Date: July 3, 2006
Vol. X, No. 13

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TABLE OF CONTENTS

COMMENTARY: The New Consumer 

Our industry is facing changes of all kinds, but perhaps the biggest is the consumer. The new one ain't like grandma anymore. There appear to be three elements to the crafter of the 21st century: 1. She's tech savvy. She may not need her leisure activities to be high touch just because her job is high tech. Escape from high tech? Technology is so ubiquitous in her life she can't imagine – or wants to – escape from it. 2. She doesn't have the "smiling bunny" syndrome that her mother had. I'm not sure what she wants to make, but whatever it is, it's not "cute." 3. She doesn't want to make the same project in the same way as everyone else. She wants to make something unique.

The question is, how many of these new consumers are out there? She is not our core customer, not yet anyway. But her numbers are growing. How intensely should we focus on her right now? Email your thoughts to me at mike@clnonline.com.

Business-Wise. Two of the companies that were bidding to acquire Michaels, Bain Capital and KKR, have track records in our industry. Whom should we have rooted for? Some retailers might like to see Michaels slip, while some vendors need Michaels to continue to grow. A veteran mergers & acquisitions pro with experience dealing with investment firms, provides some insight.

Memory, Paper & Stamps. The N.Y. Times says the future of scrapbooking is with the computer, not hard-copy versions. If the Times is correct, stores selling paper, albums, and embellishments may be in trouble. CLN readers weigh in on the subject. (Comment: CLN has received more responses to this subject than any other in CLN's 9+-year history.)

Category Reports. The N.Y. Times also published a report on crafts and techno-savvy kids. CLN readers explain why kids want – and need – crafts.

The U.S. Commerce Department announced that the U.S. economy grew a very strong 5% in the first quarter, and AAA announced the number of Americans driving a significant distance this 4th of July weekend is up 2.1% over last year. Yet gasoline prices have risen substantially since 7/4/05. So here's the question: have the higher gas prices really hurt your sales? To vote, click on Industry Polls in the right-hand column or click HERE.

Rising costs for raw materials, utilities, and health insurance are catching up with CLN readers. Although 24.2% said sales were up 10% or more in the first half of 2006, only 13.3% said profits were up that much; 27.3% said sales had risen 0-9%, but only 20% said profits had risen equally high. In other words, profit margins are down. Another factor may include customers not paying their bills, or paying more slowly.

It's apparently a feast-or-famine year in terms of sales. Only 3.0% said sales were flat, but 30% said profits were flat. Meanwhile, 15.2% reported sales had fallen 0-9%, while 3.3% reported the same percentage range for declining profits. The grim news: a full 30% reported sales had fallen 10% or more, while a whopping one third of respondents said profits had declined 10% or more.

However, CLN readers are more optimistic for the second half of 2006; 30% expect sales to increase more than 10% and 26.7% think sales will increase 0-9%. Flat sales were predicted by 16.7%, while 10% think sales will decline 0-9%, and 16.7% are afraid sales will drop more than 10%. Whether profits will reflect the rebounding sales is another question.

(Comment: If the results of this highly unscientific poll seem more positive than you would have thought, here's one theory why: Readers whose businesses are doing well are far more likely to answer questionnaires. Vendors and retailers whose sales are down may be too depressed to bother responding to questions about sales and profits. The result: surveys that are skewed positively.)

The Michaels board accepted a takeover bid from private equity firms Bain Capital and Blackstone Group. The winning bid was $44/share, a total of about $6 billion. It was higher than the losing bid submitted by Texas Pacific Group and Kohlberg Kravis Roberts (KKR). The stockholders still have to approve the deal and when they do, it will end a saga that began March 20 when the board decided to put the company on the auction block. The winning bid is about 30% more than the stock was worth when the auction was announced.

Since its inception in 1984, Bain Capital (www.baincapital.com) has acquired all or some of retailers and consumer companies such as Toys R Us, Burger King, Staples, Burlington Coat Factory, Shopper's Drug Mart, Brookstone, Domino's Pizza, Dollarama, Sealy Corp., Sports Authority and Duane Reade. Bain once owned Tulip, the fabric-paint company, and later sold it to Duncan. Blackstone's (www.blackstone.com) investments include Houghton Mifflin, Spirit Group, TRW Automotive, Texas Genco, and Universal Orlando.

In an email to vendors, Michaels said the next steps are arranging financing, shareholders approving the deal, and meeting certain regulatory conditions. It should be wrapped up by year's end and then Michaels will be a private company.

Private-equity firms have made $213 billion worth of takeovers thus far this year, compared with $124 billion in the same time last year, according to Bloomberg.News. Analysts said Michaels was an appealing target because it is debt-free and had a cash flow of $363.9 million in 2005, money that could be used to pay off the debt incurred from buying Michaels in the first place.

After the sale, there remains some unfinished business for the Michaels board chair Charles Wyly and his brother Sam, the vice chair. The Securities and Exchange Commission and a federal grand jury in New York are investigating possible irregularities in Michaels' granting of stock options. The SEC is also looking into possibly irregular manipulation of Wyly offshore family trusts.

A sign of how much the industry has grown? Michaels went for a higher price than Nieman Marcus.

Digital or hard-copy? Martha is going both ways. After signing a big licensing deal with E.K. Success last year to develop hard-copy scrapbook supplies, she agreed to a multi-year deal with Kodak to develop personalized photo products. Financial terms were not disclosed.

"The idea is to help shutterbugs who lack ideas for the printing and presentation of their snapshots," Forbes reported.

The line will be sold on the Kodak EASYSHARE site at www.kodakgallery.com and at www.marthastewart.com. It's expected to debut in late September with holiday offerings such as cards, "photo books," and more. Other products and new categories are expected to be introduced at the end of the year and in early 2007.

Martha said, "I am delighted to be providing unique, inspiring, and beautiful designs that will make it easier for customers to create their own high-quality, digital cards, invitations, stationery, and photo books." (Comment: Isn't a "photo book" a scrapbook?)

To learn more about the products and receive new details as they become available, visit www.kodakgallery.com/marthastewart.

The CLN Retail Index outperformed the major stock indices in the April-June period, +2.9% in large part due to the late-quarter surge in Michaels stock. The Dow was basically flat, up only 0.4%, while the S&P 500 slipped 1.9% and NASDAQ fell -7.2%.

Michaels was the industry leader, up 9.7%, and Jo-Ann's rose 8.6%. Wal-Mart rose slightly, 2.2%, while Hancock fell 6.4% and A.C. Moore dropped -11.4%. Other stocks of interest: Martha Stewart, -0.06% ... Target, -5.9% ... Primedia, -8.7% ... Meredith, -11.5%.

The picture is a little different for the first half of 2006. The CLN Retail Index is up 6.4%, while the Dow rose 4.0%. The S&P 500 inched up 1.2% and NASDAQ slipped 1.5%. Jo-Ann's is the leader thus far in 2006, up 23.8%. Michaels follows with a 16.8% increase and A.C. Moore also hit a double-digit increase, 12.0%. Wal-Mart rose +3.2% while Hancock fell -17.1%. Others: Primedia, +15.3% ... Martha Stewart, -4.4% ... Meredith, -5.6% ... Target, -11.1%.

Regarding cashing in stock options, company insiders and board members were relatively quiet. A.C. Moore: President Larry Fine, 12,500 shares for $226,000 ... Hancock: Dean Abraham, 3,280 shares for $10,381.20; Bruce Smith, 3,019 shares for $9,555.14 ... Jo-Ann's: Gregg Searle, 16,125 shares for $258,000; Frank Newman, 9,200 shares for $142,232 ... Michaels: Harvey Kantor, 26,666 shares for $988,028.63; Russell McKeekin, 12,150 shares for $121.014; Michael Sicuro, 12,234 shares for $94, 935.84 ... Wal-Mart: Michael Duke, 8,000 shares for $388,000 ... John Menzer, 2,899 shares for $137,789.47; Jack Shewmaker, 2,927 shares for $139,998.41.

Traditionally, the craft consumer did what she was told. Consider: 1. The quality of a cross stitch or needlepoint project was judged by how well it replicated the model; hundreds of thousands of a "Precious Moments" project were recreated and looked exactly the same. 2. Decorative painters achieved higher certification levels if they were judged to have mastered the precise stroke techniques. 3. Consumer magazines would not call for a product unless it was in general retail circulation, because the reader would demand the exact product. 4. Minute, step-by-step instructions were the rule for virtually all projects.

That may be changing, certainly among younger consumers for whom doing their own thing is more important than following rules. In a previous issue of CLN, Ellie Joos wrote about the difference in modern pre-schools. Kids once were given coloring books and crayons and told to stay within the lines, Ellie said. Today many children are given blank sheets of paper and told to do their own thing.

Consider the three hottest categories in recent years: 1. Beads. Because there is such a multitude of stones in the marketplace, retailers cannot carry a complete selection; therefore bead magazines present concepts for jewelry makers to follow, substituting locally available materials for those in the articles. 2. Scrapbooks. By their very nature, every scrapbook is unique. 3. Yarn. Knitters may follow a pattern, but they're choosing their own colors and textures.

A recent example of adjusting to the new crafter is Adorn magazine, published by SoHo Publishing and available on newsstands Aug. 1. Editor Christina Batch writes that Adorn is "... the crafty girl’s guide to embellishing life! We created this magazine with you in mind and packed it full of fashion, decorating and, of course, craft projects that will inspire your creativity and help you develop your own personal style. What does it mean to be crafty? ... Mostly, I think it's an attitude, a willingness to try something new and improvise when need be. Finally, it's about trusting that there's no 'right' way to do things ... just what's right for you." Visit www.adornmag.com.

This growing interest in creating one-of-a-kind projects bodes well for embellishments and wearable art. Generation T -- 108 Ways to Transform a T-shirt, a book by Megan Nicolay (Workman Publishing) is an example. To see more of Nicolay's projects, visit www.generation-t.com. For more ideas, visit www.craftster.org which has 65,000+ members.

To date officials report the show is 10% larger and buyer pre-registration is up 18% over last year's show. Online registration for badges, workshops, and events is still available. Visit www.chashow.org. Highlights include the Beading and Needle Arts Pavilions with free coffee each morning and wine and cheese Saturday and Sunday afternoon for buyers, the Industry Roundtable (free, with a ticket), and a wide array of technique workshops, business seminars, etc.

Random Thoughts About Beads

 The recent Bead&Button show sponsored by Kalmbach Publishing in Milwaukee was a revelation again this year.

1. Our stores' bead departments, and the exposure beads have at our trade shows and in our trade magazines, do not begin to reflect how popular beads have become.

2. Independents looking for product not sold in the chains should attend consumer bead shows. The exhibitors have wonderful products, but many of the vendors are not large enough to sell to the chains. But they will sell at a discount to those with tax ID's and what is for them volume buyers. There are a number of these shows -- not as large -- around the country.

3. The wonderful thing about many jewelry makers is that they sell their work, and therefore have money to buy more supplies. It's one of the few product categories left in which professional crafters remain a major force.

4. The popularity of jewelry making should be a manifestation of the rebirth of wearable art, which includes embellishing of all kinds.

Ron Staffieri has resigned as President/CEO of Rag Shops and been replaced by Mark Syrstad. Syrstad has 30+ years of retail experience, having served as President and/or President/CEO of Carter's (195 stores selling children's clothes); The Gingiss Group (268 formalwear stores); McWhorter's (37 stationery/office products stores); and Motherhood Maternity (312 maternity stores).

Rag Shops was founded in 1963 and operates 60+ fabric/craft stores in the East and Southeast. It was purchased by an affiliate of the investment firm Sun Capital Partners in September 2004. Recently Rag Shops settled its debt with vendors for 25 cents on the dollar, after threatening to file for bankruptcy and closing.

Syrstad said, "I am delighted to be joining Rag Shops at this critical point in its development and look forward to working with its management team and suppliers building upon its position as a leading retailer of quality craft merchandise."

Sun Capital affiliates own a number of retail operations, including the ShopKo and Pamida chains, which it purchased in late December for $880.8 million plus debt. Recently Sun Capital signed a sale-leaseback deal with U.S. Spirit Finance, a real estate investment trust firm, for $815.3 million. Sun Capital is selling the real estate under those stores and signing long-term leases. It's the largest sale/leaseback deal in U.S. history. Earlier this month Sun Capital bought Lillian Vernon, a 55-year-old catalog and online retailer known for its personalization services.

1. A new survey by the National Retail Federation revealed that three of four U.S. consumers plan to curb spending because of high gas prices. Half of the respondents plan to reduce driving to lower fuel costs. In a similar study in 2005, 67% said gas prices were affecting spending; in 2004 the figure was 57%.

2. Fifty-one percent of the retailers in a new study by the retail consulting firm Oracle project solid sales growth (5%-9%) and 5% expect exceptional growth (10%+) over last year's holiday season, but almost 90% predict flat or declining margins.

3. A survey by Synovate Global Omnibus Group, a polling firm, revealed that 72% of U.S. consumers said they "always seek out products made in the U.S.," but that doesn't always mean they buy U.S. products, the Sacramento Bee reported. "But when it comes to buying American, stated vs. actual behavior are two different things," said Thomas Mularz, a Synovate Sr. VP. "People will say they value buying domestic products, then they'll go to a Toyota dealer and buy a car."

4. Among the predictions for retail in 2010 by the research firm A.C. Nielsen at a recent marketing conference: A) RFID tags will be used to track in-store shopping patterns, stock merchandise, and measure consumption. Self-checkout will be simplified as "EZ-Pass"-style devices hit retailing. B) Wal-Mart sales will reach the half trillion dollar mark as it becomes a leading source for immediate healthcare. C) Private Label will reach a 20% dollar share. D) High gas/heating costs will continue to reduce shoppers' disposable income.

1. Here's a puzzlement that hits the industry periodically: A vendor has an established line of products; suddenly, all across the country, sales of one particular SKU have shot up dramatically, during what is a traditionally slow time for the category. "Is a magazine using the item for a design contest?" the vendor asked. Not that I know of. Another possibility might be something wrong with the line's UPC codes. But probably it's just the latest example of our wonderful-but-always-a-mystery consumer.

2. A recent thread on a TwoPeas message board was filled with complaints about lousy service at the local independent scrapbook store. Managing a successful, profitable independent store is tough enough in the best of times, but stores with poor customer service have no chance of surviving.

3. About 13 years ago I reported on what I consider to be the single most "newsworthy" day in the history of the industry. For many years, Leewards was the industry's most important chain and Craft World was the dominant distributor. In one 24-hour period, Leewards was sold to Michaels and Craft World filed for bankruptcy. It was the beginning of the modern era of the industry in which the chain stores dominated the industry.

Now with the pending sale of Michaels to investment firms and investors looking at other retail operations, we may soon witness the beginning of what I guess you'd call the post-modern era: the industry being dominated by investment companies.

PEOPLE. GMM Mike Lyons has resigned as GMM from A.C. Moore ... Annie Mangelsen is the new North American Sales & Marketing Manager for Makin's Clay. Call 402-614-6854 or 402-490-7000, or email annie_mangelsen@makinsclay.com.

NEEDLEWORK. At the CHA Summer Show, Plaid will introduce a line of embroidery kits designed by Jenny Hart of Sublime Stitching (www.sublimestitching.com). Budget Living magazine said her designs are more rock 'n' roll than rocking chair, and Hart's work has been highlighted by Real Simple, Teen Vogue, BUST, ReadyMade, Family Circle, Entrepreneur, and the Wall Street Journal. "Plaid is committed to drawing new consumers into the craft industry by offering relevant new products, as well as new ideas and designs in core categories," said President Mike McCooey. "... her fresh, retro-styled patterns will attract a younger consumer who is interested in a more alternative approach to stitching."

HOME PARTIES. Purple Tree is closing. June orders will be accepted through July 7. Exec Jim Turner said, "We are saddened by the decision to close Purple Tree. One of our greatest privileges was getting to know so many wonderful people associated with the crafts industry. We know that the important mission of helping women get back in touch with their creativity will live on through everyone that was involved with Purple Tree. The decision was not an easy one and we know there are a lot of disappointed people out there. The decision was really based on our inability to realize sustainable momentum with the business. We still believe there is a tremendous opportunity for this type of business. Unfortunately, we just ran out of time." For any questions, email support@purpletree.biz.

TECHNOLOGY. Do young people want an escape from technology like many older people?. Or is it so ubiquitous that they can't imagine not using it? The most common scrapbook for high school kids is the traditional yearbook, but the Associated Press recently published an article about the trend of high school students using MyYearbook.com (www.myyearbook.com) rather than hard-copy yearbooks. The research firm Media Matrix says it's growing faster than MySpace.com and when CLN checked, it said it had added 4,677 new members and 104,521 "yearbooks" had been updated in the last 24 hours.

QUOTATION. "A store that keeps a cat feels like a charming anachronism from a more innocent era." – Workman Publishing

ACQUISITIONS. Federated Department Stores sold its Lord & Taylor unit to private equity firm Apollo Real Estate Advisors and shopping center developer NRDC Real Estate Advisors for about $1.2 billion.

STATISTIC. The Journal of Commerce reported that Wal-Mart brought in the equivalent of 576,000 20-ft.-long containers of goods in 2004, about 30.5% of all such containers imported into the U.S. that year, the Providence Journal reported.

SHOWS. The Knit & Crochet show is July 13-16 in King of Prussia, PA, co-sponsored by the Crochet Guild of America (www.crochet.org) and The Knitting Guild Assn. (www.tkga.com).

MAGAZINES. CLN has heard unconfirmed reports that Meredith will stop publication of Family Circle Easy Knitting and may publish only one more issue of Family Circle Easy Crochet this year ... The Chicago Tribune 's 4th annual "50 Best Magazines" list included Vogue Knitting. "It's a niche publication, yes, but because knitting has hit the Trend-O-Meter, newbies should know about it. The instructions are always reliable, and the designs are fabulous. And every issue contains Very Easy, Very Vogue projects that are quick and relatively simple to make."

AWARD. At The National NeedleArts Assn. show in Indianapolis, Laura Militzer Bryant won the TEN Award, a Tribute to Excellence in Needlework, for her lasting impact on needlearts. In 1986 Bryant founded Prism Arts, which has published numerous pattern books; serves as a contributing editor for Cast On magazine; and is on the advisory board for The Knitting Guild Assn. She is a past board member and president of TNNA.

DIVIDEND. Michaels' board of directors declared a quarterly cash dividend of $0.12 per share to be payable July 31 to shareholders of record at the close of business on July 14.

ROLODEX. Bill Shugarts & TradeWinds is moving to TradeWinds, Inc., 8101 Glenhurst Dr., Fairfax Station, VA 22039. Call 703-615-1369; email wshugarts@earthlink.net.

SHOWS. "While the mood at the [Dallas Gift Mart] seemed cautious, there was still a feeling that we may be seeing a glimmer of better days ahead, with business beginning to take an upswing. Traffic seemed to be a bit on the light side, but early reports indicate that there is decent order-writing going on." – Gifts & Decorative Accessories

TV. The second series of Bake Decorate Celebrate! uploads to PBS stations Aug. 20. The show is produced by KS, Inc. and offers projects at www.bakedecoratecelebrate.com.

To see the jobs currently available, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 16.29 ... Change**: +0.70
Hancock Fabrics (HKF). Last*: 3.39 ... Change**: +0.21
Jo-Ann Stores (JAS). Last*: 14.61 ... Change**: -0.11
Michaels (MIK). Last*: 41.24 ... Change**: +3.31
Wal-Mart (WMT). Last*: 48.33 ... Change**: +0.02
CLN Retail Index. Last*: 123.86 ... Change**: +3.4%
Dow Jones Index. Last*: 11,150.22 ... Change**: +1.2%

It looks as though someone will pay $5 billion or more to acquire Michaels. A billion is a difficult number to comprehend, but a CLN subscriber emailed this explanation compiled by an ad agency that put that figure into perspective.

A. A billion seconds ago it was 1974.
B. A billion minutes ago Jesus was alive.
C. A billion hours ago our ancestors were living in the Stone Age
D. A billion days ago no-one walked on the earth on two feet.
E. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.

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xxx

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