Date: August 21, 2006
Vol. X, No. 16

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TABLE OF CONTENTS

COMMENTARY: Tis the Season ... for Entitlements 

This time of year some chain stores gather their vendors together, describe their plans for the year, talk about partnerships with their manufacturers, and then ask for "entitlements": ad allowances, new-store discounts, chargebacks, delayed payments, markdowns, damage allowance, freight allowance, new product discounts, and on and on and on.

The purpose of the entitlements, of course, is to keep prices low for the consumer and improve earnings for the retailer. And of course, the vendors will grumble. "Every time these guys talk about partnerships, I hold onto my wallet," one vendor told CLN. They grumble, but reluctantly, eventually most agree to the chain's terms.

Then the vendors return home and try to figure out how to cut costs. These days savvy, effective, hard-working sales reps are often cut, and employee benefits are scaled back. When everything that can be cut has been cut, the only alternative is to cheapen the product.

This is not a new trend. In the very first "Benny Da Buyer" column in June, 2003, "Benny" asked, "When did we move from a quality-conscious, consumer-demand-driven, creative-unique retail environment to flea-market-pricing, and me-too retail stores that are so unattractively filled with only same-old vanilla products? When in fact we are in a design-driven (not price-driven) industry called CRAFTS?" To read all of "Benny's" thoughts on the subject, visit www.clnonline.com/archives/vinnyarchives/2003/vinny0306-1.html.

Kate's Collage. Did you miss CLN's newsbrief about Jo-Ann's second-quarter earnings report and the execs conference call with analysts? It's right here.

Scene & Heard. Ellie Joos and Shea Szechara provide insights on the recent New York Gift Show.

(Note: If you surf to a column and it appears to be an old column, click the "Refresh" or "Reload" button on your browser.)

So how will the industry fare in the all-important Fall/Christmas season? How will YOUR sales be. Government figures indicate the economy is strong, but .... To vote, click on Industry Polls in the right-hand column or click HERE.

More than half the CLN voters said the CHA Summer Show exceeded their expectations – 13.0% said it "greatly exceeded" their expectations and 39.1% thought it was "somewhat better" than expected. Almost a fourth, 23.9%, thought the show was as expected, while 19.62% were "disappointed" and only 4.4% were "very disappointed."

As for future shows, 68.9% said they would attend (as exhibitors or buyers) the 2007 Summer Show, while 15.6% said they would not attend, and 15.6% were not sure.

For scrapbook vendors and retailers, 37.1% planned to attend the Memory Trends show in Las Vegas in October, but 42.9% said they would not, while 20.0% had not yet decided.

Thomas Coughlin, the former Vice Chair at Wal-Mart, was sentenced to 27 months of home confinement after pleading guilty on federal charges of wire fraud and tax evasion in a plea agreement. He will also serve five years of probation and pay restitution of about $411,000.

He had faced up to 28 years in prison and $1.35 million in fines. Prosecutors had asked for a 6-12 month prison sentence, but the judge sided with a doctor who testified that Coughlin was in poor health.

As Vice Chair, the #2 person behind CEO Lee Scott, Coughlin received a base salary of $1.03 million, plus $3+ million in bonuses in his final year with the company, and held about $20 million in Wal-Mart stock, according to Securities and Exchange Commission filings, the Associated Press reported. The year before, his total compensation was $10.9 million, reported the Cleveland Plain Dealer.

The agreement had Coughlin plead guilty to a smaller sum than the company had initially charged – $100,000 - $500,000. He pled guilty to $6,500 for his share of a private hunting lease, $2,695 for upgrades to his 1999 Ford truck, and a $200 Sam's Club gift card that he used to buy a cooler, two cases of Miller Light beer, and other items, the AP reported.

Wal-Mart had originally charged Coughlin's schemes included pressuring subordinates to fake invoices and expense reports and misuse of Wal-Mart gift cards. But Coughlin had previously claimed his "thefts" were actually to divert company money to a secret anti-union spy operation. Wal-Mart denied any such operation. At the sentencing hearing, however, Coughlin only said, "There is no excuse for my conduct. I feel compelled to apologize to my extended Wal-Mart family."

Wal-Mart had filed a civil lawsuit seeking to revoke Coughlin's $12 million retirement package, but it was dismissed by an Arkansas judge. The company is appealing to the Arkansas Supreme Court.

The ultimate irony in the case: Coughlin joined Wal-Mart in 1978 as head of its loss-prevention department.

The investment/market-research firm that initially reported on the possibility of Wal-Mart getting out of the by-the-yard fabric business has sent an update to clients. It says in part that according to an email Wal-Mart sent to vendors, "Wal-Mart plans to stop selling fabric in approximately 115 stores per month beginning January 2007, ending the year with fabric in approximately 1,500 stores. It will continue the process in 2008. Prior to this email, our sources indicated that Wal-Mart planned to keep fabric in roughly 600 stores, or roughly 20% of its store base."

Apparently word is getting out. During the Jo-Ann's conference call (see below), at least two analysts referred to the news, implying Wal-Mart's exit would be a boon to Jo-Ann's. (It should help Hobby Lobby, Hancock, and independents, as well.)

The research firm estimates Wal-Mart's annual fabric sales are $700-$800 million.

A Wal-Mart spokesperson said she could neither confirm nor deny the situation.

The general consensus at the CHA Summer Show was that scrapbooking and yarn have declined – but what does that mean? And is it true? Is consumer interest waning for what has been the industry's two strongest categories? Should publishers, manufacturers, and retailers jump off these bandwagons?

Yarn. In recent quarterly and monthly reports, publicly held retailers such as Michaels, Jo-Ann's, and A.C. Moore proclaimed sales are down. Some independents have, too. But there are two factors to consider: 1. Chains overbought and are now discounting to move excess inventory. So the dollars are down, not necessarily consumer interest. Yarn just costs less. 2. According to yarn vendors, the amount of yarn sold may be down from the last year or two, but it is still up substantially from not that long ago when the category relied on grandmothers making afghans and baby booties.

Scrapbooking. By all accounts, the number of independent retailers is down; that will probably take down some vendors who rely exclusively on specialty shops. That simply could mean that the larger stores and better operated independents are gaining a larger share of the market. Consumers may have fewer places to shop, but they may be buying just as many – or more – supplies.

All of this is theory. What about some hard research data? The first-quarter update of CHA's Attitude & Usage Study reveals that household participation rates remain the same, not down, for both categories – 25% for scrapbooking, 25% for crochet, and 18% for knitting. Scrapbooking expenditures – dollars spent – in the first quarter rose 7.9%.

Based on "planned participation" rates, scrapbooking is expected to grow 2.8%; that's higher than the industry average of 1.8%. Crochet (2.4%) and knitting (1.9%) beat the industry average, too.

And it's not merely current crafters planning to do/buy more. The research also indicates newcomers are ready to try scrapbooking, crochet, and knitting in the next year. If respondents try these categories as they say they will, it will result in an increase of 1.7 million households with a new scrapbooker, 1.6 million with a new crocheter, and 1.2 million with a new knitter.

So perhaps it's not time to jump off the bandwagons after all.

(Note: CHA members can read the updated Attitude and Usage Study in the members section – it's free – of the website, www.craftandhobby.org; non-members can purchase the study. Click HERE for ordering info.)

(Note: This was written by the sales manager of a mid-size, scrapbook-related manufacturing company after returning from the CHA Summer Show.)

This was one of the most active shows we have had. Our booth was constantly busy, but I believe we are at the end of an age and can see the new age dawning.

For every person who requested a new account credit form, we had two (previously great) customers come up and tell us they had sold or closed their business, including three stores in Indiana, three near Chicago, two in North Carolina, and three in California.

One store owner I hold in great respect told me that no matter what she did to help her business – active membership in Crafter’s Home, Smart Group, being a Red Heart store, etc., and trying to buy smart and keep up with the trends – it wasn't enough to allow her to stay in business.

I was told by one store owner that she overheard good customers tell other customers that they could buy the same product they were considering in her store across town for a few dollars cheaper. She was wondering if they wanted to drive across town to save $2 so they could afford the increased gas prices.

One distributor said he was losing a retailer a week.

Scrapbooking is changing from a hands-on craft that used actual family heirloom photographs to a system of software that allows people to arrange virtual (scanned copies) of photographs and objects in their computer and print as they desire. Three-dimensional pages weighted with ribbons and bottle caps suitable only for framing are being replaced with pages that are flat and easily stored in albums.

Scrapbooking has evolved from a traditional black page with a photograph and notes in white ink, to well beyond the sculptural, 3-D, altered book, to a scanned facsimile of the scrapper’s interest.

Digital photographs are made at little Susie’s ball game in the afternoon and downloaded into a formatted page and printed after dinner that night. This page can also be posted on the family website that was created when mom and dad had their wedding album scanned and posted online.

Some people will always want to spend time quilting with actual cloth and thread, making pins and buttons out of clay or glass, drawing with pen and ink, or making photographs with film; but as our lives become more conveniently digital, the creation of family albums will move into a virtual world for most people.

As there are fewer and soon to be no ‘heirloom’ photographs in shoe boxes, our scrapbooks will be created digitally through Shutterfly, Kodak Gallery, and Flickr, and posted online in the family version of "MySpace." As we approach this brave new world, there will be very little for retailers to sell scrappers, as it can all be ordered online. – Name Withheld

The latest market research data says scrapbooking is still growing, albeit more slowly than in the past. Yet the number of stores selling supplies has fallen, and judging from recent media reports, technology is encroaching on the realm of the hard-copy scrapbook.

Clearly the industry is in the midst of upheaval and change. But what will the industry be like when the dust settles, if it ever does? Look into your crystal ball and describe the state of scrapbooking in the year 2010. Email your predictions/guesstimates – on or off the record – to CLN at mike@clnonline.com. (Note: Readers' comments on the current digital/hard-copy divide are still online in Memory, Paper & Stamps.)

Now a second grand jury has subpoenaed Michaels' records regarding its stock options practices. The first subpoena came from a U.S. District Court in New York in June, and this latest subpoena is from the District Court for the Northern District of Texas. The Securities and Exchange Commission, which has investigations into stock-option policies of 80+ companies, says it plans to request documents in the future, Reuters reported.

Michaels' Audit Committee launched an internal review of the company's historical stock-option practices, but has not reached any final conclusions, according to a SEC filing.

Meanwhile, a number of "derivative" lawsuits have been filed by stockholders, according to a Michaels filing with the SEC. ("Derivative" actions are suits that are filed on behalf of the corporation, and not on behalf of the individual bringing them.) They include:

1. A suit charging certain former and current officers with breaches of fiduciary duty regarding the company's stock-option policies.

2. A suit charging Bain Capital and The Blackstone Group with aiding the directors' alleged breach of fiduciary duty.

3. A suit alleging that, prior to a Nov. 7, 2002 announcement lowering the company's fourth-quarter earnings guidance, "certain defendants made mis-representations and failed to disclose negative information about the financial condition of Michaels while the individual defendants were selling shares of Michaels common stock."

The investigations and lawsuits are not expected to derail the pending $6+ billion acquisition of Michaels by Bain and Blackstone, Reuters reported.

The companies are fighting over Provo's Cricut and Xyron's Wishblade Media Cutter, according to the Salt Lake Tribune. Xyron says the Cricut cutting systems violate a pending Xyron patent and had offered to allow Provo to use the patent for a fee. Provo responded with its own lawsuit questioning the validity of the patent and asked the court to declare Xyron's application "invalid and unenforceable." If the court agrees, Provo won't have to pay Xyron.

The Tribune reported that the issue in question is the pad inside the Xyron machine that attaches adhesive to the back of die-cuts, and the unique panel of buttons on top. Pazzles filed a similar lawsuit involving yet another paper-cutting system, according to the paper.

Primedia reported a second-quarter net loss of $2.1 million ($0.01/share), compared with a profit of $5 million a year ago. It recorded a charge of $0.02/share related to discontinued operations. In the report the company finally announced it was selling its Crafts Group to Sandler Capital Management for $132 million, which Sandler had announced weeks ago. The Group includes Craftrends, Creating Keepsakes, Simple Scrapbooks, and other industry-related magazines. The deal is expected to be completed in this quarter.

When the deal is completed, it will end Primedia's extensive involvement in the craft industry, although it still owns Step by Step Beads. Originally known as K-III, the company went public in the fall of 1997 at about $10/share. The stock rose to a high of $35 in early 2000 but has since fallen to $1.70. The decline appears to be due to some disastrous acquisitions (e.g., paying hundreds of millions for the portal, About.com, shortly before the dot.com bubble burst) rather than a poor performance by the Crafts Group.

Meanwhile, late last month Meredith, publisher of American Patchwork and Quilting and numerous industry-related publications, reported fourth-quarter earnings grew 17% and revenues rose 28% to $426 million.

Target reported second-quarter net earnings rose 12.8% to $609 million ($0.70/share); same-store sales rose 4.6%. "Certainly we recognize that the current environment presents a number of real challenges that may adversely affect consumer spending," CEO Bob Ulrich told analysts on a conference call. "We are not immune to adverse factors."

Wal-Mart's net sales for the second quarter were $84.524 billion, up 11.3%, and income from continuing operations rose 4.6% to $2.984 billion. During the quarter, Wal-Mart announced it was selling its operations in South Korea and Germany and recorded a loss of $863 million in its German business. Same-store sales in U.S. Wal-Marts grew 1.57%.

Earnings would have increased to $2.98 billion ($0.72/share), not counting the German and South Korea businesses. On that basis, the results matched Wall Street's average expectations, MarketWatch reported. But including the German and South Korean writeoffs, the company posted lower earnings for the first time in a decade.

"Some of the same issues affecting our customers – higher utility costs and gas prices – are impacting many corporations, including Wal-Mart," said CEO Lee Scott. "We find it encouraging that we continue to grow market share in food and consumables during this time. We also are transforming our stores through remodeling, expanded merchandise offerings, and customer service initiatives."

The results have some analysts worried about the upcoming holiday season. "Wal-Mart says sales are slowing. Home Depot posted declining same-store sales last quarter. Target warned of weakening same-store sales. Gap has struggled with falling sales for a long time. This is a signal that we're going to see some softness this holiday season," Howard Davidowitz, chair of New York-based retail consultancy and investment banking firm, Davidowitz & Associates, told CNN/Money.

Many industry products are produced in factories in the Guangdong-Fujian areas that employ low-cost "migrant" laborers from other areas of the country. Now there's a shortage of such laborers, reports CNN/Money.

The causes are three-fold: 1. Fewer young people because of China's "one child" policy. 2. The government's pro-agriculture policy has lured many workers back to the farms. 3. Low wages/benefits have forced migrant workers to leave for other areas.

"The cost of living and housing in the coastal region in the east has gone up," Professor Marshall Meyer, a China expert at the Wharton School, told CNN/Money. "That shifts the balance dramatically. Most factories order their migrant workers to go home on national holidays. About 5% of the 10 million migrant population hasn't come back."

Wal-Mart. CLN reported that employees in a Wal-Mart in China had formed a union. Seeing the writing on the wall, the company has now agreed to cooperate with China's state-sanctioned labor group, the All-China Federation of Trade unions, to create unions at its 60 Chinese outlets. Quoting the Beijing News, the Associated Press reported the order for the state-sanctioned labor group to pressure Wal-Mart came from Chinese President, Hu Jintao.

Technology. In the last issue, CLN reported on technology that allows retailers to offer an enormous selection without carrying any inventory. Notions Marketing's kiosk enables retailers to offer every needlework kit Notions carries – without having to carry inventory – and a bookstore in Washington, DC has a system that allows the store to print and bind any digitized book in the time it takes the customer to drink a cup of coffee. Now, a Manhattan Ralph Lauren store offers consumers the opportunity to shop the store 24 hours a day without entering it. There's a touch-screen system in the front window which allows passers-by to buy anything in the store and have it delivered to their homes.

Sales. CLN reported a survey of 34,000 consumers by the market research firm NPD Group indicated they were delaying purchasing school supplies and planned to spend no more than last year. But Carl Steidmann, the author of the Deloitte Research Leading Index of Consumer Spending, says, "We continue to believe that this back-to-school season will be better than last year's, which was weak due to the record hurricane season. However, the housing market in particular is having a negative impact on consumers spending and confidence."

1. Our very best wishes to Jerry and Dee Hacker, who have sold Dee's Delights (see below) and retired. Jerry was one of the founders of MACHA, which later changed its name to the ACCI and finally merged with HIA to become CHA. No question, Jerry is one of the industry's good guys. But the Hacker name lives on in the industry. Jerry and Dee's daughter, Katie, is a top bead expert/author. Her 20 books have sold 450,000+ copies. Her latest is Hip To Bead, published by Interweave Press. Visit www.hiptobead.com for a preview. Katie can also be seen on the PBS series, Beads, Baubles & Jewels (www.beadsbaublesandjewels.com), and has her own site at www.katiehacker.com and an online journal at www.katiehacker.blogspot.com.

2. There have been numerous comments in CLN recently about the younger consumer for whom technology is so ubiquitous that she may not feel the need to escape to high-touch leisure activities such as scrapbooking and crafts. Now Newsweek has published a report that sales of wristwatches were down 4.9% last year. Why? Because so many consumers carry iPods and cell phones that tell time, they don't need a watch. (If you haven't read readers' comments/analysis about this younger consumer, click on Business-Wise and "Benny Da Buyer" in the left-hand column.)

ACQUISITIONS. Jerry and Dee Hacker have sold Dee's Delights to Handley House. After 30 years in the miniatures and dollhouse business, the Hackers are retiring. They have sold all trademark companies, including Chrysnbon, Chrysolite, Multi-Minis, Barbara O’Brien curtains, NWC fencing, Magic Systems, etc. The operation will move to Handley’s headquarters in Wheeling, WV. For more on Handley House, visit www.handleyhouse.com.

AWARD, I. Walnut Hollow won the 2006 John E. Brogan Environmental Achievement Award from the Wisconsin Department of Natural Resources. It's the DNR’s highest recognition to reward outstanding achievements in environmental protection. CEO/Founder Dave Ladd. said, "We’re a manufacturing company and involved with wood. There’s a lot we could be doing wrong, like putting waste in landfills, but we’re not. This award is a good personal feeling not only for my family and me but for the company as well.

AWARD, II. Fortune Small Business announced that Acme United has been ranked 53rd on the sixth annual FSB 100 list of the fastest growing small public companies in America. The companies were measured by three-year revenue and earnings growth and stock performance. CEO Walter Johnsen said, "We are excited that Acme United has been selected for the second year in a row .... We continue to expand our distribution channels, gain market share and invest in new products." Acme supplies cutting devices, measuring instruments, and safety products for various industries. Brands include Blooms, Clauss Forged Scissors, and Westcott.

HOBBIES. The iHobby Expo Oct. 19-22 sponsored by the Hobby Manufacturers Assn. will feature 250+ companies, including 85 new exhibitors in model railroad, plastics and diecast, radio control, model, and general hobby categories. There are workshops and free seminars, For more info and online registration, visit www.ihobbyexpo.com; for a brochure, call 877-TO-HOBBY ... HMA also has a new brochure, What’s Your Hobby?, designed to attract more consumers to hobby activities. It explains HMA's new marketing campaign, "Hobbies…for the fun of it," and launches its consumer website, www.myhobbyfun.com, which is not yet "live." The brochures are available for HMA members and affiliate organizations. For copies, call 973-283-9088 or email pat.koziol@hmahobby.org.

PEOPLE. Wilton promoted Marvin Oakes to Sr. VP/General Manager ... Darlene Johnson is the new Sales & Marketing Manager for Sakura.

YARN, I. Spinrite reported a net loss of $132.9 million for the quarter ended July 1, primarily due to a $129-million writedown of goodwill, compared to a $6.1-million profit a year ago. Revenue fell to $11.3 million from $35.2 million. Gross profit dropped to $1.6 million from $14.7 million a year ago. (Note the numbers are in Canadian dollars.) The company said the decline was due to retailers reducing their inventory and CFO Ryan Newell told the Canadian Press sales of fancy yarn fell 87.7% from a year ago.

YARN, II. To read a fascinating opinion on the popularity of knitting in Great Britain, published in the London Times, visit www.timesonline.co.uk/article/0,,24390-2309801,00.html. Excerpt: "The websites that cater to interests such as knitting, crochet, sewing ... are not the fuddy-duddy, slightly sad places you might imagine them to be. Many look so beautiful that they could win design awards, are written with wit and panache, and are patronised not by old fogeys but by hip young women in their twenties. (If I’m whetting your palate, try www.knitty.com ... www.funwithyarn.com ... cupcake crochet at www.twinkiechan.com ... www.stitchnbitch.co.uk ... and www.stitchymcyarnpants.com.)"

MAGAZINES. Ellie Joos informed CLN that Women's Wear Daily sanctioned crafts in the Aug. 10 edition – a cover and two inside pages devoted to DIY'ers who are turning their craft into businesses, including Frank Zappa's daughter, Diva, who said, "I look like I should be a crazy drug addict, but, really, all I do is knit, drink tea, and hang out with my kitties." The article also quoted the Craft Yarn Council of America survey, talked about knitting cafes, mentions new books on beading, crochet, and knitting that are about to hit the stores in September and interviewed several designers, including Wendy Mullin who has a store and an upcoming book called "Sew U." She also has a licensing agreement with Simplicity.

CREDIT. Barclays Bank Delaware and Jo-Ann's are offering a new Jo-Ann Platinum MasterCard, which will be linked to the company's Preferred Customer program.

QUOTATION. " ... following the pattern at the other summer shows, traffic [at the New York Gift Show] did seem to be off." – Gifts & Decorative Accessories

CONDOLENCES. Our very best wishes to the family and colleagues of Gary Richardson, 57, the Editorial Director for Dynamic Resource Group, who died late last month. Send condolences to the family at 9576 Pawnee Way, New Haven, IN 46774 and memorials to the American Heart Association.

To see the latest listings by 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*: 17.15 ... Change**: +0.31
Hancock Fabrics (HKF). Last*: 3.04 ... Change**: -0.08
Jo-Ann Stores (JAS). Last*: 14.89 ... Change**: +0.68
Michaels (MIK). Last*: 42.74 ... Change**: +0.15
Wal-Mart (WMT). Last*: 44.49 ... Change**: -0.25
CLN Retail Index. Last*: 122.31 ... Change**: +0.7%
Dow Jones Index. Last*: 11,381.47 ... Change**: +1.3%

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xxx

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