Date: September 5, 2005
Vol. IX, No. 17

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TABLE OF CONTENTS

COMMENTARY: Katrina  

Most of this issue was written before Katrina, and like my post 9/11 issue, the industry's "news" seems pale by comparison to what we're all seeing in the Gulf Coast. Complaining about a customer, vendor, or competitor? Seems relatively minor now, doesn't it?

Business-Wise. CLN asked readers, "What's going on out there?" and was bombarded with insightful, thought-provoking responses. The problem is not just high gas prices, and the comments came before Katrina....

"Benny Da Buyer". Michaels gives out its Vendor Partner of the Year awards. And the winners are....

"Vinny Da Vendor". A vendor describes why independents are declining and the industry is soft. When we know the root causes, then we can work on solutions.

Memory, Paper & Stamps. Answers to "What's going on out there?" relating specifically to scrapbooking.

Scene & Heard. Trend-watcher, marketing/design pro Ellie Joos reports on the recent New York Gift Show.

Kate's Collage. Hilarious recent examples of typos and mis-statements allegedly in church bulletins. (It has nothing to do with our industry, but maybe we need a few laughs after watching the news from the Gulf Coast.)

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

Granted, it's too early to know for certain, but how do you think Katrina and its ripple effects will affect your sales and profits? To vote, click on Industry Polls in the right-hand column or click HERE.

CLN POLL: THE EFFECT OF GAS PRICES

(Note: CLN readers responded to this poll before Katrina and the resulting jump in gas prices.)

No surprise: the industry is worried about rising oil prices and thinks it will get worse. Almost 40% (37.5%) think it has already seriously affected their business and another 41.7% think it has slightly affected their companies. 12.5% think it has not affected their business, and 8.3% aren't sure. But the future is gloomy: 66.7% think it will seriously affect business, and another 25% think it will slightly affect business. Only 4.2% do not think it will be a problem, and 4.2% aren't sure.

If you have me in your address book, please change my email to mike@clnonline.com! Address all correspondence to mike@clnonline.com.

Like everyone else in the United States, the people in our industry are horrified by the reports from the Gulf Coast. Trying to accurately assess even the short-term effects Katrina will have on our industry is as impossible as the task of rescue workers accurately counting the dead and displaced. Determining the long-term effect at this time is unimaginable.

A major concern has been SLS Arts, the art material distributor in New Orleans. CLN has heard second hand that President Sam Seelig and industry veteran Phil King are safe. The area where the warehouse is located is dry, but because of the collapse of the area's communication infrastructure, it is not known if the facility suffered any storm damage. Reportedly, the area residents have been told they will have 12 hours today to go into the area to retrieve personal effects and then the area will be closed for as long as a month.

Frank Stapleton of MacPherson's said, "In addition to the more serious problems of the citizens of New Orleans, there are a lot of retailers in the country who count on SLS for quick response service, and now that we are in the midst of back to school, this will be an ever deepening tragedy if they are not able to get back up and running quickly." MacPherson's is matching employee donations to the Red Cross.

Jo-Ann's has four stores in the New Orleans area that are closed, and the Mobile store is operating limited hours due to curfews. Jo-Ann's VP Dave Bolin thinks three of the stores have been destroyed, but communications with that area is so hit-and-miss that officials can not confirm if the stores still exist. "Our first priority has been the safety of our team members. Over the past couple of days we have been working on trying to locate our New Orleans team members and have successfully located [only] about half of them at this time," Dave said.

CLN was told 14 Michaels stores closed as a result of Katrina, but 7 have reopened.

Wal-Mart had closed 75 stores following the storm, either due to flooding or electricity outages, after having reopened some of the 120 that were closed immediately after Katrina hit the area. The company has upped its original $2 million contribution to hurricane relief by another $15 million. As part of this commitment, the company will establish mini-Wal-Mart stores in areas impacted by Katrina. Items such as clothing, diapers, food, formula, toothbrushes, bedding, and water will be given out free of charge to those with a demonstrated need.

"This was murder by bureaucracy," Aaron Brussard, President of Jefferson Parish, told NBC's Meet the Press. "If the federal government had responded the way Wal-Mart did, we'd be a lot better off."

Nine Hancock stores closed, but the warehouse and offices were unaffected. Reportedly the company cancelled a planned vendor meeting because it was to be held in a nearby facility that is being used for refugees.

Organizations. Quilts Inc., the sponsor of the Quilt Markets and Festivals, launched a campaign to raise money and quilts for Katrina victims. Visit www.quilts.com ... The National Art Materials Trade Assn. has already launched a campaign to help its members affected by Katrina. Visit namta.org/displaycommon.cfm?an=1&subarticlenbr=117 ... The Hobby Manufacturers Assn. and the National Retail Hobby Stores Assn. have launched a joint relief effort: collect info about stores in need and organize an effort to help them with monetary and product donations; make a $4,000 donation to the Red Cross; encourage members to donate; and turn the welcome party at the iHobby Expo (Los Angeles, Oct. 20-23) into a benefit for the affected stores. Call Pat Koziol at 973-283-9088 to assist in the benefit ... No doubt other industry organizations will launch relief efforts once the needs are more clear.

Stores throughout the country lost sales as consumers remained home to watch news reports, but long-range economic implications are impossible to gauge. Consumers will be hit with higher home and auto insurance rates, and gasoline prices may continue to rise, depending on how long it takes for the Gulf refineries and pipelines to become fully operational. Economists are predicting the Federal Reserve Board will halt raising interest rates to keep the country from sliding into a recession.

Another key question is the Port of New Orleans. Midwest farmers will be hurt if the New Orleans port remains closed, thus hampering their ability to ship grain overseas. Industry related imports should not be seriously affected because most imported goods do not go through New Orleans. In the short term, consumers will pay higher prices for imported food such as coffee and bananas which are shipped through New Orleans.

And a final, sobering thought: the Federal Emergency Management Agency reports that about 40% of small businesses don't reopen after a major disaster.

(Note: CLN emailed subscribers in Louisiana asking if they were safe. Most emails didn't get through. Here's an answer from Jackie Erickson-Schweitzer of HeartStrings Fiber Arts.)

"I am currently in east Texas and am safe. I think I'll be able to return to my home and business in a couple of days to assess damage. I hate to imagine what is ahead, but there really is no choice but to go forward as best can be. Thank you for your continued good thoughts and prayers for all affected by this disaster. It appears that it will evolve into a true test of the unity of spirit in our entire country."

Retail sales were a mixed bag in August. high end stores such as Nordstrom's performed well, as did teen clothing stores that benefitted by back-to-school sales. Wal-Mart and the dollar stores did not perform as well, claiming high gas prices forced their customers to cut back. Fabric and craft stores' results were disappointing, although results were not available for Michaels and A.C. Moore, who only report quarterly figures.

Jo-Ann's same-store sales fell 2.4%. In light of the sales figures, Chair/CEO Alan Rosskamm warned that it would be difficult for the company to achieve its previously stated expectations for the year. "However, over half of our full-year revenues are generated during the months of September through January, and we are well positioned for the upcoming critical selling seasons."

Hancock's same-store sales fell 6.3%. CEO Jane Aggers said, "Our stores have now completed the makeover process, and we continue to ship new merchandise assortments from our distribution center to the stores in preparation for the fall selling season."

Others. Costco, +9.0% ... Duckwall-Alco, +7.4% ... Sam's Club, +6.6% ... Target, +6.3% ... CVS, +6.2% ... Wal-Mart (U.S.), +3.3% ... Family Dollar, +1.8% ... Dollar General, +0.9% ... Big Lots, +0.6% ... Pamida Division (ShopKo), -6.6%.

A recent report in DSNRetailing Today highlights efforts of various "non-craft" chains adding scrapbooking or expanding their departments. Office Depot has 12 ft., up from 8 ft., targeted at the beginner and intermediate scrapbooker. Wal-Mart and Target have expanded their departments, Office Max is in the mix, and photo retailers are jumping into the arena.

DSN interviewed Tom Bazzone, president of the ReCollections division for Michaels. Bazzone thinks the chain can grow to 250 stores, and he sees the category expanding into card making and home dec. As a result, "We got much more intense with our merchandise offering and smarter with our fixturing," Bazzone told DSN. "There's a real void of a dominant brand in papercrafting."

Meanwhile, Big Lots is so pleased with its scrapbook sales that it is expanding its department from 8 to 12 feet, TD Monthly reported. CLN had previously reported that Big Lots was selling $1 million per month in scrapbook paper. It will continue to sell close-outs, but now is working on developing new merchandise under the Creative label.

'Tis the season for chains to meet with vendors and bad feelings to smoulder. Vendors are complaining to CLN again, in advance of the meetings, thanks to the "vendor agreements" that were sent prior to the meetings. One vendor emailed CLN about her Michaels agreement; she wrote, "This chain is trying to take all of us for a DEEP ride. Asking for just crazy demands on the vendor agreement. If we make a penny, they want it. It is VERY bad. The word partnership is a joke these days! Problem is, they know they have power and they can just push all of us around! Very very sad what is going on these days."

Yet it's hard to argue with success. The vendor who sent this to CLN is not going out of business. Michaels' stock has split twice in the last 4 and a half years and is up approximately another 11% this year, not counting dividends.

Is Michaels' approach the only road to success for a retailer? Perhaps not. In April 2004, a vendor sent a letter to David Green, CEO of Hobby Lobby, and a copy to CLN. The vendor wrote, in part, "... working with you has always been easy and straightforward. You buy the product from us at a fair price and then assume the risk of selling it and making a profit. That’s exactly what we do. We manufacture our product at a fair cost and take the risk of selling it for a profit. Some of these chains complicate matters so much, and toss around so many percentages, that it’s impossible to TRACK if you’re making a profit, let alone actually MAKE one."

Meanwhile, excessive demands can cause some quiet, indirect repercussions:

1. Some vendors raise the price before agreeing to what the chains call "entitlements." For new products, they set the price knowing they'd be required to agree to the chains' terms. "It becomes a game," one vendor told CLN.

2. Vendors who have a new product or have overstock to sell will first contact those chains who don't feel so "entitled."

3. Vendors no longer have the margins necessary to promote their category. Paint companies, for example, used to spend a fortune promoting painting. Now they can't afford to, and sales have ultimately suffered. Seen many customers in the paint aisle lately?

4. Vendors have less money for new product development.

5. If vendors can't make money in this industry, they will look to other industries. Numerous "craft" and "scrapbook" companies are exhibiting at gift shows and other venues, trying to find a niche that allows them to make a profit.

Will the bottom line ultimately be fewer vendors and fewer new products? If that happens, will we wake up one day like the cat in the kitty litter commercials and ask, "Where'd everybody go?"

1. In the meantime, however, whose stock would you rather buy?

2. Years ago an importer complained bitterly to CLN, "My good customers are going into importing themselves, and my bad customers don't pay their bills." His plight was eliciting genuine sympathy until a friend walked by and asked the vendor, "How's your Porsche?" The vendor answered with a question: "You mean the green one or the red one?"

3. Chain stores in many industries are as demanding, if not more so, than our chains.

4. Chains are not inhuman, greedy monsters. The majority of the chain personnel are as nice, as conscientious, and as ethical as the majority of vendors. The problem lies not with the people, but with the system.

5. Chains claim they will use the extra discounts and revenue to better sell the vendors' products. Someone has to pay for all those Sunday newspaper inserts.

Michaels. Net income for the second quarter ended July 30 increased 15.2% to $30.8 million ($0.22/diluted share). That met Wall Street's expectations. As CLN had reported, overall sales rose 9.2% to $745.5 million and same-store sales rose 4.2% thanks to a 2.4% increase in average ticket, a 1.4% increase in transactions, and a 0.4% increase in custom frame deliveries. The stronger Canadian dollar contributed approximately 0.4% to the average ticket increase for the quarter. The top zones were the Pacific, Southwest, and Southeast and the strongest departments were Jewelry/Beading, Paper-crafting, Foam, and Yarn.

In a conference call with analysts, Rouleau discussed the company's success with its replenishment systems which has increased in-stock levels to 97% and reduced clearance merchandise to record low levels. (Comment: This is probably the major reason Michaels out-performed its competitors in the second quarter.)

With the systems working well, the focus moves to merchandise. Store layouts have been consolidated into six racetrack plans. As part of that focus, 25 stores have been remodeled and another 25-80 will be remodeled next year. at a cost of $100,000-$280,000/store. To read the complete report, visit www.prnewswire.com/micro/MIK.

Hancock. For the quarter ended July 30, Hancock reported a net loss of $5.4 million ($0.29/diluted share), compared with a loss of $2.7 million ($0.15) a year ago. The earnings comparison was negatively affected by an increase in the government's Producer Price Index that the company uses to measure inflation in inventories, which resulted in a higher LIFO charge to cost of sales this year. That caused a negative swing in the after-tax loss comparison of $0.05/share. Sales decreased 7.3% to $83.2 million. To read the complete report, visit www.hancockfabrics.com; click on Investors, and then the press release.

Jo-Ann's. For the quarter ended July 30, the net loss was $5.1 million ($0.23 loss/diluted share), compared with net income of $0.3 million ($0.01) a year ago. Analysts expected a loss of $0.21 according to Thomson First Call. Net sales rose 3.5% to $383.8 million, but same-store sales decreased 0.5%. Gross margins for the second quarter decreased to 48.2% of net sales from 49.0% in the second quarter last year.

To read the complete report, visit www.joannstores.com; click on Jo-Ann Stores, then Our Company, then Investor Relations, then Press Releases.

Wal-Mart. For the second quarter ended July 31, net income rose 5.8% to $2.8 billion ($0.67/share). Net sales were up 10.2% to $76.8 billion and same-store sales rose 3.6%. CEO/President Lee Scott blamed gas prices. To read the complete report, visit www.walmart.com; click on Wal-Mart News, then News Releases.

EMAIL: VENDOR-RETAILER COMMUNICATIONS

(Note: This is written by Pam Riddell, a sales rep, founder of Maps2Memories, and who is helping the independent scrapbook stores in Kentucky and Tennessee work together. She is commenting on the Memory, Paper & Stamps column in which Lisa Kanak writes about the importance of vendors and retailer talking to each other. To read Lisa's comments, click on Memory, Paper & Stamps in the left-hand column, then "Why Independents Aren't More 'Loyal' to Small Vendors" in the right-hand column.)

I agree with Lisa's assessment of the communication problem between vendors and retailers. I think that is the single biggest issue. Our retailers are constantly having to react to vendors' selling choices. With honest communication retailers could take a more proactive approach and make the wisest buying decision possible. That's really all they're asking.

It goes both ways. Frequently manufacturers seem to make decisions based on the wind. Far too few of them actually use their independent customers for feedback, and because of that, there's been an escalating hostile environment between vendors and retailers over the last year or two that's unnecessary. Some savvy manufacturers have an advisory board of independent retailers – smart move. The chains are here to stay and have a huge impact on the industry. But it doesn't have to be exclusive. Lisa is right – communication.

I've long harbored the thought that manufacturers don't communicate with retailers because they're afraid of losing business. In reality, if communication became the norm, business would increase and it would be a win-win for all. Thanks to Lisa for speaking out and identifying these issues. – Pam Riddell, The Riddell Group

1. Regarding Pam Riddell's and Lisa Kanak's comments about vendor-retailer communication: It's a part of Wal-Mart lore that at one time Sam Walton felt the same way, so he went camping with the head of Proctor & Gamble. From that trip grew a wide variety of ideas to improve communication.

And years later, one of our industry's biggest vendors who sold to all the chains told me that Wal-Mart was by far his best customer. Not simply because of the volume, but because Wal-Mart shared so much information with him.

2. This belongs in the "Some days you should just stay in bed" department: Business was interrupted at the Jo-Ann's in Anchorage. Weather? Nope. A small plane crashed into the parking lot at the front door. (No one was hurt.)

STORES. Richie McDonald, a member of the Lonestar country-western band, bought his wife a 2,000 sq.-ft. store for her birthday so she could start her own scrapbook shop, Scrappin, in Carthage, TN. Reportedly he bought a store on eBay that was closing in North Carolina, and sent a semi to pick it up.

SPC. Dee's, with two stores in Louisville, is the latest retailer to join Sierra Pacific Crafts. Dee's is led by Larry Olliges, who is the fifth SPC member currently serving on the CHA Board of Directors.

CLOSING. The Craftmart stores in Peoria and Phoenix, AR are closing. Chuck and April are retiring and daughter Laurie is returning to teaching special ed. The Craftmart in Chandler will remain open for now.

LAUGHS. A Wal-Mart store that sells husbands? Visit www.chronwatch.com/content/contentDisplay.asp?aid=16301.

INDEPENDENTS. Maps-2-Memories' website/organization (www.maps2memories.com) for independent retailers continues to grow. Check the site and email Pam Riddell at riddellgroup@aol.com or call 888-690-5552 to have an update on the group's plans and progress emailed to you. Advertising on the site is available, too.

ADS. Wal-Mart is serious about attracting upscale consumers. According to the Toronto Globe and Mail, the retailer is running eight pages of ads in the Sept. Vogue at a cost of $800,000. It's part of an agreement in which Wal-Mart will buy 68 pages of ads over two years.

TOYS. KB Toys emerged from bankruptcy with 640 stores.

TRAGEDY. Two teenage employees of a Wal-Mart in Glendale, AZ were shot to death as they gathered shopping carts in the parking lot, the Associated Press reported. The gunman, who apparently did not know the victims nor had a grudge against Wal-Mart, was arrested without incident. Police could not give a motive for the shooting spree.

STOCK. In a nine day period, July 5-14, Michaels CEO Michael Rouleau sold 72,100 shares of Michaels stock for $2,949,197, according to Vickers Stock Research. Rouleau still owns 126,157 shares.

NEW ORLEANS. More than 70,000 people were scheduled to attend trade shows in New Orleans this month, including a major AARP convention. Yes, our industry's trade associations have insurance in case a trade show has to be cancelled.

DESIGNERS. SCD holds its annual Conference Oct. 5-7, at the Hyatt Regency in Atlanta. To register, visit www.creativedesigners.org/annualconference.htm. Speakers include the Pantone Institute Exec Director Leatrice Eiseman and licensing expert Suzanne Cruise. Other classes include contracts, product development, intellectual property, marketing, etc. It's a great opportunity for designers to take business and technique classes and showcase their designs – and for vendors and editors to meet with designers one-on-one to discuss their design needs. Make hotel reservations by calling the Hyatt Regency Atlanta, 800-233-1234.

SHOWS. Highlights of the CHA Winter Show (Jan. 30-Feb. 2 in Las Vegas) include "Twenty Trends for 2010: Retailing in an Age of Uncertainty" with Tom Rubel, CEO of Retail Forward, a major retail research/consulting firm ... "The Drivers of Supply Chain Management: Competitive Advantage" with Tom Mentzer, professor of Marketing and Logistics at the U. of Tennessee ... and "Digital Photo Memories and Retail: Tapping into and Profiting from the Convergence of Paper and Technology." There will also be seminars on emerging in-store technologies, e-commerce, and licensing fundamentals.

GIFTS. The semi-annual Gift Fair in Atlanta has been cancelled. The sponsors cited low demand/attendance by buyers. The Gift Fair held six semi-annual editions since its 2002 debut, the last being in July 2005.

BEADS. Online registration for the new Bead & Art Glass Fest is available until this Friday. The show is Sept. 30 – Oct. 2. Visit www.beadandartglassfest.com, call 740-452-4541, or email beadandartglassfest@offinger.com ... Bead Fest Philadelphia, Oct. 6-9, is sponsored by Lapidary Journal and Step by Step Beads magazines. There will be 200+ vendors. Visit www.lapidaryjournal.com/beadfest or call 610-232-5714.

SEWING. The Home Sewing Assn. is promoting September as National Sewing Month with a new slogan, "Sewing…the alternative yoga," emphasizing the proven health and creative benefits of sewing. To learn more about specific ideas for National Sewing Month, visit the Industry section of www.sewing.org. Visitors can also download the newly redesigned NSM logo and banner advertisements available in a variety of formats and sizes.

SHOWS. National NeedleArts Assn. officials report that exhibitors at the recent Phoenix cash-and-carry show had stronger sales. "Buyers stocked up on canvases and threads in anticipation of the growing wave of interest in needlepoint," officials said.

CROCHET. The cover story on the 8/14 New York Times Style section showed numerous photos of glamorous women wearing crochet dresses, shawls, and tops.

HOME PARTIES. The list of well known craft veterans who have joined Purple Tree continues to grow. The latest is Julie Stephani, who recently resigned as Craft Book Editor for Krause/F+W. She joins her husband, Bill, and industry pros such as Maureen Carlson, Debra Quartermain, Marie Browning, Sue Warden, Debba Haupert, Lorine Mason, and Sharon Reinhart. To learn more, visit www.purpletree.com.

MEDIA. Sandra Joseph, President of Reminders of Faith, is featured in the September issue of Guideposts, a faith-based magazine with a paid circulation 2.6 million and an overall readership of 8 million. Visit www.guidepostmag.com.To learn about Sandra's new books, Scrapbooking Your Spiritual Journey and The Women’s Ministry Guide to Scrapbooking, visit www.remindersoffaith.com.

MEDIA. Clapper Communications is expanding Paper Made Easy from an annual to a bi-monthly magazine due to strong reader response. It begins with the February issue and Jenny Bezigue is the editor. It will be sold by subscription, on newsstands, and in stores. Call 800-CRAFTS-1. For advertising, email Bobbie Zych or Marie Clapper (bzych@clapper.com, mclapper@clapper.com). For editorial submission info, email Jenny at jbezigue@clapper.com.

BOOKS. DRG released Quick-Stitch Crochet Afghans: Time-saving Designs for Home Decor and Gift-giving. Visit www.drgnetwork.com/pages/news_releases/news_room.php.

STOCK. Michaels repurchased 457,900 shares of the company's stock during the second quarter. Since then, the company repurchased an additional 542,100 shares.

CLAY. The Sculpey "Clay Mobile," an evolving art exhibit/souped up VW Beetle that highlights Sculpey III creations, will be touring fairs and festivals in eleven states from August to November. For locations and details, visit www.sculpey.com.

To see a partial list of the available jobs, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 21.83 ... Change**: -4.22
Hancock Fabrics (HKF). Last*: 6.01 ... Change**: -0.32
Jo-Ann Stores (JAS). Last*: 19.87 ... Change**: -4.39
Michaels (MIK). Last*: 35.41 ... Change**: -2.56
Wal-Mart (WMT). Last*: 44.55 ... Change**: -4.15
CLN Retail Index. Last*: 162.46 ... Change**: -11.0%
Dow Jones Index. Last*: 10,447.37 ... Change**: -1.4%

"There but for fortune go you or I," the song goes. If you want to contribute to help your fellow Americans, visit www.networkforgood.org and click on Help Victims of Hurricane Katrina. It enables you to contribute money online to a wide choice of social agencies.

Comment: Yet another ripple effect of Katrina may be felt by the local charities in your area. Many people, horrified by the tsunami, gave generously to the relief effort – but cut back on their usual donations to local charities. The answer is to give more – to the victims of Katrina and your local organizations. 

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xxx

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