Date: May 15, 2006
Vol. X, No. 10

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TABLE OF CONTENTS

COMMENTARY: Using Unnamed Sources  

Most issues of CLN include a comment, email, or article by "Name Withheld" or I quote an unnamed source. Why? Simple. Most businesses worry that they will offend their customers, so they won't express their true feelings. Because of that, communication becomes warped.

I have seen countless cases where vendors will tell chains what they want to hear, then vent to me about how they really feel. The result is chains operating in an unreal environment. When I can, I try to act as a go-between in person or in CLN.

A subscriber once called CLN "the village green of the industry, where everyone can safely come together and discuss industry issues." That's exactly what I want.

So when will I publish something by "Name Withheld"? If it's someone I trust to speak honestly, who has something interesting to say and/or raises a serious issue for the industry. Sometimes I don't agree with the  source, but that's fine. I certainly don't have all of the answers. (If I did, I'd probably be laying on a beach somewhere instead of writing this issue.)

Much of the time issues can be resolved, or partially resolved, if the parties involved know what the other side really thinks. For example, in a recent issue I told the story of Michaels instituting a new policy shortly after Michael Rouleau became CEO. I don't even remember what the policy was, and it wasn't a particularly big issue for Michaels, but it would have been a great hardship for small vendors – as many of them told me. I suggested they talk to Michaels, but they were afraid of offending a major customer.

So I called Michael Rouleau, explained the situation without naming names, and suggested he meet with some vendors at an upcoming trade show to hear their stories first hand. Then I encouraged vendors to attend and really talk. Rouleau did, the vendors did, and the policy was changed. Lesson: If we communicate honestly, some of these crises will recede.

Business-Wise. "How can we possibly tell our customers that they can make it for less when it is cheaper to buy clothes than cloth?" asks JudiKins' CEO Rob Bostick. More food for thought on pricing and promoting the concept of making unique items.

Category Reports. A cross-stitch publisher has blunt, harsh words for retailers.

Industry Research. The new Sewing in America survey, sponsored by Sew News and International Textiles Expo is now available.

Store Layout/Design Tips. Improving your store's "power zones," appealing to the consumers five senses, and how to collect data on your store's traffic.

The President and Congress are hitting new lows in the polls, and we wondered if their standing in our industry has changed, too. So tell CLN how you feel about our leaders in Washington and we'll compare the results with our earlier poll. To vote, click on Industry Polls in the right-hand column or click HERE.

CLN goofed. Most subscribers read CLN the day it's online. When we asked questions about the May 1 boycott by immigration protesters, it was May 1, so most people couldn't vote because the day wasn't over and they didn't know if sales were lower than on a usual Monday in May. However, they could answer the question, do they employ any Hispanics: 76.5% said yes.

As the company prepares for – and makes – presentations to potential buyers, the board of directors is taking care of themselves and their top execs, the Ft. Worth Star Telegram reported. According to a filing with the Securities and Exchange Commission, six of the top execs were promised two years of employment with pay and benefits and accelerated vesting for all stock-based compensation, if the company is sold. There are also additional benefits if the execs are terminated by the new owner.

Bonuses are affected, too. The execs are guaranteed a bonus for 2006 and they are eligible for an additional bonus based on performance. Plus, if the sale occurs by the end of 2007, execs receive another $125,000.

The board's action caused some industry veterans to surmise that a sale is imminent, but additional benefits to execs while a company is being sold are not that unusual; the Toys R Us board created a similar program. The board does not want Michaels' leaders to bolt during the selling process, which could decrease the company's appeal to potential buyers.

Meanwhile, the board is taking care of itself, too, according to the Star Telegram. Each outside board member was paid a $48,000 retainer for general board duties, plus $1,500 per meeting, according to Michaels' fiscal 2004 proxy. (The 2005 report hasn't been filed yet.)

In addition, the board appointed the four outside directors as a committee to evaluate the buyout offers. Cece Smith receives $40,000 for chairing the committee, while Richard Hanlon, Richard Marcus, and Liz Minyard each receive $25,000. The four also receive $3,000 for each committee meeting.

Jeffrey Sonnenfeld, Sr. Associate Dean of the Yale School of Management, told the Star Telegram, "It's part of their duty as directors to consider strategic alternatives. The extra pay, as if this is combat duty, for the directors is outrageous."

There's another committee, too, comprised of Marcus, Minyard, and Smith. This one is to examine the potential liability of the company and Board Chair Charles Wyly and his brother Sam, the Vice-Chair. As CLN reported earlier, they are being investigated by the SEC for stock transactions involving offshore family trusts. Marcus receives another $15,000 for chairing the committee, and all three are paid $1,500 for each meeting attended.

Apparently we won't have to pass the hat for retired CEO Michael Rouleau, either. Dow Jones News reported that Rouleau realized $10.6 million from the exercise of stock options to acquire 375,000 shares when he retired on March 15. That's on top of his $802,119 salary and his bonus of $427,350. According to another filing with the Securities and Exchange Commission, Rouleau will receive his current base salary of $840,000 through Jan. 31, 2008.

And he gets to keep the company-paid car.

Two Peas in a Bucket has been sold to Kaboose, Inc. for $600,000 and additional considerations to be paid on an "earn-out" basis. The site, particularly the message boards, are read by industry personnel to learn insights into the minds of hard-core scrappers.

The Two Peas founders, Kristina and Jeffrey White, will remain. "The online store will be re-energized with new drive and focus with new inventory, new kits, new ideas, new promotions, and a new organization," Kristina said. "The community areas and resources at Two Peas will grow exponentially in the next year. Included in this are online classes and other exciting media presentations."

Kaboose (www.kaboose.com), an online media company focused on kids and families, also announced the acquisition of Baby Zone, an Internet site for parents and expectant mothers. Kaboose trades on the Toronto Stock Exchange under the symbol KAB.

For the quarter ended Mar. 31, revenue increased 194% to $2.34 million, but there was a net loss of $0.90 million compared to a loss of $0.64 million in the same period of 2005.

Michaels has given its book/magazine distribution business to a division of Home Design Alternatives (HDA, Inc.), a St. Louis based company that distributes media to various retailers in other industries. CLN is in the process of pursuing the details and will send out an email later today. To learn more about HDA, visit www.hdainc.com/profile.htm.

Last year a toy company, Mega Bloks purchased craft manufacturer Rose Art for $315 million. A glowing press release detailed how happy both parties were with the deal, which included Rose Art president/owner Larry Rosen staying on as CEO/President of the Rose Art division and Exec VP/Chief Marketing Officer of Mega Bloks. Well, the party is over.

Recently Larry Rosen filed suit against Mega Bloks claiming he and his brothers weren't getting paid according to the terms of the agreement. Mega Bloks responded by booting Rosen out the door.

"The company and the Rosens have different interpretations of the items that can be inputted into the contingent purchase price formula and of the claims that may be recoverable by the company," Mega Bloks CEO Marc Bertrand said in a statement. "We were hopeful that we could work out our differences without resorting to the courts, but considering they chose to sue, we expect to file counterclaims and the dispute will be litigated vigorously."

Vic Bertrand, Mega Bloks's COO and the Marc Bertrand's brother, will become President of Rose Art.

Part of the problem, according to the Toronto Globe and Mail, is Mega Bloks doesn't know what the final fallout will be from lawsuits about Rose Art's Magnetix line of magnetic toys. Since last fall there have been more than 30 instances and one death in which children have swallowed loose magnets. The sale included an additional payment up to $50 million if Rose Art profits exceeded certain targets.

A new study by AlixPartners, a corporate turnaround and financial advisory firm, indicates the consumers' attitudes toward the five basics of retail – price, product, service, access and overall shopping experience – are changing. Some key findings:

"Honest" pricing that is well marked is more important than the lowest price. "What [consumers] crave: consistency, honesty, and fair value – even if, in many cases, that means paying a little more."

"Good is good enough." Consumers will settle for adequate proucts rather than insist on the very best products.

A store's most important quality, according to consumers: courteous employees. 

To read the entire study, visit www.alixpartners.com/EN/tabid/316/Default.aspx.

Most retailers saw a strong jump in April sales compared to a year ago, thanks in part to a late Easter. That increase helped many stores – but not ours. The Int. Council of Shopping Centers (ICSC) reported sales rose 6.6%, and 63+% of retailers reported sales that were above the average forecasts by analysts surveyed by Thomson First Call.

"Most of the bulge in April comes from Easter shift. If you average March and April, the growth pace is 4.3%, and that's still strong," ICSC chief economist Michael Niemira told Dow Jones News. Consumers bought Easter candy, clothing, and accessories as expected, but not as many craft products as the industry hoped.

It was good news and bad news for Jo-Ann's. The bad news is same-store sales fell 5.4% in April. The good news is analysts surveyed by Thomson First Call expected the decline to be worse – 7.0%. Total sales fell 1.1% to $130.1 million, while sales for the first quarter increased 0.9% to $424.4 million.

Michaels and A.C. Moore do not report monthly sales, but judging from their first-quarter reports (Michaels same-store sales were down 3% and A.C. Moore's dropped 1.8%), April wasn't great for them either.

Hancock's same-store sales fell 3.0% in April, while overall sales slipped 3.8%. For the first quarter, same-store sales declined 4.5%, including a 2.4% benefit from stores that are being liquidated. Total sales were $93.6 million, down 4.3%.

Wal-Mart's U.S. stores showed a 7.3% jump in same-store April sales, while Sam's Clubs' increase was 3.8%. "... we were pleased with strong seasonal sales for Easter," said Exec VP/CFO Tom Schoewe. "Rising fuel costs were overshadowed by the customers' response to merchandise in apparel for the entire family and consumables. April was a strong month for toys, from traditional items like dolls, balls, and outdoor toys to electronics. We have seen customers buying more toys, video games, music and movies, in addition to candy, to fill Easter baskets."

Duckwall-ALCO's same-store sales rose a whopping 16.3%, but the company cited only apparel as a strong seller. The company also agreed to sell and lease back 11 ALCO retail locations to Realty Income for approximately $11.2 million. The proceeds will be used to repay a significant portion of the company's long-term debt.

Others: Target, +10.4% ... Walgreen, +8.4% ... CVS, +9.7% ... Nordstrom, +7.3% ... Costco, +7.0% ... Fred's, +6.3% ... J.C. Penney, +2.6% ... Federated Department Stores, -0.8% ... Pier 1, -11.5%.

Michaels announced its first quarter sales rose 1.4% to $832.5 million, but same-store sales fell 3.0%, thanks to a 1.6% increase in average ticket, a 5.0% decrease in transactions, and a 0.4% increase in custom frame deliveries. A favorable Canadian currency translation added approximately 0.4% to the average ticket increase for the quarter.

Execs said same-store yarn sales were down 38% from a year ago, and there was an increase in "business disruption" – 15 merchandise categories were reset during the first quarter, compared to none a year ago.

The strongest regions were the Southeast, Southwest, and Pacific zones and the strongest departments were General Crafts (primarily due to jewelry and beads), Custom Floral, Apparel Crafts, and Kids Crafts.

Execs continue to expect first-quarter diluted earnings/share to be $0.38-$0.40, despite the less-than-anticipated sales, because of higher margins.

More than a dozen private equity firms are considering making an offer to buy Michaels, or are forming teams to make a bid, Reuters reported. First-round bids are due in early June.

The Blackstone Group, Texas Pacific Group, and Kohlberg Kravis Roberts are among the private equity firms pursuing Michaels, Reuters reported, citing unnamed sources; others include the Carlyle Group, Apollo Management, and Thomas H. Lee Partners.

Kohlberg Kravis Roberts (KKR) is the primary investor in Primedia, which has its 11 industry-related magazines (Creating Keepsakes, Craftrends, etc.) up for sale.

As CLN reported previously, Michaels hired investment bank J.P. Morgan in March to explore its options, including a possible sale of the company. Reuters reported that J.P. Morgan is expected to offer bidders a "staple financing" package of seven or more times EBITDA, Staple financing is a prearranged package meaning that, in addition to representing a seller in an auction, the bank offers to provide the financing to the buyer.

EBITDA (earnings before interest, taxes, depreciation and amortization) essentially means cash flow, which appeals to investors because they use it to pay down their debt. Michaels estimated cash flow this year is $540 million. Buyers may be willing to pay $5+ billion for the company, Reuters reported.

1. Hmm. So the top execs at Michaels are guaranteed a bonus this year. And another bonus based on performance. Silly me, I thought a bonus was supposed to be based on performance. I guess that's reserved for the bonus bonus.

2. Apparently our industry isn't the only one doing a lousy job of marketing to Hispanics. According to research from Unilever, Hispanic shoppers are less satisfied than the general population when it comes to supermarkets, drugstores, and most other retail outlets. If we ignore this growing marketplace, we're just burying our heads in the sand.

3. The owner of a yarn shop called recently asking why, after 15 years of increasing sales, his store is now seeing a decline from last year. I cited three reasons: A) We may have witnessed a fad. Some college students may have knitted a scarf and then felt, "Been there, done that." B) The trend inspired more stores to open or add yarn, so the pie is being divided into more pieces. C) Anticipating the trend would continue to grow, the industry made and stocked too much yarn. Now price cutting and dumping ultimately lessens the allure of his higher-end yarn.

Did I miss anything? Am I wrong? Email your thoughts to me at mike@clnonline.com. And if you have any suggestions about what the industry should DO about it, include those, too.

4. When I read that Leisure Arts had published a book on knitting prayer shawls, I wondered how big an audience there was for the concept. Author/TV host/spokesperson Kathy Peterson wrote, "Our church has started a prayer shawl knitting group in which I participate when I get a chance. It's an awesome group and a meaningful purpose indeed, helping those who need prayer and support from our church. If you are not aware of this group I believe it is national and once a shawl is knitted, the local group says a prayer for the shawl, then someone takes the shawl to someone in need and reads a prayer as they wear the shawl. It's just simply a wonderful spiritual experience." To see examples, visit http://cache.lionbrand.com/lola/20060501.html.

CHA. Among the events at the CHA Summer Show are two general sessions: "Grow Your Business through Effective Communication" on transforming challenging situations into learning opportunities and improving customer-relations skills, and "How Women Buy, and How To Guide Their Paths to Your Door." And don't forget the Industry Forum on Sunday morning, where attendees will have a free buffet breakfast and join in a roundtable discussion on a topic of their choice: How to finance the growth of your business ... Recognizing and capitalizing on trends ... Strategies to differentiate and grow your business ... Understanding and inspiring your customers ... How to best manage the ups and downs of the market cycle ... How the industry can help independents survive and prosper. Tickets are required for these events. To reserve tickets for these and other education programs, or to register for show badges, visit www.chashow.org.

TNNA. Online registration for the Indianapolis show ends May 24 and the room block information for the Jan. 13-15 show in San Diego is now available. Visit www.tnna.org.

PAINTING. Approximately 4,000 are expected to attend the Society of Decorative Painters' Conference/Expo in Nashville June 5-10. To date, there are 1,512 registered for the Conference and 256 booths for the Expo. For more info or to register, visit www.decorativepainters.org/conference/index2.asp ... The Board of Trustees of The Decorative Arts Collection will host a reception for Friends of the DAC during the Conference; the invitation-only event is to thank sponsors who understand the need to collect and preserve outstanding historic and contemporary works of decorative painting for future generations. To become a Friend or sponsor, contact Andy Jones at andyjones@decorativeartscollection.org.

YARN. To register for the Knit & Crochet Show, which included the CGOA Chain Link Conference and the TKGA Conference, July 12-16 in King of Prussia, PA, visit www.KnitandCrochetShow.com.

BEADS. Online registration for the Bead & Art Glass Fest, Nov. 10-12, in Orlando, is available. The show includes two hours of trade-only time on Nov. 10. Visit www.beadandartglassfest.com.

PROMOS. The CHA-sponsored National Craft Month (March) media campaign included a satellite media tour featuring spokesperson Terri Oulette that resulted in 173 airings, including those in every major U.S. market. She also conducted media tours in New York, Cleveland, Salt Lake City, and Dallas. During her tour she appeared live to an audience of almost 4 million viewers on tv morning shows, plus radio and newspaper interviews. CHA also booked demonstrators from craft stores and manufacturers and CHA designer members to appear on local tv programs that aired to an audience of 2+ million. Other highlights: articles in national print media, a public service radio announcement, and inclusion on many Internet websites.

CONSUMERS. In a recent newsletter, Making Memories listed primary reasons why readers scrap: 1. It's my creative outlet ... 2. Share my story with future generations ... 3. Celebrate and remember special moments ... 4. Birth of a child ... 5. Inspired by something in a magazine, in school, or on tv ... 6. A friend introduced me to it ... 7. Engagement or marriage ... 8. Wanted to organize my pictures ... 9. Love photography ... 10. Give albums and cards as gifts.

RESEARCH. The first Sewing in America study, sponsored by Sew News and Int. Textile Expo, reveals sewing is a $6+ billion category, but the average age of a sewer remains in the early 50's. For more info, read the May issue of Craftrends. For ordering the complete study ($150), email mike.irish@primedia.com.

CONGLOMERATE. Primedia reported it earned $7.4 million ($0.03/share) in the first quarter, down from $365.5 million ($1.39) a year ago. There was no mention of its craft division magazines, which are up for sale.

SCRAPBOOKING, I. The 5/8/06 edition of DSN Retailing Today includes a profile of Meijer, the Midwest chain of 170+ superstores (grocery/general merchandise). "Although it long has had crafts, Meijer has reconfigured the operation, bringing product together and updating the assortment to meet changing demand. The category that has been generating the greatest new demand in crafts is scrapbooking. So, in its Rockford, MI prototype store, Meijer put together a designed craft department with a big selection of scrapbooking items amidst year-in-and-year-out staples for those interested in sewing, knitting, and other consistent favorites."

SCRAPBOOKING, II. The June issue of Good Housekeeping includes "Tech Products for Digital Photos" and highlights the Xyron Design Runner.

INTERNET. Congrats to Inside Scrapbooking, the online site filled with articles, news, product info, and commentary by founder Nancy Nally. The site has passed the 50,000 page-view milestone. Visit http://insidescrapbooking.typepad.com; email insidescrapbooking@gmail.com.

BOOKS. The number of new books published in 2005 declined by 9% according to Bowker, the publisher of Books in Print and the provider of ISBN's for U.S. publishers. Categories in decline were adult fiction, kids' books, history, biography, technology, and religion. The number of sports, recreation, and medical/health titles increased.

MAGAZINES. CLN has learned that Memory Makers has absorbed the circulation list of the now defunct PaperKuts. Subscribers to PaperKuts will now have the remainder of their subscriptions fulfilled by Memory Makers.

$$$. The Ft. Wayne Journal Gazette published an article on a couple saving money by making their own wedding invitations and buying silk flower arrangements from Hobby Lobby – an excellent example publicizing how our industry's products can help consumers save money.

TV. Martha Stewart is already plugging EK Success products on her tv show, well in advance of the introduction of her line of scrapbook products manufactured by EK.

YARN. A recent edition of the fashion bible, Women's Wear Daily, featured a front page feature, "Knit Decision," that highlighted knitted hats, gloves, and purses for fall.

PEOPLE. Debra Paull has been transferred and is no longer the craft/fabric DMM for Wal-Mart. A seasonal/soft home division has been established, led by Sr. VP/GMM Lucy Cindric. The division includes crafts, fabrics, seasonal, and others. Cindric had been in women's apparel. Wal-Mart also named Paul Beahm SR. VP/GMM for the "hard home" division which includes stationery ... Industry veteran and former Michaels VP Brenda Lugannani has taken a VP position with the Family Christian Stores chain which has 320+ stores in 39 states and 5,000+ employees.

RESEARCH. At a conference sponsored by Ad Age magazine, Wal-Mart VP/Chief Marketing Officer John Fleming said the company had three types of customers: Loyalists visit Wal-Marts 57 times/year, spend 77% of their grocery dollars there, and visit more than five product categories. Selective customers visit 26 times/year, spend 28% of their grocery dollars, and shop two-four categories. Skeptics shop five times/year and spend less than 10% of their grocery money, and shop departments for only their most pressing needs.

FOREIGN RETAIL. U.S. chains such as Wal-Mart are opening retail stores around the world – except in India. India's 12 million shopkeepers, who account for 97% of the country's $258 billion in annual retail sales, have such political clout, says Forbes, that the government makes it very difficult and expensive for investment from foreign retailers.

YARN. The direct sale company Purple Tree has teamed with Lion Brand to form the Lion Brand Knitting Club. More than 1,000 have registered for the Knitting Instructor program. To learn more, visit www.lionknittingclub.com.

MARKETING. More and more small businesses are turning to the Internet and away from traditional media to advertise their business, reports the Wall Street Journal. That's occurring because consumers are changing the way they search for information about local businesses. The newspaper cited a study by the market research firm Kelsey Group which reveals that, while print Yellow Pages is still the first choice for 61% of consumers, search engines are now used by 12.5%, and online yellow pages by 7%. The result: more small businesses are advertising on Yahoo and Google, and using the free online classified ad site, Craigslist, www.craigslist.org. "The Internet has really leveled the playing field for the little guys,"Jason Hacker, owner of Tech Plummer, a computer-repair company in McLean, VA told the Journal.

ROLODEX. As of May 18, the new address for the Sierra Pacific Crafts office is 25589 SW Canyon Creek Rd., Ste. 400, Wilsonville, OR 97070. Call 503-685-6161; fax 503-685-6160; email info@sierrapacificcrafts.org; visit www.sierrapacificcrafts.org.

CONDOLENCES. To the family and friends of Richard Gold, the founder of Aldik in 1951, who passed away at the age of 86. In lieu of memorials, send donations to the Urology Dept. at UCLA. Make checks payable to U. of California Regents and mail them to Jenny Shepard, UCLA Dept of Urology, P.O.Box 951738, Los Angeles, CA., 90095-1738.

To see the latest job listings from the only personnel recruitment firm specializing in our industry, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 17.41 ... Change**: -1.24
Hancock Fabrics (HKF). Last*: 3.23 ... Change**: -0.28
Jo-Ann Stores (JAS). Last*: 14.95 ... Change**: +2.69
Michaels (MIK). Last*: 38.40 ... Change**: +0.57
Wal-Mart (WMT). Last*: 46.54 ... Change**: +1.51
CLN Retail Index. Last*: 120.53 ... Change**: +2.8%
Dow Jones Index. Last*: 11,380.99 ... Change**: +1.2%

A man looked at his wife turning back and forth, looking at herself in the mirror. Since her birthday was not far off, he asked what she'd like for her birthday.

"I'd like to be six again," she replied, still looking in the mirror.

On the morning of her birthday, he arose early, made her a big bowl of Lucky Charms, and then took her to Six Flags theme park. What a day!

He put her on the Death Slide, the Wall of Fear, the Screaming Monster Roller Coaster – every ride in the park. Five hours.

They staggered out of the theme park and he took her to a McDonald's where he ordered her a Happy Meal with extra fries and a chocolate shake. Then it was off to a movie, popcorn, soda, and her favorite candy. What a fabulous adventure!

Finally she wobbled home with her husband and collapsed into bed exhausted. He leaned over his wife with a big smile and lovingly asked, "Well dear, what was it like being six again?" Her eyes opened and her expression suddenly changed. "I meant my dress size, you dope!"

The moral of the story: Even when a man is listening, he is going to get it wrong.

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xxx

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