Date: November 6, 2006
Vol. X, No. 21

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TABLE OF CONTENTS

COMMENTARY: THE MICHAELS DEAL RAISES QUESTIONS 

Two possible scenarios: 

1. Michaels could be a stronger, more profitable force in the industry because management doesn't have to think short-term in order to please stockholders who constantly asked, "What have you done for me lately?" Or the new owners, Bain and Blackstone, might ask the same question even more forcefully.

2. Michaels' cash flow is supposed to pay off the debt and pay the management fees that these investor groups always charge. In this case, the interest rates alone on the senior notes Michaels took on are 10% and 11.375%.

What happens if/when the industry goes through one of its fallow periods when there is no hot trend to draw customers? Will Bain and Blackstone insist on unwise, short-term cuts and require management to be even more demanding of its vendors?

Stay tuned.

NEW! Thought Leader. A new column by Kathy Lamancusa, who has been reporting on industry and society trends for 20+ years.

Category Reports. Pt. II in the ongoing saga of a non-crafter turned enthusiast: Barbara starts selling her jewelry.

Kate's Collage. Last week CLN emailed a newsbrief with details about the Michaels sale to Bain Capital and The Blackstone Group, and October's retail sales figures. If you missed that newsbrief, it's right here.

Scene & Heard. Industry pro Jean Kievlan reports on the trends and mood of the recent Quilt Market in Houston and Ellie Joos reports on the Premiere Vision show in Paris.

Store Layout/Design Tips. Georganne Bender of the consulting/seminar firm Kizer & Bender and Ann Krier of Design One World give their thoughts on how store layouts help or hurt aging consumers trying to shop.

Note: To read the columns, click on the titles in the left-hand column of the main page.

A few months ago CLN asked how you felt the U.S. was doing and for whom you were thinking of voting for the House of Representatives. Tell CLN how you plan to vote tomorrow and we'll compare the industry to how the country at large voted – and see if the election campaign changed voters' minds. To vote, click on Industry Polls in the right-hand column, or click HERE.

Apparently the industry is entering the critical holiday selling season with modest expectations. Only 10.7% of CLN readers in this unscientific poll think industry sales will increase by 10% or more. More than a third, 35.7% believe the increase will be 1%-10%, but a higher percentage, 39.3%, believe sales will be flat. A sales decline of 1%-10% was predicted by 10.7%, while 3.6% think the decline will be more than 10%.

In its last public report, Michaels announced third-quarter sales rose 6.7% to $896.1 million, and same-store sales increased 3.3%. There was a 3.5% increase in average ticket, a decrease of 0.1% in transactions, and a 0.1% decrease in custom frame deliveries. A favorable Canadian currency translation added approximately 0.4% to the average ticket increase.

Year-to-date, sales have risen 3.8% to $2.497 billion and same-store sales are up 0.1%. There has been a 2.7% increase in average ticket, a 2.5% decrease in transactions, and a 0.1% decrease in custom frame deliveries. The favorable Canadian currency translation added 0.5% to the average ticket.

The Southwest, Southeast, and Northeast zones were the quarter's strongest performers, while the strongest category performances were general crafts, primarily driven by jewelry and beads; frames; seasonal; and ribbon/wedding.

Because the company has gone private, a press release stated, Michaels "... will incorporate its future sales information within any required future public filings and will therefore discontinue issuing separate quarterly same-store sales releases. The company currently plans to release its fiscal 2006 earnings results in late February..."

The Wall Street Journal says sewing is hot. The Nov. 1 issue presents a variety of facts to prove and explain the resurgence in sewing.

1. The number of sewing machines imported into the U.S. has doubled to 2.8 million since 1999. (Note: All sewing machines are imported, so this represents the total sales.)

2. Stores such as Haberman Fabrics (Royal Oak, MI), the Stitch Lounge (San Francisco) Vogue Fabrics (Evanston, IL), and Fabricland (North Plainfield, NJ) report rising sales and big increases in class attendance. Jo-Ann's reported better sales in dress forms and cutting tables.

3. Simplicity Pattern reported increased sales helped by a retro line and a line designed by Wendy Mullin. McCall Pattern explained its increased business on the success of its Sew Hot, Sew Now and vintage lines.

Why the increase now? Some of the causes the Journal cited: A) Sewing machines that enable the consumer to do more. B) Fashion trends that emphasize personalizing. C) The "retro" trend. D) Patterns appealing to a younger, more urban consumer. E) The TV series, Project Runway, "a reality show that showcases pattern-making and sewing, as fashion designers compete to display their work in New York."

(Comment: This article is very similar to the first New York Times article about the Knit-Out in New York, and the In Style article showing actresses knitting on movie sets. Those two articles started a wave of publicity about the knitting trend, which actually launched the trend nation-wide. Could the Journal article start a similar wave?)

Some info on the new owners of Michaels: In 1985 Blackstone opened its first office with a staff of four, including the founders, Peter Peterson and Stephen Schwarzman, and a balance sheet of $400,000. In July Blackstone closed the world's largest equity fund, BCP V, with total commitments of $15.6 billion. The company has raised more than $63 billion.

Today Blackstone's holdings include such diverse companies as Celanese, CineWorld, Extended Stay America, FGIC, Freedom Communications, Graham Packaging, HealthMarkets, Houghton Mifflin, Nalco, Orangina, Southern Cross/NHP, SunGard, Travelport, TRW Automotive, TDC, Universal Orlando, Vanguard Health Systems, and VNU. The total enterprise value of all transactions effected up to June 30 is $158+ billion.

When investing, Blackstone often partners with other corporations. In the past it has partnered with Time Warner, AT&T, Northrop Grumman, Sony, Union Carbide, Union Pacific, USX, and Vivendi.

Bain Capital was established in 1984, and now has approximately $40 billion in assets under management. It once owned Tulip, the industry's leading fabric paint company, now owned by Duncan. Bain has invested in 45+ retail and consumer product companies, including Burger King, Burlington Coat Factory, Brookstone, Domino's Pizza, Duane Reade, Office Depot, FTD, KB Toys, Samsonite, Sealy, Shoppers Drug Mart, Sports Authority, Staples, and Toys "R" Us.

1. Early response to the news that Martha Stewart will be the keynote speaker has been overwhelming, CHA officials report. If you want to attend her speech (Sun. Jan. 28, 6 p.m.), order your tickets early.

2. There will be a special track of programs regarding the the growing Hispanic market: "The Essential Hispanic Market Overview" (Sun., Jan. 28, 3:00-4:15 pm) address the nuances of acculturation, country of origin, and language usage among the 40 million+ Hispanics in the U.S. ... "Capturing Your Share of the Hispanic Craft Market" (Mon., Jan. 29, 11:00 am–12:15 pm) will tell retailers key triggers for shopping and crafting and drivers of purchasing decisions among the Hispanic customer base. ... a customized session for manufacturers will be held (Tues., Jan. 30, time TBA) focusing on designing products for this market.

3. The CHA SMART Store returns, an enhanced version of last’s year 3500-sq.-ft. scrapbook store. It will have 200+ modifications, including daily merchandising changes, live demos, etc. There will be eight educational seminars ("Consumer Loyalty Programs," "Layout & Design," etc.) and the entire store worth approximately $165,000 will be raffled off.

4. The DIY network is sending four of its "stars" to the show for demos and lectures: Michele Beschen, host of B. Original, on "Frames and Wall Décor" ... Vickie Howell, host of Knitty Gritty, on "Fabric Treatments" ... Cathy Filian and Steve Piacenze, co-hosts of Creative Juice, on "Floral Design" and "Decorative Painting." There will also be room vignettes – Sun Porch, Library/Office Room, and 'Tweens Bedroom/Study Room – created by members of CHA's Designer Section.

5. Online registration is scheduled to begin tomorrow, Nov. 7. The deadline for being listed in the show directory is Wed., Nov15. Visit www.chashow.org.

6. For exhibitors looking for coverage in trade magazines' show issues: The deadline for submitting editorial (new product) info for Craftrends and the new Memory Trends is Nov. 17. Send material to Beth Hess (beth.hess@primedia.com) ... CNA's deadline is Nov. 15. Email Karen Ancona at karen.ancona@fwpubs.com. (Jpeg or tiff, 3", 300 dpi, + 40 words of copy; subject line of the email should be company name and "Showcase.") ... For Scrapbook Retailer, the deadline is today, Nov. 6. Email Maddy Roe at maddy@scrapbookretailer.com or visit www.scrapbookretailermagazine.com and click on "upload a file." Send one "clean" (no hands, logos, or words) image at 3"x5" at 300 dpi or greater, plus a short (30 words maximum) description and company name, website, phone number, and booth number, if known.

River Capital, an Atlanta based private investment firm, has purchased Kelly’s Crafts Inc. which will operate as a wholly-owned subsidiary of the New Image Group. Kelly’s Crafts manufactures, designs, imports, and sells kid's craft items. The product lines include sun-catchers, glass stain, frames, craft sand, buttons, and seasonal products.

Located in Union, SC, New Image Group was created in November, 2003 when RC acquired CPE, a manufacturer of acrylic felt and other textile products, and Masterworks Décor, a producer of botanical decor. This past July River Capital acquired Signature Designs, an importer of artificial floral arrangements, and last December RC acquired Lara's Crafts, a supplier of wood parts and accessories. All are now part of RC's New Image Group.

Wal-Mart is conducting tests involving moving and shrinking the craft department, possibly eliminating fabric altogether, and telling vendors the area is under heavy pressure to improve its performance. Which raises the question: What if, someday, Wal-Mart dropped fabrics and crafts? Some thoughts:

1. Wal-Mart competitors, chains and independents alike, would benefit. Jo-Ann's and independent craft stores that carry fabric would benefit the most.

2. The size of the industry ($30+ billion according the CHA research) would decline at first. Most of the Wal-Mart sales would move to our stores, but some would be lost.

3. Some Wal-Mart vendors who are also important suppliers to other chains and independents, could end up in bankruptcy.

4. More independents would spring up, especially in specific categories.

5. The pressure to reduce prices would not abate.

6. Because Wal-Mart is so influential among other retailers, non-industry stores such as Target will be less inclined to add and/or expand any of our products.

7. Currently the industry is awash in investment companies looking to buy into the industry. Would they become disenchanted with the industry if Wal-Mart wasn't a player?

8. The biggest question of all: Are there many non-crafting consumers who, while shopping at Wal-Mart, buy a craft product to try something new? Does Wal-Mart attract many novices who, after some initial success, then move on to the greater selections offered by our chains and independents?

Of course all this is premature. "Wal-Mart could go one way or another," one veteran industry pro told CLN. "They could eliminate the departments, or decide to make a real commitment to it like they did with toys a few years ago."

Email your thoughts – on or off the record – to CLN: What do you think Wal-Mart will do? And will it be good or bad – short-term and long-term – for the industry? Send emails to mike@clnonline.com.

Recently Wal-Mart has attempted to go a bit upscale with store remodeling, wine and sushi bars, and the Metro 7 clothing line. The decision to eliminate the decades-old layaway program seems to be part of that same philosophy. Perhaps the idea of dropping or reducing fabric and craft departments is, too.

"I think they may be forgetting about their core customer," an industry manufacturer and Wal-Mart vendor told CLN.

But maybe trying to appeal to a hipper, more affluent consumer is not such a good idea. As reported in CLN's recent newsbrief, Wal-Mart's October same-store sales were lousy. CEO Lee Scott blamed the Metro 7 apparel line and store remodeling hampering customers. A few months ago, he was blaming high gas prices on disappointing numbers, but no mention of that now that gas prices have dropped.

Trying to emulate trendy Target is not easy. "Wal-Mart is not cool," retail consultant Howard Davidowitz told CNNMoney.com. "It's impossible for Wal-Mart to be cool because they would have to discredit their entire business to do that."

So maybe Wal-Mart execs will realize that, admit their mistakes, and go back to basics. If the company does, it may not drop crafts anytime soon.

Tradition says the day after Thanksgiving is when retailers' bottom line goes from red to black. But there may not be as much merchandise sold this year as there once was. Consider:

1. According to the survey by the National Retail Federation, 40% of U.S. consumers did not wait for Black Friday to begin their holiday shopping, and retailers are encouraging the trend.

2. The Hobby Lobby in College Station, TX had a Christmas tree decorated with scarecrows, which were replaced with Christmas decorations after Halloween. "Retailers want[ed] shoppers to think about the ghost of Christmas future even before they dealt with the goblins of Halloween present.... It's almost as if Santa is being marketed as a Halloween costume." – Associated Press

3. Now various retailers are already implementing policies such as expanded hours and Christmas sales long before Black Friday. "They want to get you before you maxed out your credit cards," said Gail Hillebrand of Consumers Union to the CBS station in San Francisco. "It's a hook to get you to go there first."

4. In light of Wal-Mart's poor showing in October (with the exception of highly discounted toys), "They are going to be very price aggressive," Ken Perkins of Retail Metrics told the Associated Press. "And it is going to have an effect on everyone. It is going to force other retailers to cut their prices, which in turn will squeeze their profit margins."

5. Meanwhile, many consumers will buy gift cards rather than merchandise; the NRF survey indicated that 52.8% of respondents said they would like to receive a gift card this year. Gift cards are counted as sales only when they are redeemed.

6. Plus, many consumers will buy on the Internet rather than in brick-and-mortar stores. The NRF survey indicates the average consumer will spend $791.10 on holiday merchandise and 28.9% will use the Internet for their shopping. New research by Forrester Research indicated U.S. online holiday sales will reach $27 billion, a 23% increase over last year.

(Note: CLN has launched a section devoted to new products and any vendor is welcome to submit material. However, CLN will not publish photos and lengthy descriptions – that's the trade magazines' forte. CLN will publish a very brief description and a link to it IF the vendor's website has a description of the product or line. So vendors, email your product press releases to CLN at mike@clnonline.com WHEN the product is on your website.)

Leisure Arts published new books celebrating Debbie Mumm's 20 years of creativity: New Expressions and Memories & Milestones. Visit http://business.leisurearts.com/catalog/search_pubs.asp; type Debbie Mumm in the search engine. There are numerous other new books, many published in conjunction with Creating Keepsakes and Better Homes and Gardens.

MCG Textiles has new, blue-lined, 5-mesh canvas, perfect for latch hook, locker hooking, and needlepoint products. Visit http://mcgtextiles.com/whats_new.cfm.

Rupert, Gibbon & Spider unveiled Jacquard Tee Juice Markers, a "big bold marker that delivers a lot of color!" for t-shirts. Visit www.jacquardproducts.com/products/teejuice.

Scott Publications announced that its Just Cards! magazine has been so successful it will expand into a quarterly, with the next issue on sale Dec. 12. For more info, visit www.scottpublications.com.

Stemma, distributed by Masterpiece Studios, unveiled its new "citrus blue line of 12"x12" paper designs, coordinating resin stickers, rub-ons, hang tags, ribbons, quick borders and journal curtains. Visit www.masterpiecestudios.com/whatsnew.cfm.

1. What, really, is happening with yarn? Is the consumer losing interest, or is it something else. Are sales down, or are sales steady but lower prices caused by excess inventory mean revenues are down? A price/inventory dilemma will sort itself out, but a drop in consumer interest could be cause for concern. Does the industry have reason to worry? Email your thoughts – on or off the record to me at mike@clnonline.com.

2. I started reporting on Michaels stock about 15 years ago when it traded around $3.25. After stock splits it finally ended at $44. In the last 10 years it gained about 1,600% – far outperforming the Dow. As one vendor said to me, "I've made more money on Michaels' stock than I have selling to the company."

RENT. Wonder why there are no scrapbook stores on New York's Fifth Avenue? The cost of leasing prime retail space there is $1,350/ sq. ft., according to a survey by the real estate consultant Cushman & Wakefield and reported by Bloomberg News.

CLOSING. Total Crafts is closing its stores in Annandale, Burke, and Chantilly, VA and in January the Fairfax store will become Total Framing.

CUSTOMER SERVICE. According to a new survey of 8,000+ consumers by the National Retail Federation and American Express, online retailer Amazon.com is the nation’s top company for customer service, followed (in order) by Nordstrom, L.L.Bean, Overstock.com, Lane Bryant, Boscov’s, Kohl’s, REI, Lands’ End, and Macy’s. The survey also revealed customers expect the most from restaurants, followed by specialty stores and department stores.

QUOTATION: "Retailers big and small face the same basic challenges: shoppers demand more than just low-priced merchandise when they shop. In the past retailers’ success has largely been a function of offering the right products at the right price in the right location. But those factors are less important today as shopping becomes one of our favorite forms of recreation. Today success in retail is less about what you sell, and more about how you sell it." – Pam Danziger, author of the new book, Shopping: Why We Love It and How Retailers Can Create the Ultimate Customer Experience, published by Kaplan Publishing.

HANCOCK. Received an extension until Jan. 27 to file its annual report for the year ended last January. If the company does not meet the deadline, the New York Stock Exchange would de-list the company or grant another extension. Hancock's bank group agreed to amend its credit facility to extend the deadline.

WAL-MART. Says it will customize its stores' inventory and layout for six key groups, including Hispanics, African-Americans, and affluent shoppers ... Reduced its expansion plans for 2007 from an 8.0% increase in retail floor space to 7.5% and cut capital expansion increases from 15%-20% to 2%-4% ... Revamped its website, walmart.com. The site does not include any craft, fabric, or scrapbook supplies, only a few industry-related books and sewing machines.

QUOTATION. Deborah Weinswig, an analyst at Citigroup, said in a letter to investors, "We believe Wal-Mart will roll out another format in the U.S. in 2007, which could be similar to the Bodega format in Mexico based on the company's success there with this format." (Women's Wear Daily)

CHA. The CHA Board of Directors has elected new officers for 2007. Jim Scatena, President/CEO of FloraCraft, is the Chief Governance Office, replacing Jim Bremer of Tall Mouse, whose term has expired. Jim remains on the board as Past Chair. Mike McCooey, President/CEO of Plaid, was elected Vice Chair, and Emma Gebo, President of Crafts & Frames, (dba SIERRA’S) retail store in Pocatello, ID, was re-elected Secretary. All have extensive industry and association experience, and served on the HIA/ACCI merger task force.

FINANCES. The assets of Promotions Unlimited, the Racine, WI-based distributor and provider of advertising and promotional programs for independent stores, are up for sale. One of the assets is the trademark and franchising rights to Ben Franklin, Ben Franklin Crafts, and Ben Franklin Stores. The sale is being conducted by a trustee for the creditors. It is expected that Promotions' owner Ira Greenberg will buy the assets and continue the operation. The deal is expected to be completed within 30 days. Greenberg founded the company in 1973.

MOVIES. Actress Julia Roberts has agreed to produce and star in film, The Friday Night Knitting Club, based on an upcoming novel by Kate Jacobs, Daily Variety reported. Roberts will play a single mother who tries to raise a teenage daughter while running a yarn shop and dealing with customers.

BEADS. To read an excellent, free newsletter for consumers wishing to sell their jewelry creations visit The Home Jewelry Success Resource at www.home-jewelry-business-success-tips.com/index.html.

MEDIA. CKmedia is the new dba name of Enthusiast Media, the new owner of Craftrends, MemoryTrends, Creating Keepsakes, Simple Scrapbooks, Paper Crafts Magazine, McCall’s Quilting, McCall’s Quick Quilts, Quiltmaker, Quilter’s Newsletter, Sew News, and Creative Machine Embroidery.

CANDLES. Madison Dearborn Partners agreed to buy Yankee Candle for about $1.4 billion in cash and assumed debt. Yankee shareholders will receive $34.75/share.

SHOWS. The recent iHobby Expo in Chicago had a big increase: 1,833 buyers, up 50% from the Los Angeles show a year ago. The Sat./Sun. consumer show drew 15,282, more than triple the same event in Los Angeles. The '07 show will return to Chicago Oct. 18-21. For info, call 973-283-9088 or email boothsales@ihobbyexpo.com.

PEOPLE. Andy Bailen was named Exec VP of Loew-Cornell. He's held exec positions with Party City, Blockbuster, Noodle Kidoodle, Circus World Toys, and Kay-Bee toy stores ... ... CHA announced the appointment of Gail Curtis as Membership Marketing Manager.

SHOWS. Booth space for The National NeedleArts Assn. San Diego show, Jan. 13-15 has sold out. There will be 342 exhibitors, including 23 new vendors, in 880 booths. (There is a waiting list.) "Add intense education and our fabulous fashion show and Galleria to the mix, and TNNA can proudly boast they have all of the elements in place for the best show in needle arts history," reports TNNA Exec Director Patty Parrish. Online registration ends Dec. 13. Visit www.TNNA.org.

MARTHA. For the third quarter, her company lost $0.49/share, compared to $0.51 a year ago, but excluding additional items, the loss was $0.13, a nickel less than expected. Revenue increased 48% to $61.1 million, thanks to better publishing ad revenue and new retail distribution deals.

TV. The 8th series of America Quilts creatively with Sue Hausmann uplinks to PBS stations Dec. 31. A set of 4 DVD's with the 13 episodes is available for $24.95 to America Quilts creatively, Box 458012, Westlake, OH 44145 or call 877-881-4179. The series is produced by KS, Inc. Productions and is sponsored by Sulky of America, The Electric Quilt, Coats and Clark, Elisa's Backporch, Moda Fabrics, Rit Dye, Robison-Anton Textile, Rowenta, The Warm Co., Colonial Needle, June Tailor, Bead Thread Designs, Wrights, Quiltsmart, and Liten Up.

QUOTATION. "I think one of the factors that is very important is that people feel they are not in control of very much anymore. …In the end, they are going to say: 'Let's just have a good Christmas.' " – Wendy Liebmann, President of WSL Strategic Retail, a marketing consulting firm (Louisville Courier Journal)

To read the latest 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*: 21.68 ... Change**: +0.26
Hancock Fabrics (HKF). Last*: 2.96 ... Change**: +0.05
Jo-Ann Stores (JAS). Last*: 17.72 ... Change**: +0.22
Michaels (MIK). Last*: 44.00 ... Change**: +0.35
Wal-Mart (WMT). Last*: 47.53 ... Change**: -1.84
CLN Retail Index. Last*: 133.89 ... Change**: -0.7%
Dow Jones Index. Last*: 11,986.04 ... Change**: -0.1%

The Discover Card is in the midst of an extensive television ad campaign in which consumers are tossing their other credit cards onto the street where they are cut apart by hundreds of dancing, orange-handled scissors. Apart from the technological marvel of making hundreds of scissors "dance," the commercials are a wonderful public relations/branding boon to Fiskars.

Which raised the question, why orange? According to the company, in 1967 the company decided to make a new type of scissors with sharp, stainless-steel blades and ergonomic, plastic handles. "We made hair dryers and some other equipment for the kitchen," says Olavi Linden, Director of New Product Development for the parent company, which was founded in 1649 (yes, 1649) in Finland. "The set up man at the molding machine had some orange left in the barrel; so the first few handle samples came out orange before switching to other colors. "

The orange handles were voted on like the other colors, even though orange was never part of the original color palette for the new scissors. When all the data was compiled, orange was the clear winner.

In addition to dancing in the streets for the Discover Card, the orange-handled scissors are part of the permanent design collection of the Museum of Modern Art in New York and the Philadelphia Museum of Art. 

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