Date: July 21, 2004
Vol. VIII, No. 14

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TABLE OF CONTENTS

COMMENTARY: Helping Consumers Get Started

At last weekend's CHA Summer show, I had an interesting conversation with Sandra Joseph of Reminders of Faith, which offers a variety of scrapbook supplies with a religious theme. She told me of her recent appearance on a national radio call-in show on a religious network. She said she expected theological questions and had her Bible ready for the calls.

Instead, all the questions were basically this: "How do I get started in scrapbooking?"

These callers may have walked down the scrapbook aisles of a chain or wandered into an independent store wanting to get involved, but they didn't know how to start. Clearly if scrapbooking is going to continue to grow, people need to know how to start. Frankly, I don't think our chains or independents do a very good job of that.

Further in this issue you'll read about the astonishing number of chain stores adding, or thinking of adding, scrapbook supplies. In most cases, they're adding beginner scrapbook kits. If that attracts non-scrappers, helps them get started, and provides them with a good experience, all this new chain competition could help everyone.

Business-Wise. What are the qualities shared by hit products/categories? From scrapbooking and stamping to painting and needlework, they share the same characteristics. Learn the eight key elements.

Tech Talk. Ever used Google and been overwhelmed with the listings? Here's how to get the best out of the search engine.

Legal Q. & A. "Can David Really Defeat Goliath, Pt. II." Our resident lawyer represents a small craft company against Google. The outcome may surprise you.

New Trade Show Exhibitors. Can't remember details about a new exhibitor you saw at the CHA Summer (formerly ACCI) show? We'll keep their listings and links to their websites online for a while.

Note. If you surf to a column and it's an "old" column. Click on your "Refresh" or "Reload" button on your browser.

Ok, in our last issue you told us about your expectations for the CHA (formerly ACCI) Summer Show. (See the results below.) Now you're back home, tired, and no doubt playing catch-up. But take a moment and vote on your experience in Chicago. Click HERE to vote.

The industry traveled to Chicago last week in a very optimistic mood. Exhibitors: 18.2% anticipated that the show would be "excellent," 45.4% thought it would be "very good," and 36.4% predicted the show would be "fair." No exhibitor expected a "poor" or "lousy" show.

Buyers were even more optimistic. 25% expected an "excellent" show, 50% thought it would be "very good," and 25% thought it would be "fair." Again, no buyer traveled to Chicago expecting a "poor" or "lousy" show.

1. Preliminary numbers. The attendance was down 2.8%. Possible causes for the slight decline: A) Some scrapbook retailers chose to attend the September MemoryTrends show in Las Vegas; and B) the fact that some independents did not receive their HIA February show orders until May, paid for them in June, and therefore had little open-to-buy. Exhibitors were up 4.0% and booths were up 12.9%.

2. The retail world discovers scrapbooking. Some of the following are A) adding scrapbook supplies (usually beginner kits); B) are considering adding SKU's; C) are testing programs; or D) have already added supplies: Best Buy, Big Lots, Borders, Costco, Dollar Tree, J.C. Penney, Kmart, Media Play, Mervyn's, Office Depot, Office Max, Sears, and Staples – to say nothing of Wal-Mart, Target, and Linens 'n Things.

3. Home party plans on the horizon. We know of three and possibly four new operations – all hoping to do for crafts and painting what Creative Memories has done for scrapbooking. (There will be much more on this in the next issue of CLN.)

4. The growing financial problems of some independent scrapbook retailers. The key problems seem to be poor inventory management, the emphasis on margin rather than turnover, lack of capital, and imprudent buying.

5. Micah Jones. The show was overshadowed by news that Micah Jones, the 23-year-old daughter of Marrijane Jones, ACCI's exec director, was hit while crossing a Nashville street by a car driven by an off-duty policewoman who had been drinking. At last word Micah, a senior at Middle Tennessee State U., was stable but still in very serious condition. (Note: For those who attended the Chicago show and wondered about the posters with a picture of a lovely young lady in the front lobby, they were giant get well cards for Micah, signed by hundreds of attendees.) Those wishing to send a card (no flowers), send it to Attn: Patient Micah Ashley Jones, Vanderbilt University Hospital, 1161 21st Avenue South, Nashville, TN 37232.

(Note: There will be much more about the show in our next issue.)

For the third quarter ended May 29, Rag Shops posted a net loss of $600,000 ($0.13/diluted share), compared to a net loss of $251,000 ($0.05) in the quarter a year ago. For the first three quarters, there's a net loss of $12,000 ($0.00) compared to a net income of $350,000 ($0.05) a year ago. Officials said the increased losses were due to approximately $1 million in extraordinary expenses during the quarter.

For the quarter, sales fell 2.5% to $27.2 million, but are up 1.5% to $93.3 million for the first three quarters.

President Jeff Gerstel said, "Soft sales during our third quarter were mitigated by gross margin improvement and expense control. Gross margin for the quarter increased by 0.7% as a percentage of sales compared to last year's third quarter, after adjusting for the cost to terminate the lease of an unprofitable store of $147,000. Selling, general and administrative expenses were $64,000 lower than last year's third quarter after adjusting for the payment of professional fees incurred in connection with the retention of SunTrust Robinson Humphrey and additional depreciation expense related to the closure of four stores during the quarter in the aggregate amount of $353,000.

"Sales were adversely impacted for the quarter by the shift of one newspaper circular to the prior quarter and by the shift of Memorial Day from fiscal May to fiscal June," Gerstel added. "In addition, our decision to manage the increase in merchandise inventory and by management's continuing expenditures of time and resources on the exploration of strategic alternatives both had an adverse impact on sales results."

In February Rag Shops retained Sun Trust Robinson, an investment banking firm, "to provide financial advisory services and review possible strategic alternatives ... in an effort to maximize shareholder value." That can mean possibly selling the company, but the company had no developments to report when it announced its third-quarter earnings.

For the first three quarters, the company opened one store, closed two, and relocated two. The current store count is 67.

While much of the industry was in Chicago, Martha Stewart was sentenced to five months in prison, five months of home detention, and two years' probation after having been found guilty of obstructing justice in the investigation of possible securities fraud concerning the sale of her ImClone Systems stock.

"I will be back," Martha told the press after the sentencing, and encouraged her supporters to buy her magazine and her products in Kmart. The stock in her company, Martha Stewart Omnimedia, rose 37% the day of her sentencing; apparently investors were relieved the sentence was not tougher.

Meanwhile, Kmart announced its continued support of Martha – and a special 25%-off sale of her products.

The prison term is on hold while she appeals her conviction, but she still faces a civil suit brought by the Securities and Exchange Commission. The suit has been on hold pending the conclusion of the criminal trial. The SEC suit calls for a fine; barring her from serving as a director of a public company, including her own company; and limiting her activities as a corporate officer. A settlement is expected, according to Dow Jones News.

As expected, Wal-Mart has appealed to a federal appeals court the recent ruling allowing as many as 1.6 million current and former female employees to join a lawsuit charging the chain with sex discrimination and harassment, Reuters reported. The judge ruled any woman who worked for Wal-Mart since Dec. 26, 1998 is eligible to join the class-action suit.

"This court should review this unprecedented, unmanageable, and unconstitutional class now," the petition to appeal said, "before the parties and the district court are forced to devote vast amounts of time and resources litigating an action that would not in the end survive judicial review," Reuters reported.

The U.S. Chamber of Commerce has filed a legal brief with the court in support of Wal-Mart's position.

As an example of how expensive this case could be for Wal-Mart, Home Depot settled a similar discrimination case for $104 million seven years ago. And that was for only 25,000 women. Seven years later, and 64 times as many plaintiffs...?

It seems ironic that as many as 1.6 million women are suing Wal-Mart in the largest sex discrimination suit in history, considering that Playboy.com ran a "Women of Wal-Mart" pictorial last November. According to CNN, the "Women of Wal-Mart" was the most successful feature in the website's history.

(Note: During the CHA Summer show, Boeing announced it had settled a sex discrimination case similar to Wal-Mart's. If Wal-Mart settles for the same payout per plaintiff, it would cost the company approximately $5.5 billion.)

Michael Rouleau has agreed to extend his employment agreement as CEO and President of Michaels through Jan. 2008. His previous contract was to expire in Jan. 2006. Current President Ron Staffieri announced he will leave Michaels by the end of next month.

Rouleau said, "When I joined the company in 1996, I believed that Michaels had enormous long-term potential, and I am very proud of our progress as we have delivered seven straight years of record sales and profits. However, much remains to be done, and I've never been more excited about our business, our management team, or our opportunities to continue transforming Michaels from a good company into a world-class retailer."

The Uniform Code Council, the North American arbiter of bar codes, has told American retailers that bar-code scanners will have to read the 13-digit codes by January. The 13-digit codes are the standard everywhere else in the world, the New York Times reported.

The U.S and Canada have been using a 12-digit system since the bar-code's inception 30 years ago. The Times warned that the pending computer and software change "has echoes of the Y2K computer problem," but added that systems that can read the 13-digit codes can also read the old 12-digit codes.

Bar codes are now 30 years old. The first product ever scanned was a package of Juicy Fruit gum in a Marsh supermarket in Troy, OH.

(Comment: Of course, about the time the bar code system is straightened out, the world will switch to RFID tags. But for U.S. vendors who hope to eventually export, moving to the 13-digit code system will solve one of the problems of selling overseas.)

The annual "Top 150" report from DSN Retailing Today listed craft chains at sales of $7.9 billion in 2003, up 5.61%. Stores of interest:

Michaels. #57, down one ... 2003 sales: $3.09 billion, +8.23% ... Earnings, $303 million, up 12.2% ... Store count by 1/1/05: 1,026.

Jo-Ann's. #72, down one ... 2003 sales: $1.7 billion, +3.1% ... Earnings, $85 million, -14.1% ... Store count by 1/1/05: 857.

Hobby Lobby. #83, up three ... 2003 sales: $1.4 billion, +9.5% ... Earnings, NA ... Store count by 1/1/05: 342.

Garden Ridge. #125, down seven ... 2003 sales: $461 million, -7.8% ... Earnings: NA ... Store count by 1/1/05: 36.

Hancock. #127, down two. 2003 sales: $444 million, +1.4% ... Earnings, $27 million, -12.9% ... Store count by 1/1/05: 445.

A.C. Moore. #129, up one ... 2003 sales: $434 million, +10.4% ... Earnings, $28 million, +20.0% ... Store count by 1/1/05: 97.

Frank's. #144, same ... 2003 sales: $317 million, +0.6 ... Earnings: $15 million loss ... Store count by 1/1/05: 169.

Other vendors of interest: Wal-Mart, #1 ... Home Depot, #2 ... Target, #4 ... Lowe's, #12, Kmart, #15 ... Staples, #24 ... Office Depot, #26 ... Toys R Us, #28 ... Dollar General, #36 ... QVC, +44 ... OfficeMax, #48 ... Big Lots, #51 ... ShopKo, #56 ... Linens 'n Things, #64 ... Home Shopping Network, #69 ... 99 Cents Only, #101 ... Party City, #124 ... Duckwall-ALCO, #130.

Next month's issue of STORES magazine, published by the National Retail Federation, will list its "Top 100 Specialty Stores" of 2003. Some rankings of interest, based on sales:

#1: Best Buy ... #2: Gap ... #3: Staples ... #4: Office Depot ... #5: Toys R Us ... #14: Big Lots ... #20: Michaels ... #24: Dollar Tree ... #27: Linens 'n Things ... #36: Jo-Ann's ... #53: Hobby Lobby ... #94: Garden Ridge ... #100: Fred Meyer. The magazine estimated the privately-held Hobby Lobby chain at $1.2 billion.

The retail sales figures for June indicate a substantial difference between craft chains and other types of retailers. Michaels and Jo-Ann's posted very strong numbers for the month, while the U.S. Commerce Dept. reported retail sales fell 1.2% as non-craft retailers announced poor or below-plan figures. Many retailers blamed the weather, but apparently it didn't rain on Michaels and Jo-Ann's.

Michaels. Same-store sales were up a whopping 13% and overall sales rose 19% to $267.7 million. The average ticket remained the same and there was only a 1.0% increase in custom frame deliveries, but there was a 12% increase in customer traffic.

Year-to-date, sales are up 12% to $1.196 billion and same-store sales are up 7%. There has been a 2% increase in average ticket and a 5% increase in customer traffic.

An "extremely pleased" Michael Rouleau, CEO, said the strongest regions were the Pacific, Northeast, and mid-Atlantic, and the top categories were scrapbooking, frames, custom framing, and general crafts. He attributed the strong showing to changes in the timing of promos and higher store- level in-stocks.

Officials expect same-store sales for the second quarter to increase 3% - 5% and diluted earnings/share to be $0.38 -$0.40, but same-store sales for July to decrease 2% to 4% due to the changes in advertising.

Rouleau also reported that Michaels had fully implemented its auto-replenishment system, planning for which began eight years ago. The system "allows us to begin our transition from an operations-focused company to a merchandise-driven one," Rouleau said. "A world of opportunities has opened for Michaels Stores as we now have the tools to take our business to a new level, further improving our top-line sales performance and our overall profitability."

Jo-Ann's. Same-store sales rose a whopping 6.8%–7% overall. In June 2003, same-store sales fell 2.5%. Through the first nine weeks of the second quarter, same-store sales are up 4.7% and overall sales have risen 4.9%. Year-to-date, sales have increased 6.8% and same-store sales are up 5.8%.

Hancock. Same-store sales dropped 6.6% and overall sales fell 6.1% to $33.7 million. For the first two months of the second quarter, total sales declined from $66.7 million to $61.7 million and same-store sales are down 7.7%. Year to date, sales are down $7.5 million and same-store sales are down 4.9%.

Others. Costco, +6.0% ... Nordstrom, +5.7% ... J.C. Penney, +4.8% ... Federated, +3.4% ... Target, +2.3% ... Dollar General, +2.3% ... ShopKo, +2.2% ... Wal-Mart, +2.2% ... Family Dollar, +0.9% ... Duckwall-ALCO, -0.2% ... Gap, -2.0% ... Sears -3.1% ... Kohl's, -3.7% ... Pier I, -4.3%.

The company does not report monthly sales figures, but announced that sales for the second quarter ended June 30 rose 8.0% to $101.2 million; same-store sales, however, slipped 1.0%. For the first two quarters, sales have risen 14.6% to $212.7 million and same-store sales grew 4%.

CEO Jack Parker stated, "The second quarter was one of significant accomplishments with major changes in our plan-o-grams and implementation of new merchandising initiatives. These changes are showing positive results, which make us even more confident in our sales, operational, and marketing plans for the remainder of the year.

"Second quarter sales did not have the benefit of the merchandising changes since they were not completed until the latter part of the quarter," Parker added. "Also, sales were affected by the weather which was not as favorable as last year's wet and cool spring, particularly on the weekends."

Officials estimate second-quarter earnings will be $0.00 - $0.02/share and continue to predict annual earnings of $0.94-$0.97. Without a recent change in accounting practices, the second-quarter earnings would have been $0.03-$0.05 higher, officials said.

Parker also reported that the new, 760,000 sq. ft. distribution/office complex should be fully operational by Sept. 1. The new corporate address is 130 AC Moore Dr., Berlin, NJ 08009. The phones remain the same: 856-228-6700; fax 856-228-0080.

The current store count is 84.

Ever wonder when you see a sale sign in a retail store if you're really saving as much off the regular price as the store claims? The owners of the Sport Chek and Sport Mart stores in Canada were just nailed by the government for inflating the retail prices so they could make the "sale" prices that much more appealing. They were fined $1.7 million and have to publish corrective notices in newspapers across Canada.

SHOW. The sponsors of the MemoryTrends show in Las Vegas in September announced they had obtained additional exhibit space and would now be able to accommodate the waiting list of approximately 50 vendors. For exhibit info, visit www.memorytrends.com.

PEOPLE. Kay Blair has resigned as Exec. Dir. of the Society of Decorative Painters.

HELP WANTED. Exec .Dir. for the Society of Decorative Painters in Wichita, KS. Reports to the SDP President and the Board. Requires strong creative industry background and knowledge of key clients, vendors, and industry leaders; strong public relations skills and track record; ability to represent SDP to its membership and the creative industry at large; excellent administrative and leadership skills to supervise 12 full-time staff members. Send cover letter, resume, references, and salary requirements to Sheila Rouse, SDP President, srouse@decorativepainters.org. The deadline is Aug. 15.

MICHAELS. At the annual stockholders' meeting, execs announced plans to open three ReCollections stores in the Washington, D.C. market, two in Phoenix, and a sixth in the Dallas area. Look for another 45 Michaels stores this year and another seven Aaron Bros. stores, including the Washington D.C. market. The company also has three Star Decorators Wholesale operations and eventually plans to open 50-60 more.

STOCK. Michaels repurchased an additional 568,800 shares of the company's common stock during June ... Apparently Sam Walton's widow, Helen, likes the leadership of her husband's company. Now 84, Helen spent more than $39 million to buy Wal-Mart shares. Five years ago she sold $290+ million of the stock, reported CBS MarketWatch.com.

WAL-MART. Look for the discounter to try a new format, Urban99, in areas where it can't find 20 acres of land necessary for a typical supercenter. Urban99 is about half the size of a supercenter – 99,000 sq. ft. The first one is in Tampa. No word on whether the format eliminates or shrinks any particular departments.

UK. Check another consumer scrapbook/paper magazine, Scrapbooking Memories and More at www.scrapbookingmm.co.uk ... And while you're surfing, check the excellent sewing/craft magazine in South Africa, Threads & Crafts (www.threadsandcrafts.co.za).

RFID. Want to learn more about the upcoming technology? The IMRA, which changed its name to the Retail Leaders Industry Assoc., has a Web-based management training course, Discovering RFID. For info, contact Britt Wood: 703-600-2022; britt.wood@retail-leaders.org.

TV. The 10th Shay Pendray's Needle Arts Studio will downlink to PBS studios Jul 25. Once again it will feature knitting, crochet – and needlework. It's sponsored by Coats & Clark, DMC, TNNA, Lion Brand Yarn, The American Needlepoint Guild, and Warm Up America!.

PAINTING. The Society of Decorative Painters is accepting nominations for board offices. To submit a name, contact Nominating Committee Chair Darla Foreman, P.O. Box 427, Poteau, OK 74953, or email sdp@decorativepainters.org with the subject "SDP Nomination." The deadline for nominations is Nov. 1.

DOLLS. Girl Scout troops in 22 states have created 2,000+ dolls for the children in Iraq. Dolls for Iraq is spearheaded by the Caprock Council in Lubbock, TX. The Scouts around the country are using 1500+ sewing machines donated by the Home Sewing Assn. as part of an ongoing campaign to promote sewing among younger consumers by supporting local Scout chapters. HSA has donated five machines to each of the 317 Scout Councils

PAPER. An Australian distributor, Sam Kurc of Riot Art & Craft, is looking to purchase 50,000 sheets of scrapbook paper that has been discontinued. Sam's looking for a minimum of a thousand sheets of 50 designs. Contact Sam at riot@mira.net.

ROLODEX. Arnold Grummer's Paper Making has moved to 316 N. Milwaukee St., Ste. 214, Milwaukee, WI 53202. Call 414-347-9296; fax 414-347-9206.

LOOKING TO HIRE. Ad Rep: National best-selling craft magazine is looking for a Utah-based ad sales pro to cover our growing Utah client base. Must have 3-5 years ad experience, be a fearless cold caller, and eager to represent the country's fastest growing hobby/craft. Please send resume/salary requirements to: Memory Makers Magazine, attn: Eva Marie Kreil, 12365 Huron St., Ste. 500, Denver, CO, 80234. Email eva.kreil@fwpubs.com.

CONDOLENCES. Our very best wishes to Albert Sbar of Sbar's on the death of his wife, Thelma. Albert, Thelma, and Albert's sister, Mildred (also passed away) are true pioneers of the industry, starting with a general merchandise store about a half century ago and building it into one of the biggest, most successful distribution companies in the industry.

Note: CLN will profile one company per issue, which will remain online for at least a year. 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.

A. C. Moore (ACMR). Last*: 23.93 ... Change**: -3.08
Hancock Fabrics (HKF). Last*: 12.05 ... Change**: -0.90
Jo-Ann Stores (JAS). Last*: 26.75 ... Change**: -1.59
Michaels (MIK). Last*: 54.25 ... Change**: -0.18
Rag Shops (RAGS). Last*: 3.15 ... Change**: -0.15
Wal-Mart (WMT). Last*: 53.25 ... Change**: +1.32
CLN Retail Index. Last*: 173.38 ... Change**: -2.6%
Dow Jones Index. Last*: 10,149.07 ... Change**: -1.3%

Q. What does HMO stand for?

A. This is actually a variation of the phrase, "HEY MOE." Its roots go back to a concept pioneered by Moe of the Three Stooges, who discovered that a patient could be made to forget about the pain in his foot if he was poked hard enough in the eyes.

Q. I just signed up for medical insurance. Will it be difficult to choose the doctor I want?

A. Your insurer will provide you with a book listing all the doctors in the plan. These doctors basically fall into two categories – those who are no longer accepting new patients, and those who will see you but are no longer participating in the plan. But don't worry; the remaining doctor who is still in the plan and accepting new patients has an office just a half-day's drive away, and a diploma from a Third World country.

Q. Do all diagnostic procedures require pre-certification?

A. No. Only those you need.

Q. Can I get coverage for my pre-existing conditions?

A. Certainly, as long as they don't require any treatment.

Q. What happens if I want to try alternative forms of medicine?

A. You'll need to find alternative forms of payment.

Q. My pharmacy plan only covers generic drugs, but I need the name brand. I tried the generic version, but it gave me a stomach ache. What should I do?

A. Poke yourself in the eye.

Q. What if I'm away from home and I get sick?

A. You really shouldn't do that.

Q. I think I need to see a specialist, but my doctor insists he can handle my problem. Can a general practitioner really perform a heart transplant right in his office?

A. Hard to say, but considering that all you're risking is the $20 co-payment, there's no harm in giving him a shot at it.

Q. Will health care be different in the next century?

A. No. But if you call right now, you might get an appointment by then.

REMINDERS

1. For more information on how your business can be the subject of a "Business Profile" call Mike Hartnett at 309-925-5593 or email mike@clnonline.com.

2. If you want a hard-copy of this issue, click on "Printer Friendly version".

3. If your company is a paid subscriber, everyone in the main office is welcome to register, free. Just click on "Current Subscribers Click Here To Register."

4. If you want to recommend CLN to a friend, use the "Tell Your Friends" box on the home page.

5. Creative Leisure News next issue will appear a bit early, on Friday, July 30.

xxx

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