Date: March 1, 2004
Vol. VIII, No. 5

Printer Version

TABLE OF CONTENTS

COMMENTARY: SOCIAL EVENTS BOOST SALES

Elaine Schmidt faxed me a copy of an article about the growing trend of bead shops throwing parties for their customers. They sound very similar to quilting bees and scrap parties – further evidence of the social component to crafting, no matter what the category.

I've even seen that phenomenon in decorative painting. The stereotype of painters as solitary people, working alone in a garret, is not true with our consumers. Many of the women who attend the decorative painting shows will take classes all day – and then gather together in their hotel rooms at night to paint some more.

The more opportunities retailers can give their customers to scrap, quilt, knit, craft, paint, etc., together, the better for everyone.

Memory, Paper & Stamps. Some very serious challenges are on the horizon for independent scrapbook retailers. Mike Hartnett details the problems and offers solutions.

"Vinny Da Vendor". This month the space is given to the head of a very small, one-person company whose story illustrates the plight of many industry companies – must reading for small companies trying to gain a foothold in the industry, and larger companies willing to invest in creativity.

Scene & Heard. Trend pro Ellie Joos' take on the trends and products at the HIA show.

Legal Q & A. Legal pro Eva-Marie Boyd explains how to protect your ideas.

(Note: If you visit one of the columns mentioned above and it appears to be an "old" column, click the "Refresh" or "Reload" button on your browser.)

Net income for the year ended Dec. 31 increased 20% to $17.3 million ($0.88/fully-diluted share) on sales that increased 10.3% to $433.9 million.

For the fourth quarter, sales rose 10.9% to $149.7 million and same-store sales increased 3%. Net income increased by 20% to $14.6 million.

CEO Jack Parker said, "We expect continued growth in 2004, and we are very pleased that we are trending above our sales plan thus far in the first quarter."

Expectations for the new year: open 16 stores, relocate two stores, and expand one ... Same-store sales growth in the mid-single digits ... Overall annual sales to grow 18%-20% ... Earnings/share to grow 7%-10% to $0.92-$0.95 – that's a reduction of about $0.12/share due to changes in accounting practices.

Rag Shops has retained the investment banking firm of SunTrust Robinson Humphrey "to provide financial advisory services and review possible strategic alternatives for the company, including, but not necessarily limited to, sale, merger, or other corporate transactions, in an effort to maximize shareholder value," a company press release said. "There is no assurance that any transaction will result from the engagement or that, if a transaction does occur, it will be on terms that all shareholders consider favorable."

The company's common stock is traded on the NASDAQ SmallCap System under the symbol RAGS. The stock was selling for $3.80 when the announcement was made and closed the week at $4.14. In the past year the stock has fluctuated between $2.85 and $4.73.

The move comes less than two months since the company's last quarterly report, which showed a drop in earnings of 52.3%. Overall sales had risen, but same-store sales dipped 1.8%.

Management blamed changes in the company's ad program and disappointing fabric sales for the same-store sales decline. President Jeff Gerstel said, "While we are disappointed with first quarter results, we have analyzed the factors leading to the earnings decline and are actively implementing steps aimed at improving sales, margin and expense performance."

The last annual report was issued in late November and showed a net loss of $705,000 compared to a profit of $290,000 the prior year. At the time, President Jeff Gerstel said, "Our net loss for the fiscal year resulted from lackluster sales coupled with increased costs. Growth in our craft categories was not sufficient to offset softness in our fabric and floral segments, especially in the fourth fiscal quarter. We are making changes in product mix, advertising, personnel, and planning aimed at reversing our results."

Net earnings for the year ended Feb. 1 were $17.4 million ($0.94/diluted share), down 11.7% from a year ago. Sales rose 1.2% to $443.6 million; same-store sales also rose 1.2%.

For the fourth quarter, earnings were $7.6 million ($0.41), down 13.6%. Overall sales slipped 1.1% to $127.2 million and same-store sales were down 1.5%.

A competitive, promotional environment was a problem, CEO Larry Kirk said, but the major cost was the transition to the new distribution center. "The most notable pressure on earnings in 2003 came from the temporary but significant costs of operating two distribution centers for much of the year, and then transferring inventory, fixtures, equipment and systems to the new facility. In 2003, we invested $22 million in capital assets related primarily to the new D/C and the rollout of store point-of-sale systems, repurchased almost $10 million of treasury shares, paid over $7 million of cash dividends, and temporarily increased our level of high-turn basic inventory in anticipation of the move to Baldwyn," Kirk said, pointing out that the company's outstanding debt is only $10 million.

The transition to the new facility wasn't flawless, Kirk added, saying there were some shipping problems late in the year, but the company should be poised to reap the benefits of last year's investments. Kirk expects the new facility will allow weekly shipping to all stores beginning this month, plus efficiencies in inventory, freight, labor, utilities, and maintenance, plus cutting the response time to stores in half. Point-of-sale systems are operating in 160 stores, and Kirk expects all stores will have POS systems by year's end, a year ahead of schedule.

Inventories had increased due to adding yarn and small furniture, expanding quilt offerings, and increasing stock levels of basic goods in case of problems with the transition to the new warehouse, but those stock levels should subside fairly quickly, Kirk added.

Due to upgrading and relocations, the stores now average 13,700 sq. ft., up from the 8,000-9,000 sq. ft. basic store of a few years ago. "The right-sizing of our stores and the merchandising improvements that are being made have resulted in significantly more sales and less inventory in 433 stores today than in the 500 smaller, less productive stores we operated then," Kirk said. "The increased productivity has also reflected in better gross margins and increased cash flow. We're adding new products and improving our merchandising while keeping our sights on the business we know best -- fabrics."

Net sales for the twelve months ended Jan. 31 were a record $256.3 billion, up 11.6%. Income rose 13.3% to $8.9 billion ($2.03/share). Net sales for the quarter rose 12.2% to $74.5 billion, and income increased 11.0% to $2.7 billion. Fourth-quarter same-store sales for the Stores division rose 4.8%.

The store count as of Jan. 31: 1,478 Wal-Mart stores, 1,471 Supercenters, 538 Sam's Clubs, and 64 Neighborhood Markets in the U.S., plus units in Argentina (11), Brazil (25), Canada (235), China (34), Germany (92), South Korea (15), Mexico (623), Puerto Rico (53), and United Kingdom (267).

Final Numbers. Buyer attendance was 7,921; international buyer numbers increased to 1,539, or 19.4% of total buyer attendance. However that means the number of U.S. buyers was down compared to last year, but up over the last Dallas show in1999 ... There were 1,159 exhibitors in 3,049 booths, the first complete sellout of exhibit space in 10 years.

Miscellaneous. Audiotapes of many of the events are available at www.aven.com ... Attendance at the keynote address by Barbara Bush surpassed 1,500 ... Members of the media voted Golden Press Kit awards to Scrapworks (1st place); Ellison (2nd ); and Junkitz (third).

Charity. There was a 23% increase in the number of companies participating in the Kids In Need program. Exhibitors contributed leftover product to the School, Home & Office Products Assn.'s Kids In Need Resource Centers for distribution to needy students and teachers in the Dallas area. These donations were valued at more than $225,000.00, which combined with the $20,000.00 raised at the HIA Foundation Golf Tournament, was a total donation of more than $245,000.00 to support crafting in education.

Future Boards. This year's Nominating Committee for HIA (soon to be CHA) is comprised of members elected by the membership – Gail Czech (The Creative Network), Barb Lashua (Fiskars), and Robert Workman (Provo) – and three elected by the HIA board: Dave Bolen (Jo-Ann's.), Bob Ferguson (Ferguson Merchandising), and Committee chair Richard Brown (Spinrite). This Committee will choose nominees for the Board later this year.

Media. HIA spokespersons – usually Terri Oullette, the National Craft Month spokesperson – appeared on KDFW-TV (FOX) Dallas; CNBC, KTVK-TV (Ind) Phoenix; WFAA-TV (ABC) Dallas; WGN-TV (WB) Chicago; and KDAF-TV (WB) Dallas – and HGTV's Carol Duvall Show was taping on the show floor. Among the registered media were Martha Stewart Living, Woman's Day, KDFW-TV (FOX) Dallas, Parents Magazine, and the Dallas Morning News.

In our previous issue of CLN, we only had time to give you the names of the companies who won HIA Innovations (new product) awards, as voted on by the retailers after seeing the entrants in the Innovations booth. Here are the winners again, this time with a short description of their products – and links to their website when possible.

Best of Innovations & Scrapbooking/Stationery. Ranger Industries for a distressed ink paper line for scrapbooking. The product creates an aged look on papers, fibers, photos, etc. www.rangerink.com.

Art Materials/Framing. Callen Corp. for a shadow-box product that converts any frame into a way to display memories in 3-D.

Fabric/Quilting/Needlecraft. Flights of Fancy for its fabric-trimming line, Special Effects. It features floral and sparkling accessories with a Victorian flair. www.flightsoffancyboutique.com/wholesale.

Florals/Seasonal/Home & Garden. Design Master for a wide selection of professional use cleaning products for crafters – including cleaners for hands, workshops, shears, glass, and silk flowers. www.dmcolor.com.

General Crafts. Walnut Hollow for the Versa-tool, which can be used for woodburning, leather crafting, stamping, paper crafting, embossing, stencil-cutting, pattern transferring, etc., and the Hot Marks scrapbooking tool. www.walnuthollow.com.

New Exhibitor. Riverwind, for a flexible metal paper product that comes in copper, silver, stainless steel and titanium.

A bill in Congress would make it easier for trade associations to offer health insurance opportunities for its members, most of whom have small operations such as retail stores, relatively tiny manufacturing facilities, etc. Passage of the legislation could result in all of us being able to purchase health insurance through our industry's trade associations.

Trade associations with members in various states often find it impossible to adhere to each state's insurance requirements, but the bill would ease those problems.

The U.S. House of Representatives has already passed the bill, "The Small Business Health Fairness Act," (S. 545), and it was introduced in the Senate by Sen. Olympia J. Snowe. Joining Snowe as co-sponsors are Sens. Kit Bond, Jim Talent, John McCain, and Elizabeth Dole. President Bush urged the Senate to pass the bill in his State of the Union address and it has been strongly endorsed by the National Federation of Independent Business.

To learn more, visit www.ahpsnow.com. (Comment: With all legislation, the devil is in the details, but this certainly sounds like something about which we should write our Senators.)

Did you see enough paper at the HIA show? Here are some thoughts emailed from the folks at Arnold Grummer:

Look for deeply textured papers to be on the shopping list of paper artists, plus every shade of orange, pink, and green, this spring. Sparkle is also attracting the attention of more paper artists and scrapbookers – glitter and glisten that is subtle and airy, but crisp. Plastic is on the comeback trail in jewelry and accessories, and when filtered down into other art and crafts, that means the consumer wants some shine with that sparkling paper.

Darker hues are still in demand for heritage, collage, and weaving, yet most crafters want bright and pastel to get them beyond the winter ho-hums. The hottest trend is ultra-simple cards with sassy and chic embellishment including anything with word(s) on it. Other hot paper embellishments include fibers, rhinestones, and glass beads.

To see examples of these trends, check out K&Company, Magenta, Blue Moon Beads, Sulyn, Hot Off The Press, Delta, Making Memories, Magic Scraps, Plaid Enterprises, DMD, and USArtQuest. Buyers might want to check out their product lines. – The Arnold Grummer Team

(Note: Arnold Grummer and his team have being selling papermaking and paper-casting supplies since 1976. Visit www.arnoldgrummer.com. To read more about trends from the HIA show, read the columns in Designing Perspectives, Category Reports, Scene & Heard, and Business-Wise. Just click on the appropriate title in the left-hand column.)

1. A sign of how spoiled consumers have become concerning discounts: The day after Christmas, I was in an upscale shopping mall in Florida. My niece was in line outside Crate & Barrel, waiting for the store to open. A woman walking by, stopped, and asked her why there was a line. My niece told her the store was having a 50%-off sale.

"Bah," the woman said. "I wouldn't wait in line for just 50% off."

2. This was emailed from a subscriber: "Interesting way of looking at this issue: A car company can move its factories to Mexico and claim it's a free market. A toy company can outsource to a Chinese subcontractor and claim it's a free market. A major bank can incorporate in Bermuda to avoid taxes and claim it's a free market. We can buy shirts made in Bangladesh. We can purchase almost anything we want from many different countries BUT, heaven help the elderly who dare to buy their prescription drugs from a Canadian (or Mexican) pharmacy."

3. Deja vu all over again: The excellent Fun Facts Publishing newsletter for scrapbook retailers and others reported on a "new" controversy: consumers getting a resale tax ID and buying wholesale. Exactly the same thing happened in crafts years ago. It became so bad, wholesalers would demand new customers send photos of their stores to make certain that they were, in fact, storeowners.

PROMOS. National Craft Month kicks off today with an appearance by spokesperson Terri Oullette on the CBS Early Show.

TRADE SHOWS. The ACCI/HIA merger into the Craft & Hobby Assn. is progressing – all that's left is the lawyers cleaning up a few technical details. In the meantime, those wishing to avoid class sell-outs and receive member discounts for the show July 16-18 should submit their ACCI membership application and payment now. When the merger has been completed, HIA members will receive full refunds of their 2004 ACCI dues. Early registration and class sign up will begin online later this month and many sell-outs are expected. Visit www.accicrafts.org for your membership application and show info. For more on the pending association merger, visit www.accicrafts.org/unification.htm.

TOYS. Given the problems the toy industry had last year, last month's Toy Fair was surprisingly upbeat. Playthings magazine reported, "... there was definitely innovation going on in the categories of games, arts and crafts, construction, and role play — which, come to think of it, are probably at the very heart of child engagement. The big show ended yesterday on a very upbeat note for the industry." ... Total attendance was 21,234 from 29 countries. Order-writing was considered brisk, especially for licensed properties, retro toys, and Tweens ... The Specialty Toy of the Year award, for toys distributed primarily through specialty retailers, went to the It's My Life Scrapbook Kit by Creativity for Kids. Fisher-Price's Hokey Pokey Elmo won the Toy of the Year award. Binney & Smith won a Caring For Children Recognition of Excellence award for its Crayola Dream-Makers public service program ... The 2005 Fair is Feb. 20-23.

WAL-MART. A federal jury in Portland ruled the discounter should compensate employees who worked unpaid overtime, the Associated Press reported. It's a mixed victory – the jury ruled 83 workers were entitled to payments, but 25 were not ... Meanwhile, Fortune magazine named Wal-Mart the "Most Admired Company" for the second year in a row.

MEDIA. We're beginning to see media coverage of the jewelrymaking trend just as we've seen in knitting in recent years. The 4/1 issue of Woman's Day reported on it, and the Newark, NJ Star-Ledger told readers of a jewelry-making party – for men – at the Mermaid Dream Co. The article reported that Montclair Beadworks owner Mary-Ann Cucci, who only opened her store Dec. 5, said the store had birthday parties and showers booked through May.

YARN. Spinrite has a new partnership with Sentinel Capital Partners, a New York-based private investment firm. CEO/President Robert Hay said, "With Sentinel as our partners, we will continue to broaden delivery of our well recognized branded craft yarn products and to adhere to our founding ideals to provide high quality products and service to our customers."

AWARD. Plaid named Debba Haupert as the winner of the 2004 Horizon award, a $3,000 professional development grant the company established for members of the Society of Craft Designers.

INTEREST RATES. Jo-Ann's closed on the sale of $100 million of 7.5% Sr. Subordinated Notes due 2012. The sale resulted in net proceeds of approximately $97 million which will be used in part to repurchase $39.2 million of its 10-3/8% Sr. Subordinated Notes due 2007, and for general corporate purposes.

PEOPLE, I. Foss Manufacturing announced the addition of Jeff Berline to the Sales and Marketing division of their Consumer Products Group. The Kunin Group, long a leading producer of felt products, is a division of Foss. Angela Robertson also joined the Kunin sales team, and Foss has retained the services of Ellie Joos & Associates for product development, advertising, and p.r. ... Coleman Peterson, 55, retired as head of human resources for Wal-Mart. The company is currently defending itself against dozens of lawsuits claiming discrimination, violations of wage/hour laws, and use of illegal aliens.

PEOPLE, II. A.C. Moore appointed Eli Segal as Lead Director of the board of directors ... The Creative Network announced that Dave Rayburn has joined the company as a top executive recruiter ... Amanda Philemon has joined the Cutters Productions’ sponsor development team.

INTERNET. Crafts 'n Things magazine debuts an improved, expanded website today at www.craftsnthings.com ... Artella is an interesting art/literary magazine at www.artellawordsandart.com. Those involved in altered art and mixed media may find it particularly helpful.

DIVIDENDS. The Hancock board increased the quarterly cash dividend to $0.12/per share, a 20% increase. It's payable Apr. 15 to shareholders of record Apr. 1.

NCM. At part of National Craft Month, Michaels will host a Free Family Event at each of its 809 stores on Mar. 27 from 10 am to 3 pm. The event is co-sponsored by Binney & Smith who will introduce the Zoogles family of plaster characters. Family members will use Crayola watercolor paints or markers.

BOOKS. Search Press now distributes the line of Dutch Papercraft Books from Forte of the Netherlands. Topics include Iris Folding, Lace, Spirelli, Coluzzle, Mola Cutting, Embossing, Eyelets, Ornare, and more – all relating to scrapbooking, stamping and cardmaking. Call 800-289-9276, ext 235.

FOR SALE. Walnut Hill, an industry candle-making pioneers that was devastated by a fire a couple of years ago, still has equipment/supplies for sale – wicking, molds, "plastic-critter" molds, other molds, and boxes. Call 215-676-3910 this week.

TV. The 18th America Sews with Sue Hausmann series, Tools of the Trade, uploads to PBS stations next month. Sponsors are Husqvarna Viking, Sulky, Rowenta, The Warm Co., Sew Artfully Yours, Jo-Ann's, Krause Publications, Hewlett Packard, Brandy's, ErgoSew, Scrap Smart, Havel's, and Sudberry House. Call your local station and ask for the series.

MEMORY. The first Memories Expo is this weekend in Las Vegas and the Chicago version is Apr. 2-3. (Online registration for the Chicago Expo closes Mar. 12). For info, visit www.memoriesexpo.com, call 740-452-4541, or email memories@offinger.com.

RECOMMENDED READING. The Future of Competition: Co-Creating Unique Value with Customers, by C.K. Prahalad and Venkat Ramaswarmy (Harvard U. Press). "...the Wal-Martization of U.S. business means that people's business and personal needs are increasingly being met by outfits that provide a tremendous array of commodity-like products and services – and offer them with Darwinian efficiency," wrote a Business Week reviewer. "To survive in such a world, managers must make their companies as ruthlessly efficient as Wal-Mart Stores Inc. To thrive, they must create things for which people are willing to pay a premium." The authors offer suggestions on how to elicit and use input from your customers to do just that.

SCD. Mark Bennett was named Exec Director of the Society of Craft Designers, replacing Marrijane Jones who was promoted to VP of Associations & Events for Offinger Management, which manages SCD. As we reported earlier, Mark recently earned his designation as a Certified Assn. Exec (CAE) with the American Society of Assn. Executives.

QUOTATIONS. Comments by President Bush: Dec. 1st: "We want people to feel like if you want to be a small business owner, there's a chance for you." – transcript of a speech to Dynamic Metal Treating Int. in Dearborn, MI ... Dec. 5: "When a person has more money in their pocket, they're likely to come to Home Depot." – transcript of a speech to the Home Depot in Halethorpe, MD. (Both transcripts are from the White House Office of the Press Secretary.)

CLN will profile one company per issue, which will remain online for at least a year. To read various Profiles, click on Business Profile Archives in the right-hand column. A Profile is a perfect way for a new company to let itself be known to the industry, or for an established company to enhance its reputation by showing the industry its history, diversity of products, personnel, etc. For more information on how your company can be profiled, call Mike Hartnett at 309-925-5593 or email mike@clnonline.com.

To learn about the latest jobs available in our industry, click on Jobs in the left-hand column.

A. C. Moore (ACMR). Last*: 22.75 ... Change**: +0.15
Hancock Fabrics (HKF). Last*: 16.85 ... Change**: +0.20
Jo-Ann Stores (JAS). Last*: 26.88 ... Change**: +0.48
Michaels (MIK). Last*: 48.04 ... Change**: +0.64
Rag Shops (RAGS). Last*: 4.14 ... Change**: +0.51
Wal-Mart (WMT). Last*: 59.56 ... Change**: +3.24
CLN Retail Index. Last*: 178.22 ... Change**: +3.0%
Dow Jones Index. Last*: 10,583.92 ... Change**: -0.4%

Emailed from a friend: Headlines that have reportedly appeared in various print media.

SOMETHING WENT WRONG IN JET CRASH, EXPERT SAYS
POLICE BEGIN CAMPAIGN TO RUN DOWN JAYWALKERS
PROSTITUTES APPEAL TO POPE
PANDA MATING FAILS; VETERINARIAN TAKES OVER
TEACHER STRIKES IDLE KIDS
MINERS REFUSE TO WORK AFTER DEATH
JUVENILE COURT TO TRY SHOOTING DEFENDANT
RED TAPE HOLDS UP NEW BRIDGES
TYPHOON RIPS THROUGH CEMETERY; HUNDREDS DEAD
MAN STRUCK BY LIGHTNING FACES BATTERY CHARGE
OBESITY STUDY LOOKS FOR LARGER TEST GROUP
CHEF THROWS HIS HEART INTO HELPING FEED NEEDY
LOCAL HIGH SCHOOL DROPOUTS CUT IN HALF
HOSPITALS ARE SUED BY 7 FOOT DOCTORS

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5. Creative Leisure News is published on the first and third Mondays of each month. Your next issue will be Monday, March 15.

xxx 

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