Date: September 6, 2004
Vol. VIII, No. 17

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TABLE OF CONTENTS

COMMENTARY: THE SCRAPBOOK INDEPENDENT

This issue has evolved into a special report on the state and future of independent scrapbook retailers. It started with an email from Lisa Kanak, owner of The Cropper's Corner. Her thought-provoking letter (see below) got me thinking about how scrapbooking is evolving, and perhaps it's becoming impossibly difficult for the independents to survive and prosper. So I sent an email to a number of retailers, vendors, and others asking their opinions.

Boy, did I get them! The answers are divided in the various columns listed below.

I don't agree with everyone's thoughts, but that's fine. A subscriber once described CLN as "the industry's village green, where everyone can come together and safely discuss issues." That's exactly what I hope CLN is doing with this issue. And if you have any comments on what you read, please send them – on or off the record – to me at mike@clnonline.com.

Business-Wise. Mike's original thoughts emailed to various industry sources – and an answers from two of the industry's top consultants.

Vinny Da Vendor. Vendors respond, explaining why they sell/package the way they do.

Category Reports. Winners of TNNA's Star Stitchers and Student Design Competition.

Scene & Heard. The latest on Micah Jones, daughter of Marrijane Jones of Offinger Management, who was seriously hurt just prior to the CHA Summer Show. It's good news!

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

Gifts & Decorative Accessories magazine is polling its readers about future trends in design. We thought it would be interesting to ask exactly the same question, then compare our results with G&DA's. click on Industry Polls in the right-hand column or HERE -- and vote!

We asked CLN readers to predict how the national economy and their business would perform during the remainder of 2004, including the all-important holiday season.

National Economy. No one predicted strong growth or that the economy would decline significantly ... 39% predicted it would improve "slightly" ... 39% thought the economy would be flat ... 22% expect a slight decline.

Business. 8.7% predict their business will increase significantly ... 43.5% expect a slight increase ... 34.8% think their business will be flat with last season ... 4.4% predict a slight decline ... 8.7% expect a significant decline in their business.

Thanks to comments at the recent vendor meetings, the second quarter earnings report, and President/CEO Michael Rouleau's comments during a conference call with analysts, the company is clearly not resting on its laurels – even though those laurels are pretty impressive:

1. For the three months ended July 31, earnings rose 10% to $26.7 million ($0.38/share). The results included an after-tax charge of $3 million to establish an insurance reserve because of one of Michaels' insurance company's financial problems. Excluding this charge, earnings/share would have been $0. 43/share. Analysts surveyed by Thomson First Call had predicted earnings of $0.40/share. Sales rose 10.8% to $682.9 and same-store sales were up 5%.

2. August same-store sales rose 5.0%; the results were better than the vast majority of retailers in the U.S. (See article below)

3. The stock has risen more than $6 in the last three weeks. It's now in the range it was when it split a couple of years ago.

4. Michaels opened its 1,000th store last month, in Winter Park, FL. The 2004 schedule involves opening 45 and relocating 30 Michaels stores, opening seven and relocating one Aaron Brothers store, and opening six Recollections stores. It will finish the year with approximately 1,020 stores. There was no mention of Village Craft stores, whose names will be changed to Michaels.

5. In his conference call Rouleau discussed plans to achieve the "perfect store." Look for Michaels to spend the next 18 months to develop prototypes in five markets. After studying the results and refining the prototype, the company will roll out the "perfect store" in 2006.

The prototype's goal is to become a brand – one that's a continuing source for inspiration, fun, excitement, and creativity. That will be achieved through better merchandising and signage, plus classes, demos, and services such as custom framing and floral arranging.

When asked about the previously stated goal of increasing sales to $5 million/store, Rouleau said that would be achieved via the "perfect store" concept.

With very few exceptions (Michaels being one), August was lousy. The only retail sector that weathered the storm were the luxury-goods chains such as Neiman-Marcus, Nordstrom, and Saks Fifth Avenue.

Reasons for the decline were plentiful: Hurricane Charley hurt sales in Florida, high gas prices, a relatively late Labor Day, faltering consumer confidence, rising interest rates, and fairly strong sales a year ago, due in part to consumers receiving tax-rebate checks. Dollar Tree CEO and former Michaels exec Bob Sasser said on a conference call, "It is no secret that the retail environment has been tough in general," CBS MarketWatch reported.

Back-to-school sales were lackluster as customer traffic dropped to its lowest level since March, 2003, the National Retail Federation reported. "People are not spending money," Kurt Barnard, head of Retail Forecasting Group, told Reuters. "They are intimidated by the [economic] outlook."

Michaels. Overall sales rose 10.0% to $205.1 million and same-store sales increased 5.0%. Sales for the year are up 11.0% to $1.614 billion. For the month, customer traffic was up 3%, the average ticket was down 1%, and custom frame deliveries were up 3%.

CEO/President Michael Rouleau said, "Overall, we are pleased with our sales results for August. Our best performing departments were yarn, frames, impulse/party, and kids crafts, and our strongest zones were the Pacific, Northeast, and Northern. We continue to expect September same-store sales to be relatively flat and October same-store sales to increase 4% to 6%, with custom frame deliveries shifting from September into August and October."

Michaels continues to expect earnings to be $0.62 - $0.65 for the quarter and $2.92 - $3.05 for the year.

Jo-Ann's. Same-store sales decreased 2.9%. Analysts had expected a 4% decline, Dow Jones News reported. A year ago Jo-Ann's enjoyed a 9.8% increase thanks to the company's 60th anniversary promotion, which obviously was not repeated. Execs said the lack of a promotion hurt sales but helped margins. Sales for the year are still up 4.6% and same-store sales are up 3.8% compared to last year's 3.5%.

Wal-Mart. Same-store sales gained only 0.5% (the lowest gain we can ever remember), which was at the low end of the discounter's already lowered prediction, and below analysts' expectations. Wal-Mart also announced its earnings for the third quarter will likely reach only the low end of its forecast for $0.52 - $0.54/share, also lower than analysts' expectations, Reuters reported. Wal-Mart also lowered its prediction for quarterly same-store sales growth from 3-5% to 2-4%.

Hancock. Same-store sales inched upward by 0.2% and overall sales rose $100,000 to $30.7 million. For the first seven months of the fiscal year, sales are down 3.7% to $225.6 and same-store sales fell 4.2%.

Some winners: Nieman Marcus, +14.7% ... Nordstrom, +7.2% ... Chico's, +3.6% ... Best Buy, +4.3% ... J.C. Penney, +3.8% ... Dollar General, +2.8% ... Target, +1.8%.

Some losers: Family Dollar, -0.1% ... ShopKo, -0.2% ... Kohl's, -0.7% ... Big Lots, -2.0% ... Limited, -2.0% ... Federated Department Stores, -2.4% ... Duckwall-ALCO, -2.7% ... Pier 1 Imports, -2.8% ... Ann Taylor, -4.5% ... Abercrombie & Fitch, -5.0% ... Dillard's, -5.0% ... May Department Stores, -5.9% ... Sears, -6.1% ... Bombay, -19.0%.

Help may be on the way, however. On Friday the Labor Department reported employers added 144,000 workers to payrolls in August, the most since May, and revised upward the number of jobs created in July – 73,000, twice the original estimate.

The Craft & Hobby Assn. Winter Show will include a new exhibit area dedicated to showcasing art and design. CHA’s Inspiration & Design Faire will provide designers with a venue to exhibit their creative services and conduct business. The Show is Feb. 12-15 in Atlanta.

The new section will feature those who design, create or license two-dimensional or three-dimensional work in key areas such as advertising art, crafts, decorative art, giftware, florals, home dec, kids’ crafts, paper art, and more. Manufacturers, publishers, and buyers seeking ideas for product and kit development, project sheets, booth display, TV work, and other creative projects will find the talent they need at the Faire, says Anita Collins, CHA’s director of member programs and services.

"The time has come to give the CHA designer member section and all industry designers their proper recognition," Collins says, "because all successful products were inspired by great design." Collins said. For exhibit info, visit www.chashow.org or call 201-794-1133.

(Note: In the 8/16/04 issue, CLN commented, "Scrapbook vendors tell CLN the #1 reason why independents go out of business is poor inventory control." That prompted the following from Lisa Kanak, owner of The Cropper's Corner, a Crafter's Home store in Fredericksburg, VA.)

I'm an independent who's frustrated; – I'm told I need to turn my inventory not less than 6x/year, but at the same time I "have" to purchase in depths that I know won't turn in 3+ months.

It's a fact that the vast majority of papers and rolled stickers (sold in 50s), won't turn in 2 months – and over 50% won't turn in 4 months. There will always be a handful that do (but you never know which ones). In my store, I can count on one hand the number of stickers we have turned 50 or more (at regular price) of in the last 7 months – they are all from one vendor, and all Disney stickers.

We're told that we need to constantly bring in what's new – but if we can only break even because we wind up selling product at reduced prices, the owners never get ahead (pay off debt, enhance services, etc.).

This is a huge problem that faces the independent retailers. A handful of companies (usually those started by scrapbook storeowners) understand and are working with independents on depth requirements – but many refuse to listen. Instead they tell us, "You are LUCKY they don't make us purchase by the 100s." (That is an exact quote, by the way).

When there were only a handful of scrapbook manufacturers from whom people were somewhat content to buy, buying in 50s and 100s may have been feasible. However, we have created a "churn and burn" industry that literally devours its own. Faster than the customer can ask, "What's new?" the next hottest thing is being promoted – and by the time we can get it to our shelves, the craze is over and the store owners are "stuck."

Stores must be able to offer a variety to the customers. In order to do this, we must be able to purchase in smaller quantities to diversify product selection and sell through. Sell through is the only way a store can be profitable.

Unlike the craft store – which we are so often lumped into -- a scrapbook is hugely personal. People want unique, different, and personal items. People are looking for the "perfect" paper, sticker, embellishment, etc. Most of our scrapbookers do not want to create their own background papers, stickers, and embellishments; they want to find them ready to use.

In essence, the personal nature of the project makes the scrapbook store more like a Hallmark store. Hallmark succeeds, not because it has 50 designs of six "Happy Mother's Day" card designs, but because it has about 1-2 dozen of 50 "Happy Mother's Day" card designs. People shop there because of the variety – and the belief that they will be able to find "the perfect" card. They also sell gift items and impulse items to increase ticket sales. (Lest we forget, the mark up on cards is also usually more than 50%).

Our customers always want more variety, but purchasing printed papers in the 50s reduces the total number of designs we can afford to sell. By manufacturers offering papers in 25s, and stickers packaged in the dozen (which, by the way, gives the store a "higher end" look), stores can give customers a greater variety and the perception that they will be able to find "the perfect" items for their scrapbook – without having to increase inventory overhead. It increases product turns and reduces risk to everyone.

There are many other issues that the Big Box "Deals" and Internet competition have created, but the number one issue on most storeowners' minds is product turns. Because the only way I can "control" my inventory is to turn it faster. If I have to constantly sell 50-75% of my product at a discount just to make room for "the next hot thing" – there is no profit, only break-even. And, let's face it -- a store isn't going to get very far if all they do is break even. – Lisa Kanak, owner of The Cropper's Corner

(Note: To read related comments from various industry sections, click HERE for Business-Wise and HERE for Vinny Da Vendor. Business-Wise has the original email sent to various industry veterans, and responses from a scrapbook company veteran and a consultant. Vinny includes responses from vendors. To comment on this or any of the columns, email mike@clnonline.com.)

The September issue of Bazaar said: "Crochet: The New Knitting. Everyone's dropping her knitting needles for a crochet hook." The piece referred to a photo of Kate Moss wearing a Dior macrame-knit, spider-web dress, then suggested readers "get started with an all-in-one kit from Lion Brand Yarn. (www.lionbrand.com) with a portion of the proceeds benefitting the Susan B. Komen Breast Cancer Foundation." (President David Blumenthal told CLN Lion has been swamped with requests, and Lion has contributed $10,000 to the Komen Foundation.)

In the 9/14 issue of Woman's Day, Editor in chief Jane Chesnutt wrote, "I can't help but wonder if the resurgence of knitting and crocheting's popularity is a response to the stress of the technological age. It wasn't so many years ago that most of us had three networks to choose from on TV and the Internet was unheard of. With so much information vying for our attention now, it seems logical that the quiet satisfaction of watching something of your own making unfold before your eyes is the perfect antidote for over-informed, over-stressed lives." The issue also included a number of attractive how-to projects.

Lion Brand Yarn won Vendor of the Year at the recent Michaels vendor meetings. The company is also co-publishing various annual magazines, including Simply Creative Crochet (on newsstands in Oct.), Knit.1 (Oct.), and Knit It (Jan.).

Net income for the quarter ended July 31 was $0.5 million ($0.02/diluted share) compared with a net loss of $2.2 million ($0.10) a year ago. Analysts had expected a $0.02 loss. Sales rose 3.3% to $371.0 million and same-store were up increased 3.1%. As a result, the company increased its expected earnings for the year by a nickel to $2.25-$2.30/diluted share, excluding the pre-tax charge of $4.2 million recorded in the first quarter related to the company's debt refinancing.

A pleased Chair/CEO Alan Rosskamm said, "We have now achieved gross margin rate improvement while maintaining positive same-store sales growth for four consecutive quarters. We are well positioned for an exciting second half, with our inventory levels and our merchandising strategies aligned as we head into the important second half. We now have a total of 30 superstores that are the smaller, more efficient 35,000 sq.-ft. prototype. Our superstores now represent over 30% of total revenues and are expected to meaningfully contribute to the second half sales performance."

For the third quarter, execs project lower earnings than a year ago because of the 60^th anniversary promotion held last year.

Jo-Ann's opened three superstores in the quarter and an additional five in the first two weeks of the third quarter, including its 100th. Year-to-date, Jo-Ann's has opened 16 superstores and one traditional store, and closed 46 traditional stores. For the balance of the year, the company expects to open 13 superstores and close 25 traditional stores. The current store count is 762 traditional stores and 101 superstores.

For the quarter ended Aug. 1, there was a net loss of $2.7 million ($0.15/diluted share) compared to a profit of $1.6 million ($0.09) a year ago. Sales dropped 6.6% to $89.8 million and same-store sales fell 6.7%. The latest results missed a mean estimate of five analysts polled by Thomson First Call, which predicted a loss of $0.04, Dow Jones News reported.

During the quarter Hancock opened 11 stores and closed eight. Hancock plans to open 10-12 stores and close 7-8 in this quarter. The current store count is 433.

To read the complete press release, including the comments and analysis by CEO Larry Kirk, visit www.hancockfabrics.com, click on Investor Relations, then Press Releases.

Although the attendance at some of the consumers shows dipped a bit this year, sponsors believe its due to the increase in the number of shows rather than a sign of declining consumer interest. And they're backing up that theory by adding shows in new cities next year.

Memories Expos. For its ninth year, Memories Community has added three trade/consumer Expos to its schedule, bringing the total to seven. The schedule: Apr. 1-2, Las Vegas ... Apr. 29-30, Somerset, NJ ... May 20-21, St. Charles, IL ... June 17-18, Columbus, OH ... Sept. 9-10, Pasadena, CA ... Oct. 6-8, Orlando ... Nov. 11-12, Denver. The Expos are open to everyone, but Memories Community members enjoy free show admission, booth space discounts, opportunities to sponsor classes and crop parties, class discounts, free subscriptions to Memories Community magazine and newsletter, etc. Annual dues are Specialty Services $75/yr., Retail$150/yr., Corporate $250/yr. For info, visit www.memoriesexpo.com, call 740-452-4541, or email memories@offinger.com.

Great American Scrapbook Convention. June 9-11, Arlington, TX ... June 16-17, Chantilly, VA ... July 29-30, Grand Rapids, MI ... Aug. 19-20, San Antonio, TX ... Sept. 28-Oct. 1 (with Women Create), Ogden, UT. For more, call 801-627-3700, or visit www.greatamericanscrapbook.com and www.womencreate.com.

Creating Keepsakes. March 11-12, Nashville ... March 18-19, Portland ... April 1-2., Mesa ... May 20-21, Manchester, NH ... June 3-4, Jacksonville ... July 29-30, Valley Forge ... August 5-6, Charlotte ... August 12-13, Tulsa ... September 16-17, Phoenix. For more, call 801-831-0639.

1. It's that time of year again when the chains have their "vendor-partner" meetings. I've received numerous calls about the demands of the chains, and it seems this time vendors are reaching their limits. (Of course, they've said that before, and somehow find a way to go along with at least some of the chains' requirements.)

An interesting view of the situation: One vendor told me, "I bet Hobby Lobby and Wal-Mart are hoping I say yes to the other chains. I'll give 'em all the goodies they want, but it will be built into the price of the product. Wal-Mart and Hobby Lobby don't ask for all the extras, so they'll buy the product for less, and therefore should be able to sell it for less."

2. One of the responses to my scrapbook email was a former employee of Primedia who talked about the business seminars at the annual MemoryTrends show that occurs later this month. Years ago when I was editor of Craftrends, I gave a number of seminars at trade shows. ("Improving Your Store Newsletter", "Low-Cost Marketing Tips", etc.) Every seminar reminded me of my days as an English teacher in a Peoria, IL high school when I first graduated from college. The similarity was this:

The parents of my A students always attended Parent-Teacher Night. The parents of the F students, the ones I really needed to talk to, were never there. Twenty years later, the savvy, business-oriented retailers filled my seminars. The retailers who opened stores because they loved cross stitch, or crafts, or whatever, were never there. They were too busy taking product workshops, which were more fun.

So a word of advice to the retailers attending MemoryTrends: The product workshops are important, but in the long run, the business classes will keep you in business longer.

3. I have a gut feeling that the results of polls and surveys such as my CLN Poll may be positively skewed. This issue has the results of our question about your business in the next five months. I suspect folks who are morbidly depressed about the state of their business probably don't answer the question. I have no way of proving that, but when I see surveys like this, I always assume the real tally would be a bit more negative than the numbers show.

HURRICANES. Kudos to Wal-Mart for its efforts to help the victims of Hurricane Charley. The Lakeland (FL) Ledger reported the discounter has allowed one vacant property to be used as a staging area for the National Guard and FEMA officials, allowed another property to be used as a homeless shelter, sent 300 trucks filled with basic supplies totaling $250,000, and donated $150,000 to Florida Red Cross chapters ... Toys R Us donated and delivered two full truck loads of baby supplies and toys to the Sarasota branch Red Cross's warehouse. (And our best wishes to readers hit by Hurricane Frances.)

LOOKING: Experienced industry pro with extensive business, employment law, intellectual property, contracts, and marketing knowledge seeking executive-level position. Graduate degree. Willing to relocate. For more, call Mike Hartnett 309-935-5593 or email mike@clnonline.com.

TOYS R US. After announcing it was considering getting out of the toy business, TRU reported a profit for the second quarter, but it was due to tax accounting. Total sales fell 3.9%, same-store sales dropped 7.7%, and the toy division posted a big loss. Chair/CEO John Eyler said it would be "a number of months" before a decision would be made on the toy division.

DUCKWALL-ALCO. For quarter ended Aug. 1, earnings from continuing operations totaled $1,234,000 ($0.28/diluted share). Net sales rose 0.8% to $109.6 million, and same-store sales rose 0.1%. Like Rag Shops, the company is hiring a consulting firm to develop a revised business plan and "examine other means of enhancing stockholder value ...." This may be in reaction to a Reuters report that the third-largest shareholder may try to force the sale of the chain. For many months the company's sales report would cite crafts as a strong category, but recently sales and profits have been flat or fallen, and crafts has not been mentioned.

KIDS. Playthings magazine listed Michaels as the 24th largest toy – toy – retailer in the U.S.

PEOPLE. Industry veteran Frank De Roberts is Dir. of Marketing for Lion Brand Yarn. Frank has worked for Robinson Anton and Coats & Clark ... Making Memories promoted Andrew Williamson to Dir. of Marketing. Previously he had worked at Kelly’s Crafts.

LAWSUITS. Wal-Mart and Target are being sued by the Illinois attorney general's office which claims the discounters did not collect sales taxes for merchandise sold on their web sites between 1999 and 2002, the Chicago Sun Times reported..

SCRAPBOOKING. TV personality Leeza Gibbons will attend the MemoryTrends show (Sept. 28, 11 am) promoting her Legacies line in the Xyron booth (#144) ... A thread on the Two Peas in a Bucket message board for hardcore scrappers concerns a consumer who found someone else using a photo of her family on a published page layout. (No, we have no idea why a scrapbook website would be called Two Peas in a Bucket, but it's extremely popular with scrappers. To get inside the mind of hard-core scrappers, visit www.twopeasinabucket.com.)

HOBBIES. The Radio Control Hobby Trade Assn. re-elected Mark Schwing (Electronic Model Systems) and Janet Ottmers (Horizon Hobby) to their second three-year term on the board of directors. Newly elected to his first three-year term is Ed Rogala (Midwest Products/Falcon Trading) and Wil Byers (Kiona Publishing) as alternate.

XMAS. The Christmas shopping season will be two days longer than it was last year.

FLORALS. We're hearing that single-stem florals are not the dynamo they once were. Among the reasons: 1. More types of stores are carrying florals, thereby siphoning off business. 2. Price pressures keep lowering the quality, and consumers are starting to rebel. 3. Consumers can now buy finished bouquets rather than individual stems and arranging them.

CONDOLENCES. Our very best wishes to Robert Workman, CEO of Provo Craft, whose mother, Thea, passed away last week at the age of 75. Thea and her husband, Croft, founded Provo as a retail store more than 40 years ago. Now a leader in crafts and scrapbooking, Provo has more than 800 employees.

SALE. In our last issue we described the "Tent Sale" Janlynn had at it's headquarters. To see photos of the successful event, visit www.janlynn.com/tentsalepictures.htm.

BOTTLE CAPS. Yes, they've become a craft/scrapbook item. (We wouldn't have believed it either if we hadn't seen Suzanne McNeil of Design Originals wearing an attractive – really – bottle cap necklace at the CHA Summer show. Now they're embellishments and papers, too. Visit www.d-originals.com.

BOOKS. Jeanette Crews Designs' newest releases are at www.jeanettecrews.com/results.cfm?Subcategory=107.

MEDIA. The 19th series of America Sews with Sue Hausmann uplinks to PBS stations Oct. 3. Sponsors include Husqvarna Viking, Jo-Ann's Sulky of America, The Warm Co., Hewlett Packard, Rowenta, Rit, ErgoSew, The Vintage Workshop/Indygo Junction, Krause Publications, Havel's, Kandi, David Textiles, Martingale, and Cutting Corners ... A new PBS series, In The Studio with Priscilla Hauser, will be available in March. Cutter Productions is the producer.

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 read earlier Profiles, click HERE.

To learn about some of the latest jobs available in this and related industries, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 21.74 ... Change**: -1.57
Hancock Fabrics (HKF). Last*: 11.22 ... Change**: -0.41
Jo-Ann Stores (JAS). Last*: 27.29 ... Change**: +1.73
Michaels (MIK). Last*: 58.00 ... Change**: +6.30
Rag Shops (RAGS). Last*: 3.61 ... Change**: +0.05
Wal-Mart (WMT). Last*: 53.25 ... Change**: -0.09
CLN Retail Index. Last*: 172.79 ... Change**: +3.6%
Dow Jones Index. Last*: 10,260.20 ... Change**: +4.4%

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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