Date: August 16, 2004
Vol. VIII, No. 16

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TABLE OF CONTENTS

COMMENTARY: CRAFTS AND TOYS

Over the years as I've reported on our industry, I've watched the toy industry closely. I've long had the theory that we're following the same path, just a few years behind. The rise of the chains and the growing importance of importing are just two examples; learning the importance of television is another. Periodically I'd meet a newcomer to our industry who was a refugee from toys; invariably he or she would comment on how friendly our industry was – like the toy industry used to be. Then I'd hear a craft veteran complain that our industry isn't as friendly as it once was – more evidence that we're following the same path, good or bad.

Now it looks like Wal-Mart may be driving Toys R Us out of the, gulp, toy business (see article below).

I sure hope my theory is wrong.

Actually I think we're closer to the hardware industry. I've even thought that a multi-category craft store is, in effect, a type of hardware store. Now if Wal-Mart drives Home Depot out of business, then I'll REALLY worry.

Business-Wise. Mike Hartnett's thoughts about the debate on free trade and job outsourcing, thoughts that probably won't please either side.

Legal Q & A. When is a photograph copyrighted? When can it be used in a magazine, online, or in an album? Our legal eagle tries to sort out the legal complications.

Tech Topics. Time to give your web page a long hard look. CLN's computer guru gives you advice on the essential do's and don'ts.

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

This issue is primarily devoted to prospects for the economy – and industry – for the remainder of the year. Now it's your turn: In the next five months, will the national economy grow, stay the same, or decline? And your business – will it grow, stay the same, or decline? To cast your vote, click on Industry Polls in the right-hand column or click HERE.

Exhibitors and buyers were in fairly close agreement in their judgment of the CHA Summer (formerly ACCI) show.

Exhibitors: 15% said the show was "Excellent" ... 32.5% rated it "Very Good" ... 40% thought it was only "Fair" ... 12.5% thought it was "Poor" ... No one rated the show "Lousy."

Attendees: 13.04% said it was "Excellent" ... 56.52% thought it was "Very Good" ... 26.09% thought it was "Fair" ... 4.35% rated it "Poor" ... No one thought it was "Lousy."

(Note: The poll is decidedly unscientific! For the final attendance numbers on the show, see "Miscellaneous News" below.)

The most critical retail season will be upon us soon, but the economy – and recent industry sales – are making predictions little more than wild guesses.

The economy was rolling merrily along in the first quarter, and job growth had risen to 200,000+/month. Then everything seemed to slow down. The Gross National Product grew at a much weaker pace in the second quarter and the economy created 32,000 jobs, far less than the 200,000+ jobs that were expected. And the Labor Department reported far fewer jobs had been created in April and May than had been first reported.

Meanwhile, oil prices continued to break records due to strong demand (including the growing Chinese economy) and worries about the Russian oil fields and the war in Iraq. Many retailers blamed lackluster June sales on high gas prices cutting into consumers' disposable incomes. And parents are facing higher tuition costs as kids return to school.

Yet the government seems to have used all its weapons – tax breaks and record low interest rates – to bolster the economy. The huge federal deficit negates much chance of further tax cuts, and interest rates are going up, not down. Consumer confidence ratings seem to rise and fall like a yo-yo.

Retailing added its own disappointing news. Overall retail sales gained only 0.7% in July, lower than the inflation rate and smaller than economists had expected. Our industry's public retailers far surpassed most retail sectors in June, but then fell back and joined the pack in July (see article below).

Carl Steidtmann, chief economist for Deloitte Research, thinks higher interest rates will eventually hurt large retailers looking to grow. He said to Retail Merchandising, "For retailers, a slowdown in bank lending will translate into a slightly slower pace of real estate development and perhaps more stringent lending on inventories. On balance, the rise in short-term interest rates will translate in the months ahead into slower growth and less inflation for the economy as a whole."

Now the good news:

1. The Federal Reserve Board increased the prime lending rate a quarter of a percentage point because it thinks the recent problems are just a temporary setback for an economy that is poised for much stronger growth in the near future.

2. The industry's public retailers had logical reasons why July sales slumped and they continued to predict record sales and profits for the year. (As always, anecdotal sales reports from independents are mixed.)

None of this information is a strong indicator of holiday sales. Meanwhile a host of unforeseen events could drastically change the retail outlook. Terrorist attacks at the Olympics or in the U.S. could keep consumers glued to their tv sets. Gas prices could rise even higher. Economic reports could inspire consumers to shop – or stay home.

And to further confuse the issue:

1. Scrapbooking is not a typical holiday craft. Most scrappers don't make scrapbooks to give as a Christmas gift to Aunt Martha, and much of the memory sales may come after Christmas, when consumers have their photos back from the developer.

2. Paper crafting and stamping may be a different matter. If consumers turn to our industry to make their own Christmas cards, sales could be excellent, regardless of the economy.

3. Gift cards are becoming increasingly popular. One survey reported as high as 10% of all Christmas gifts last year were gift cards – and accounting practices credit the sale only when the cards are used/cashed in, not when they were purchased by the gift-giver. That could make December sales lower than expected, and January sales better.

4. There is also the continuing debate about the effect a faltering economy has on our industry. In previous decades, the industry grew during recessions as customers turned to craft stores to make gifts rather than buy more expensive readymades. As the industry grew and, in effect, joined the retail mainstream, it has been more directly and immediately affected by the national economy. So a good or bad economy may not help/hurt the industry the same way as it has in the past.

Oh how the mighty can fall. Toys R Us, once the giant in the toy industry and one of the original big-box category killers, announced it will separate its Babies "R" Us and Toys "R" Us businesses to operate as stand-alone entities, and would "explore the possible sale of the global toy business."

The plan is to continue its profitable Babies "R" Us division and either sell TRU to a buyer who wishes to sell toys, or to a chain who wants the good locations and long-term, low-rent leases. There are 1,200+ Toys R Us stores around the world and 200 Babies R Us stores in the United States.

Once the most powerful toy retailer in the world, Toys R Us has struggled in recent years as Wal-Mart surged past TRU as the #1 toy seller.

"Why are they pulling out of the toy business?" retail consultant Kurt Barnard asked Playthings.com rhetorically. "Because they can't compete."

The Toronto Star cited a classic example: the Hokey Pokey Elmo toy. Last year Wal-Mart used it as a loss leader, selling it for $19.50. TRU CEO John Eyler said his company could have sold out its Elmo inventory at $29.99, but had to cut its price to match Wal-Mart, which has almost 25 times the annual revenue of TRU. Wal-Mart could afford to slash its margin on the toy; TRU could not.

Playthings.com predicts dire consequences for the toy industry: TRU will take about $150 million in markdowns to liquidate inventories, which will further depress prices. "Retail analysts tell Playthings.com that, what's more, the ripple effect of the early price cutting will likely clog product pipelines, slow demand, and reduce order sizes across the industry."

The Craft & Hobby Assn. is taking education on the road with its Solutions for Sales Growth and Profit, a two-day workshop that includes business training and hands-on product and technique instruction. The first stop will be Oct. 3-4 at the Embassy Suites Anaheim South in Garden Grove, CA. Business topics include finance, cost-effective marketing, merchandising, human resources, increasing buying power, budgeting, and branding your business. The hands-on workshops will showcase the latest product/application trends and techniques in the industry.

"CHA’s three-fold vision and mission is to lead the industry, create consumer demand, and help members succeed," said Anita Collins, director of programs/services. "In bringing this vital business training directly to our members, we ensure that independent retailers, small manufacturers, and designers are privy to topical business information that is necessary for success."

Costs for CHA members are $249 per person, with the fee discounted to $199 per person for three or more registrants from the same company; non-members are charged $299 per person. Rooms at the Embassy Suites Anaheim South are available to attendees at a discounted rate. For more info, email sgp@craftandhobby.org, or call 201-794-1133.

July was a poor month for retailers in general. Kurt Barnard of Retail Forecasting, probably the best known retail consultant, called the sales results "terrible." Most retailers' same-store sales were negative, flat, or met very conservative forecasts. Shortly before stocks rebounded somewhat when the Federal Reserve Board raised interest rates, the Standard & Poor's Retail Index had sunk to its lowest level since early October, reported Dow Jones News.

Michaels. Total sales rose 5% to $213.0 million, but same-store sales were flat. The sales figures were better than the company had expected due to a change in the promotional schedule that made June especially strong at the expense of July. The figures were also better than stock analysts surveyed by Thompson First Call had predicted.

The average ticket declined 2%, customer traffic was flat, and there was a 2% increase in custom frame deliveries.

Sales for the quarter rose 11% to $682.9 million and same-store sales grew 5%. The average ticket was flat, but there was a 4% increase in customer traffic and custom frame deliveries rose 1%.

CEO Michael Rouleau said, July sales exceeded his expectations and "we are also very pleased with our same-store sales for the second quarter, which were at the high end of our forecast of a 3% to 5% increase. Same-store sales in the second quarter were driven by better in-store inventory in-stock levels, an enhanced promotional program, and stronger merchandise offerings.

Rouleau cited frames, party/impulse, kids' crafts, and yarn as the month's strongest departments and the Northeast, Pacific, and mid-Atlantic as the strong regions. For the quarter, the best performing departments were frames, scrapbooking, kids' crafts, and general crafts; the strongest regions were the Pacific, Northeast, and Central.

The company maintained its earnings forecast for the year – 15%-20% better than last year, which was a record – and predicted August same-store sales to rise 4%-6%. Second quarter earnings will be released Aug. 25.

Jo-Ann's. Same-store sales slipped 0.2% and overall sales were flat at $114.1 million. For the second quarter, sales increased 3.3% to $371.0 and same-store sales were up 3.1%. For the year, sales are up 5.7% to $775.9 million and same-store sales have risen 4.9%. Earnings will be reported later today. Analysts expect the company will report a loss of $0.05 cents/share, reported CBS MarketWatch.

Hancock. The financial woes continue as the company adjusts to the new warehouse. Same-store sales fell 4.4% and overall sales dropped 5.1% to $27.9 million. For the quarter, same-store sales were down 6.7% and overall sales fell 6.8% to $89.6 million. Second-quarter earnings will be reported tomorrow.

Wal-Mart. Same-store sales rose 2.4% in the Wal-Mart division – rather low by Wal-Mart standards, but within the company's announced expectations. Target, Wal-Mart's main competitor, said same-store sales rose 3.8%.

Wal-Mart. For the quarter ended July 31, earnings were $2.7 billion ($0.62/share). Analysts had expected $0.60/share, said to Reuters Estimates. Sales rose 11.3% to $69.7 billion, and same-store sales rose 4.1%. Execs raised their earnings estimate for the year by a penny to $2.36 - $2.40.

CEO Lee Scott said, "I started this year with an optimistic view. I still feel the same way. Although I am concerned about high gasoline prices, I continue to believe that growth in employment and real income will lessen the impact."

Target. Earnings were $1.4 billion ($1.54/share), thanks in part to the $1.02 billion sale of its Marshall Field division. Last year the quarter's earnings were $358 million ($0.39). Excluding Field's sale and a charge of $0.05 for debt buy-backs, earnings were $0.48/share, a penny higher than analysts expected. Sales rose 10% to $10.56 billion.

(Note: In the last issue CLN reported on conversations with Michael Rouleau, CEO of Michaels, who talked about inventory control – and a relatively new independent scrapbook retailer who described buying at trade shows as "fun." We received this email in reply.)

One would have to agree that Michael's (or any other chain CEO/Pres) has, in many ways, a much narrower focus. Rarely is CEO of a chain in the game because of his love of crafts.

In fact, their primary responsibility is to shareholders, not to the buying public. Inventory management is certainly one of the keys to showing not just profitability, but increased earnings.

The independent has that role, too, but she also wears the hats that the CEO delegates elsewhere.

Over and over, independents are told how the only way they can compete is by offering what the chain cannot: customer service and support. If a store owner does not choose merchandise she believes is "fun," she won't be able to communicate to the individual customer that same sense of fun, excitement, and enjoyment.

For many an independent, the process of selecting new merchandise is a perk. It is "fun" to see the new merchandise, get enthused, and think about who in her customer base will also "love" it.

Really these are just different ways of looking at the same problem. If the shopowner, often a regular sales staffer, is not happy about the product, then you can bet she won't do a good job of selling or supporting that item. If she buys what she thinks is fun, and thus can sell it well, guess what? Inventory is managed.

I suspect Michael Rouleau does not often get to see a customer's face light up with delight over a new product, but the independent shop owner will, and that is part of the "fun" she has when choosing new products, anticipating that customer's face.

So while you are right that "fun" should not be the only criteria, it really is too bad that the "suits" don't get to have the same "fun" the independents do. – Wheat Carr, Wandering Wolf Designs

(Comment: Scrapbook vendors tell CLN the #1 reason why independents go out of business is poor inventory control.)

1. Interesting article in Retail Merchandiser about the 99 Cent Only chain of 200+ stores, mostly in California and the Southwest. Interesting because of the company's willingness and ability to add new products almost instantly, rather than re-set plan-o-grams once a year or so. The end result is "to keep its single-price-point stores filled with exciting surprises for its customers," wrote Sr. Editor Vanessa Facenda. The company has "open-to-buy" days every Tuesday and Friday mornings.

Our consumers constantly ask, "What's new?" The number of new products, especially in scrapbooking, is incredible. Retailers who can make quick decisions and have "exciting surprises" for their customers will have a huge advantage over the more bureaucratic chains.

2. Received a question from a subscriber asking if there was an official symbol for "acid-free." Unfortunately there isn't. So I could slap an "acid-free!" label on a banana and legally no one could touch me. But there is a group, the Scrapbook Preservation Society, that has developed some scientific definitions. To learn more, visit www.scrapbookpreservationsociety.com.

3. This weekend Janlynn will have a special event at the headquarters in Chicopee, MA.

Thousands of Janlynn products will be on sale, and there will be classes and demos for kids and adults in cross stitch, cardmaking, string art, scrapbooking, etc. Duncan held a similar event last year. It's a great way to clean out your warehouse and create a very positive image in your community.

4. Finally, a special thank you to the companies who sent supplies for Barbara's (my wife's) scrapbook project for foster kids at Friendship House, the social agency she leads. The response was overwhelming! Many thanks to PM Designs, Making Memories, Wallies, Jack Dempsey Needle Art, Destination Stickers and Stamps, Artograph, Cousin Corp., and the vendors who asked to remain anonymous. More supplies were still coming in as I write this. Outpourings like this are another example of what I've known for years: the industry is filled with good, generous people.

SUMMER SHOW. Final numbers for the CHA Summer (formerly ACCI) show: 587 exhibitors, up 4% ... 174 new exhibitors, up 1.2% ... Total booths, 1,409, up 13%. (A sign exhibitors needed more space for more products?) .... Attendees came from 50 states and 22 countries, but total attendance was down 9.6% to 6,666; buyer attendance slipped 5.3% to 3,182 ... Education was strong – Retail Summit attendance rose about 33% and technique class ticket sales rose 8.2% ... Next year's show is July 15-17. For info visit www.summercraftshow.com, email summercraftshow@offinger.com, or call 740-452-4541.

WAL-MART, I. Although it denies any wrongdoing, Wal-Mart is negotiating with federal prosecutors to settle charges that it knew some janitorial companies hired to clean its stores used illegal immigrants, the Associated Press reported. Last October federal agents arrested about 250 alleged illegal workers during a sweep of Wal-Mart stores in 21 states. Some immigrant workers even sued Wal-Mart claiming they were paid illegally low wages. The settlement could include a multimillion dollar fine, but Wal-Mart would not have to acknowledge criminal liability.

NEEDLEWORK. Here's a sign of the growing popularity of the TNNA shows: The Hyatt Regency Long Beach is sold out on peak nights during the Jan. 22-24 show. A complete listing of available hotels is at www.tnna.org/pdfs/LB05Directions.pdf.

PEOPLE. Dario Margve is the new president of Spinrite, replacing Robert Hay who stepped down but remains on the board. Margve is former chair of Craft House and President/CEO of J.B. Williams ... Robbin Bedard joined Polyform Products to lead the development of new products, research, packaging, and business alliances and partnerships. Bedard has worked for Wrigley, Duncan, Coats & Clark, Bucilla, and Leewards.

SCRAPBOOKS. Fun Facts Publishing is taking advance orders for its new book, Inside The $3 Billion Scrapbook Industry: Statistics, Research, Analysis, Forecasts & More. For more info, visit www.funfactspublishing.com/inside_industry.htm. The company is also trying an interesting concept: business seminars by teleconference. To learn more, visit www.funfactspublishing.com/teleseminars.htm.

WAL-MART, II. A new study by the U. of California Berkeley's Institute for Industrial Relations claims Wal-Mart's wage/benefit policies cost state taxpayers $86 million a year to provide health care and other public assistance. Low wages means many employees qualify for state tax-supported programs. Wal-Mart vehemently denied the study's conclusions, claiming the Institute used old data and is affiliated with various unions ... A federal appeals court agreed to hear Wal-Mart's appeal of a San Francisco judge's order approving class-action status for a sex-discrimination lawsuit representing as many as 1.6 million current and former women employees, the Associated Press reported. The court did not comment on the merits of the appeal, and did not say when it would hear it.

HOME PARTIES. The Longaberger Co., a manufacturer of hand-crafted baskets, pottery, and cast iron products sold primarily by home parties, has introduced a line of scrapbook kits. Visit www.longaberger.com ... Big Yellow Box, a division of Crayola manufacturer Binney & Smith, sells through kids' parties. See www.bigyellowbox.com.

PAINTING. The Society of Decorative Painters has added benefits and incentives for its annual membership drive which begins Sept. 1. SDP’s 33rd annual conference, Beach Blanket Paintin’ Party, is next May 23-28 in Tampa. For membership and exhibit info call 316-269-9300 or email sdp@decorativepainters.org. (No word yet on a new executive director.)

MICAH. Micah Jones, the daughter of popular industry veteran Marrijane Jones of Offinger Management, who was seriously hurt when she was hit while crossing a Nashville street by an off-duty policewoman, has been moved to a rehab facility at Ohio State U. Hospital. Send cards to Micah Ashley Jones, Dodd Hall, 480 W 9th Ave., Columbus, OH 43210-1245. And there is a website: www.micahjonesgetwell.com.

SEWING. The Home Sewing Assn. reports growing momentum for its National Sewing Show (NSS) Oct. 5-7 in Las Vegas. "To date, the exhibitor base is trending strongly in comparison to previous years," reports the HSA, with 28 new exhibitors, including sewing machine vendors. Officials expect 200+ exhibitors and 1,500+ attendees. Visit www.sewing.org.

JOBS. In April, 2003, President Bush visited a Timken Co. plant in Canton, OH pushing for new tax cuts to spur the economy. He said in part, "The future of this company is bright and therefore, the future of employment is bright for the families that work here." Last month management announced the plant was closing, putting 1,300 people out of work. (For more thoughts on the outsourcing of jobs, click on Business-Wise in the left-hand column or click HERE.)

EDUCATION. Ever wish you could take classes at Mass. Institute of Technology, or its Sloan School of Management? Now you can, more or less. MIT has loaded all of the materials for 700 of its courses at www.ocw.mit.edu. The site does not require registration.

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.

To see the latest job openings, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 21.42 ... Change**: -2.96
Hancock Fabrics (HKF). Last*: 11.63 ... Change**: UNC
Jo-Ann Stores (JAS). Last*: 25.56 ... Change**: -1.00
Michaels (MIK). Last*: 51.70 ... Change**: -2.35
Rag Shops (RAGS). Last*: 3.13 ... Change**: -0.08
Wal-Mart (WMT). Last*: 53.34 ... Change**: +0.86
CLN Retail Index. Last*: 166.78 ... Change**: -.2.2%
Dow Jones Index. Last*: 9,826.39 ... Change**: -3.0%

Unusual signs, emailed from a subscriber.

In an office building: TOILET OUT OF ORDER..... PLEASE USE FLOOR BELOW

In a Laundromat: AUTOMATIC WASHING MACHINES: PLEASE REMOVE ALL YOUR CLOTHES WHEN THE LIGHT GOES OUT

In a London department store: BARGAIN BASEMENT UPSTAIRS

In an office: WOULD THE PERSON WHO TOOK THE STEP LADDER YESTERDAY PLEASE BRING IT BACK OR FURTHER STEPS WILL BE TAKEN

In an office: AFTER TEA BREAK STAFF SHOULD EMPTY THE TEAPOT AND STAND UPSIDE DOWN ON THE DRAINING BOARD

Outside a secondhand shop: WE EXCHANGE ANYTHING – BICYCLES, WASHING MACHINES, ETC. WHY NOT BRING YOUR WIFE ALONG AND GET A WONDERFUL BARGAIN?

Notice in health food shop window: CLOSED DUE TO ILLNESS

Spotted in a safari park: ELEPHANTS PLEASE STAY IN YOUR CAR

Seen during a conference: FOR ANYONE WHO HAS CHILDREN AND DOESN'T KNOW IT, THERE IS A DAY CARE ON THE 1ST FLOOR

Notice in a farmer's field: THE FARMER ALLOWS WALKERS TO CROSS THE FIELD FOR FREE, BUT THE BULL CHARGES.

On a repair shop door: WE CAN REPAIR ANYTHING. (PLEASE KNOCK HARD ON THE DOOR – THE BELL DOESN'T WORK) 

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.

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5. Creative Leisure News is regularly published the first and third Mondays of each month. Because August has five Mondays, your next issue will be Monday, September 6. Happy Labor Day!

xxx

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