Date: March 6, 2006
Vol. X, No. 5

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TABLE OF CONTENTS

COMMENTARY: The Family Business  

While the biggest news story in this issue is the Rag Shops situation, there are two other stories that reveal a larger, ongoing trend: the decline of the family-owned-and-operated business. Lyle and Marie Clapper have sold Clapper Communications, and Alan Rosskamm announced he will step down as Chair/CEO/President of Jo-Ann's. As you'll read below, both companies were started on little more than a dream and grew to become major contributors to the growth and success of our industry. Alan will stay on as an outside director on the Jo-Ann's board, and Jeff Clapper, the grandson of the founders, remains as publisher, but ....

It's the way of the world and I guess it's progress. But it's a little sad, too.

Kate's Collage. Miscellaneous letters to CLN: A long-time industry vendor asks some tough questions about Rag Shops, although he's not a creditor ... How the industry can attract more consumers ... Why designers are leaving the industry ... And a big "Thank you."

Are U.S. bankruptcy laws fair to vendors? To retailers? Recent changes in the laws have made it more difficult for consumers to declare bankruptcy, but what about creditors? And retailers? To vote, click on Industry Polls in the right-hand column or click HERE.

While some attendees complained about the CHA show divided by product categories, apparently they are in the minority. Almost half of the respondents in CNA's unscientific poll, 48.2%, said they strongly agreed with keeping the shows sectionalized, and another 25.9% agreed. Only 14.8% strongly disagreed and 9.3% disagreed. A mere 1.9% did not care.

Creditors for the troubled Rag Shops chain received an email late Friday informing them that the deadline for voting had been extended until 5 pm EST today. The email from CEO/President Ron Staffieri said in part, "The company is pleased with the response to date, but has received a significant number of requests from Creditors that did not have enough time to react to today’s deadline.... Rag Shop remains hopeful that all creditors will respond positively to the company’s proposal for this out-of-court settlement."

The offer includes an out-of-court settlement of debt owed to vendors of 25 cents on the dollar. In return, the company would not file for bankruptcy and the owner, Sun Capital, would provide a $5 million infusion of cash. The offer was hammered out with the ad hoc creditors' committee, which recommended the deal be accepted.

The offer came from a letter from the creditors' committee lawyer dated Feb. 27 which also included this: "A critical factor in the Company's promulgating the restructuring will be the Company's ability to obtain credit terms from critical vendors."

According to the Feb. 17 letter from the committee's lawyer, Rag Shops' unsecured debt to the trade is approximately $16 million. There is also a secured debt of $16 million to Wells Fargo Business Credit (for which Rag Shops went into technical default in January) and a $4 million loan from Sun Capital in connection with its acquisition of Rag Shops in 2004.

The creditors' committee consists of representatives of Caron, CIT, Delaware Dry Goods, Dimensions, Fibrecraft, Larson Juhl, Lion Brand Yarn, Loew-Cornell, MCS Industries, Plaid, RC2 Brands, SLS Arts, and Star Candle.

"Actually, it is kind of scary," an independent retailer told CLN. "Not good if these large chains (corporations) can't figure out how to make money at this business. Of course if they would just raise their prices to normal retails and quit cannibalizing each other, maybe they could make money."

One of the industry's true pioneer companies, Clapper Communications, was sold to Amos Press, a publisher of stamp, coin, and car magazines located in Sidney, OH. Clapper publishes Pack-o-Fun, Crafts 'n Things, The Cross Stitcher, Painting, and Paper Made Easy.

Pack-o-Fun was the industry's first kids' craft magazines, started by Chair Lyle Clapper's parents, Edna and John, in their basement in 1951. Crafts 'n Things was one of the first – if not the first – consumer craft magazines. President Marie Clapper served on the HIA (now CHA) board for six years; during that time she served as Vice President and Treasurer. She also has been, in effect, representing the craft industry by serving on the Magazine Publishers Association board of directors for more than 10 years.

The company was also known for The Angel Project which was launched in response to 9/11. A call went out to the magazines' readers and the company received more than 170,000 handmade angels for the rescue workers and families affected by the tragedy. The Pentagon displayed 200 of the angels and 100 remain in the National Archives, now a permanent part of America's history.

"Clapper is a well established, highly respected publisher of crafts magazines and we are thrilled with the opportunity to acquire their titles," says Bruce Boyd, CEO/President of Amos Press. "Expanding our publishing expertise into the crafts market represents a significant opportunity to diversify our enthusiast publishing business," says Bill Fay, Amos' VP of Operations.

Jeff Clapper, Publisher of Clapper’s magazines, says, "Our primary concern was finding the best possible home for the Clapper titles. We wanted our magazines to be in good hands with people who understand the enthusiast publishing business and share our values of quality publications and excellent customer service with a family oriented, long-term operating perspective. I’m confident that the Amos family will build on our successes."

Jeff Clapper has joined Amos Press as Publisher of their Crafts Publishing operations, which will continue to be located in Des Plaines, IL.

Some retailers blamed snowstorms in the East for disappointing sales and predicted sales may be tough in March because Easter falls three weeks later this year.

Jo-Ann's same-store sales fell 3.7% while overall sales rose 1.6% to $130.6 million. In other news, the company increased a loan from Bank of America Retail Finance to $425 million from $350 million, according to a filing with the Securities and Exchange Commission.

The company reports its fourth-quarter and full-year results this afternoon. Investors can listen to the earnings conference call to be broadcast live over the Internet at 4:30 pm EST.

Visit www.joann.com, then click on "About Jo-Ann Stores," then "Our Company," then "Investor Relations," then Conference Call icon.

Michaels now reports sales results quarterly, not monthly. The company will release its fourth-quarter and fiscal-year results this Wednesday.

Wal-Mart's U.S. stores' same-store sales rose 2.9% while the division's overall sales rose 10% to $16.65 billion. The company is now using a different method for calculating same-store sales. Under the old method, Wal-Mart included only new stores in the comparison once the next fiscal year after their 12-month anniversary had started. As a result, stores were on average 18 months old before they were included in the same-store comparison, the company said.

CFO Tom Schoewe said, "Within the quarter, Easter is three weeks later this year, which will likely result in a weaker March and a stronger April. Due to this shift, we estimate comp store sales in the U.S. for the March five-week period to be between 1 and 3%."

Hancock's same-store sales fell 7.3%, while overall sales slipped 5.7%. The current year period had one day more than 2005, because Hancock changed its fiscal period-ends from Sunday to Saturday in 2005. The effect of having one more day in February 2006 was approximately $.7 million. The company is now in its inventory process which began on Feb. 19, and is scheduled to continue through Apr. 15. Accordingly, this will delay the filing of the company's Annual Report on Form 10-K beyond its due date of Apr. 13.

Others: Costco, +8.0% ... CVS, +5.9% ... Walgreen, +5.7% ... Duckwall-ALCO, +5.2% ... Nordstrom, +4.9% ... Sam's Club, +4.6% ... Family Dollar, +4.4% ... Bombay, +4.2% ... Target, +3.6% ... Kohl's, +3.0% ... J.C. Penney, +2.3% ... Dollar General, -0.5% ... Pier I, -10.8%.

Alan Rosskamm has resigned as Jo-Ann's Chairman of the Board, and will become an outside director upon the naming of his replacement. The company is in the midst of a search for a new CEO and President, positions from which Rosskamm resigned last year. According to a filing with the Securities & Exchange Commission, the decision for Rosskamm to step down was made at a special meeting on Feb. 24 "to attract a broader range of qualified candidates."

Rosskamm remains as Chair/CEO/President until the appointment of his replacement. "As a major shareholder and director," Rosskamm stated, "I have both a strong desire and fiduciary duty to make sure that we attract the most qualified and capable chief executive to guide the company's future growth, while maximizing value for all our shareholders."

According to the SEC filing, Rosskamm’s employment agreement provides for the company to pay his base salary and health/life insurance coverage for 36 months from the date on which he steps down. Jo-Ann's will also award him a lump sum payment of $1.8 million, and "reasonable" legal expenses up to $75,000 upon the appointment of his replacement, but he will not receive fees, stock, or options commonly provided to outside directors.

It may not seem like it today, but Jo-Ann's started as a family-owned independent shop. It was founded in 1943 by Alan Rosskamm's grandparents, Hilda and Berthold Reich, and their friends, Sigmund and Mathilda Rohrbach. They had fled Nazi Germany and came to Cleveland. Mr. Reich had been importing cheese in a small east-side storefront when the Rohrbachs approached him to sell fabrics. The Rohrbachs' son, Max, was a fabric salesman whose company offered to supply them with remnants to start. They soon pushed cheese to the back and opened the doors of the first Jo-Ann store, then named the Cleveland Fabric Shop.

Later the name was changed to Jo-Ann Fabrics after the families' daughters, Joan Zimmerman and Jacqueline Ann Rosskamm. By 1969, the company operated 169 stores in 28 states and had gone public under the name of Fabri-Centers of America, Inc. In 1999, the corporate name was changed to Jo-Ann Stores, Inc.

Other highlights: 1994: Fabri-Centers of America acquired Cloth World, a 342-store chain ... 1995: Opened a 46,000-sq.-ft. test store which became the model for the superstores ... 1997: Launched www.joann.com ... 1998: Acquired House of Fabrics ... 1999: Opened a second distribution center in California.

The current store count is approximately 684 traditional stores and 154 superstores. The stock now trades on the New York Stock Exchange under the symbol, JAS. At CLN's deadline, the stock was trading at $12.68. The 52-week range is $10.98-$30.60.

Net income for the year ended Dec. 31 fell 40.5% to $10.0 million ($0.50/fully-diluted share). The average estimate of analysts polled by Thomson First Call was $0.52. Sales for the year rose 8.4% to a record $539.4 million, but same-store sales declined 2.6%.

Net income for the fourth quarter declined 25.7% to $10.7 million ($0.53). Sales for the fourth quarter rose 6.1% to $188.0 million, but same-store sales decreased 4.0%.

CEO Jack Parker said, "We were disappointed with our 2005 results. Thus far in 2006, as we anticipated, sales in yarn continue to decline, but we are encouraged with the sales in many of our other categories. We re-iterate our forecast for 2006 net income to be in the range of $0.71 to $0.76 per fully-diluted share."

Wall Street analysts are estimating the earnings will be $0.71. The stock has risen from below $13 in early January to above $17.

Net sales for the year ended Jan. 31 rose 9.5% to $312.4 billion, and net income rose 9.4% to $11.2 billion ($2.68/share). For the fourth quarter, net sales rose 8.6% to $89.3 billion ($0.86/share), and net income rose 13.4% to $3.6 billion. The earnings were favorably impacted by a $103 million ($0.02) tax adjustment.

The company forecast first-quarter earnings of $0.58-$0.62 and fiscal 2007 earnings of $2.88-$2.95. Analysts surveyed by Thomson Financial had projected earnings of $0.62 for the quarter and $2.98 for the year.

"Our entire management team is dedicated to growing sales by making our stores more relevant to today's customers," CEO Lee Scott said. "We want our merchandise to appeal to a broad range of customers who are already shopping our stores. We want customers to shop Wal-Mart for all their needs, from consumables to electronics, home decor, and apparel."

CLN received this letter from a long-time industry veteran: "I’m looking at scrapbooking and I have this sense of deja vu. You’re not old enough to remember, but I remember when there were hundreds and hundreds of stores that carried nothing but macrame. It was so big!!!! Remember when there were hundreds and hundreds of stores that carried nothing but cross stitch? It was so big!!! Now we have hundreds of stores carrying nothing but scrapbooking. It is so big!!!

"Eventually the consumer got tired of making plant hangers, got tired of cross stitching every possible saying in the world – and will get tired of pasting stuff.

"There is nothing that you can do about it; it’s the natural progression of crafts. Just be a Boy Scout: BE PREPARED."

The letter in Pt. I implies scrapbooking is doomed, that it will go the way of macrame and other dominant trends that are waiting for a revival. Is she right? Will history repeat itself? Consider the similarities – and the differences – with cross stitch:

Cross stitch started in the southeast in the early 80's and become the dominant category for many years. It inspired wild enthusiasm in consumers, thousands of whom opened independent shops. Hundreds of entrepreneurs began meeting the seemingly insatiable demand by producing charts, leaflets, and accessories. The category engendered its own trade organization, the Southeastern Yarncrafters Guild, whose trade show at one time was larger than our current MemoryTrends show.

Competition came strictly from within the industry – craft independents and chains, and the chains weren't near the major force they are today. Michaels and Wal-Mart were much smaller, A.C. Moore was just starting, and Jo-Ann's was more a fabric outlet than a craft store.

There was a limit to cross stitch. Once a consumer's walls were filled with projects and friends and relatives had received as many projects as they could handle, interest began to wane. The key, then became attracting new consumers. But retailers and vendors alike continued to do their own thing, by themselves. There was no coming together to support promoting the category to the masses – the only company who did was DMC.

Technology hurt cross stitch. Either intentionally or unwittingly, consumers would violate publishers' copyright by photocopying charts and giving them to friends. Later consumers scanned charts and put them on the Internet for the world to copy.

Many of the independents were missionaries, not merchants. They lacked the capital and the business expertise to deal with the increasing competition, handling cash flow, and attracting newcomers. While they were in business, they taught thousands to stitch and provided great customer service. But eventually they had trouble paying the rent.

Retailers began to football the prices for basic products and use them as loss leaders. For example, the suggested retail price for embroidery floss was 54 cents; it was not uncommon to see it on sale for four, five, or even six skeins for $1.

As time passed, enthusiasts pushed for more challenging projects and designers became bored creating simple projects. The more challenging projects thrilled the enthusiasts, but may have frightened away potential newcomers.

Cross stitch now is in a fallow period these days – just like yarn was a few years ago, and CLN is beginning to see signs of a resurgence.

Scrapbooking started in the northwest in the mid-80's and has been the dominant category for many years. It, too, inspired wild consumer enthusiasm and a few thousand independent shops. It, too, produced hundreds of entrepreneurs who created a bewildering array of products. The trend spawned its own groups for retailers and MemoryTrends. Sound familiar?

But scrapbooking spread far beyond industry-related retailers. Now competition is everywhere – dollar stores, office supply stores, drug stores, etc. – even e-commerce.

Many of the new independents were missionaries, not merchants. They lacked the financing and the business expertise to deal with the increasing competition, handling cash flow, and attracting newcomers. Sound familiar?

Yet scrapbooking has a far greater potential. Consumers take billions of photos each year. They have to do something with them. Some retailers have joined forces through Crafter's Home, et al, but vendors continue to do their own thing without joining forces to promote scrapbooking to the masses.

Technology has helped scrapbooking – and may hurt it. Websites gave retailers new ways to market their stores and allowed enthusiasts to create online communities. And the increase in the number of consumers with camera phones means even more photos will be taken. But scrapbooking may be hurt by consumers creating their entire memory books on computers rather than buying "hard-copy" supplies.

So is scrapbooking doomed to repeat history? No – IF we learn from the past.

Have any thoughts on the subject? Email them to CLN at mike@clnonline.com.

Should independent retailers order from small vendors? The issue came up during a seminar at the recent CHA show. Consider both sides:

In favor of the small vendors: 1. They provide products that help distinguish an independent from a chain. 2. If independents simply carry the same products as a chain, then consumers can make apples-to-apples price comparisons – and probably choose the chain store. 3. If independents order only from a "chain" vendor, and that vendor received a new chain-store order the same day that an independent's order arrives, guess whose order gets filled first?

In favor of large vendors: 1. Thanks to advertising and other marketing efforts, large vendors have created a brand name and products that consumers want. Retailers large and small are in business to give consumers what they want. 2. Because of their greater resources, large vendors can create more appealing, eye-catching packaging for their products. 3. Because they're producing larger quantities of a product, they should be able to sell it for less. 4. If an independent orders direct from, say, 40 small vendors, she'll drown in paperwork and go broke from trying to meet so many minimum orders.

The answer: It's not an either-or proposition. Of course independents should buy from small vendors, but as often as possible buy them through a distributor. Of course independents should buy from large vendors who have a strong brand name and created a demand.

Wal-Mart is fighting legislation in various states that would mandate large companies pay a certain percentage of its payroll for health insurance; meanwhile, the company is expanding its health care options for its employees, although critics charge it isn't enough.

Is Wal-Mart a good guy or a bad guy regarding health care? The question is moot. The continuous rise in the cost of health care is crippling all U.S. businesses and individuals, so the issue is much larger than Wal-Mart.

In fact, Wal-Mart is a master at squeezing excess costs out of a supply chain. Now the company has opened health clinics in nine stores staffed by health care professionals. A visit costs $45-$50. Most of the patients, Wal-Mart reports, have no insurance and would have gone to a hospital emergency room where the visit would have cost hundreds of dollars.

If Wal-Mart can cut health care costs the way they've cut product costs, maybe we should let Wal-Mart handle health care for the country. While they're at it, they can manage FEMA, too.

MARTHA. Martha's turnaround continues. Martha Stewart Omnimedia reported a fourth-quarter net income of $2.95 million ($0.06/share) compared with a loss of $7.33 million ($0.15) a year ago. Susan Lyne, CEO/President said: "Last month, we announced a licensing initiative with EK Success and GTCR Golder Rauner to design and distribute Martha Stewart Crafts products. The first line of Martha Stewart Crafts products will focus on the fast-growing $3 billion scrapbooking market. The launch of the line in late 2006 or early 2007 will coincide with a strategic build-out of our Internet site that will offer tools and applications for crafters, as well as a host of digital templates and ideas."

PRIMEDIA. The company's Enthusiast division saw revenues increase 2.0% to $154.2 in the fourth quarter, but slip 1.5% to $608 million for the year. The company blamed a decline in advertising in its car magazines, and did not mention that its craft-related magazines (Creating Keepsakes, Craftrends, Sew News, etc.) were up for sale.

MEDIA. Perhaps the most interesting new industry magazine is $100,000 Quilting Challenge, published quarterly by Reality Publishing, a subsidiary of All American Crafts. It claims to be the first reality-based magazine (think Survivor and American Idol, only in print). There will be 10 categories and ultimately 40 finalists picked by judges – all quilting pros; then the consumer votes for the grand prize winner. The contest evolves in each succeeding issue. To learn more, visit www.quiltingchallenge.com.

TV. The PBS 22nd series of American Sews with Sue Hausmann downloads Apr. 2 to local stations. It's sponsored by Husqvarna Viking, Jo-Ann's, Sulky of America, Chenille It, Dalco Home Sew, Rowenta, Sew Many Designs, The Warm Co., Unique Patterns, Velcro USA, F+W Publications, Springs Creative Products Group, Havel's, Kandi Corp., and Sudberry House.

EK SUCCESS. The acquisition of EK Success by GTCR Golder Raunter has been completed. "We are looking to acquire other [vendors]. We could very possibly do another acquisition in scrapbooking and other acquisitions in the broader craft sector," GTCR's Vince Hemmer, told Crain's Chicago Business ... EK named Tom Kasvin as CFO and promoted Dan Kochenash from Operations VP to COO.

RESEARCH. The latest yarn-market research sponsored by the Craft Yarn Council of America is available at www.craftyarncouncil.com/know.html.

QUOTATION. "The soaring cost of health care in America cannot be sustained over the long term by any business that offers health benefits to its employees. And every day that we do not work together to solve this challenge is a day that our country becomes less competitive in the global economy. We have to solve the health care challenges facing America. We have to do it together. And we have to start now." – Lee Scott, Wal-Mart CEO, in a speech, "A New Commitment for America," at the winter meeting of the National Governors Association

QUOTATION. "The outlook for [Wal-Mart] this year is the best it's been in about the last three years." – Richard Hastings, senior retail analyst at Bernard Sands (Associated Press)

PEOPLE. Hancock named Kathleen Kennedy as Sr. VP/Chief Marketing Officer, she will be responsible for marketing, sales promotion, and branding strategy, and will report to CEO Jane Aggers. Kennedy was Exec. VP/Corporate Marketing for vFinance, Inc., a financial services firm; prior to that she worked for Office Depot; Office Max, and Broadway Stores.

PHOTOS. Hewlett-Packard is launching self-service, photo-printing kiosks, Photosmart Express, in retail locations that do not traditionally offer photo-printing operations, such as discount and grocery chains, CNNMoney.com reported. The kiosks will debut in the Albertson's and Bashas grocery chains. The kiosks will also be placed in retailers with existing on-site photo labs, including Longs Drugs. The kiosks also enable consumers to create calendars, posters, greeting cards, etc., with their own photos and pick them up in an hour. HP thinks the number of photos consumers print themselves will climb from 33 billion in 2005 to 67 billion in 2008, CNNMoney.com reported.

GIFT CARDS. The Int. Council of Shopping Centers estimated sales of gift cards increased $30 billion to $40 billion this past holiday season. They're a boon to retailers in two ways: recipients often spend more than the price of the gift card, or don't use it at all. Limited Brands recently announced that unspent gift cards contributed $30.4 million to fourth-quarter revenue, reported Bloomberg News.

CHARITY. Warm Up America!, working with volunteers nationwide and its retail partners Michaels and Jo-Ann's has distributed hundreds and hundreds of afghans through Red Cross chapters and social service agencies throughout the Southeast to families displaced by the recent hurricanes ... The National NeedleArts Assn.’s Stitch to WIN Against Breast Cancer campaign taught needlework techniques and raised money at the 6th Annual Conference for Young Women Affected by Breast Cancer co-sponsored by Living Beyond Breast Cancer, TNNA’s non-profit partner in the campaign, and the Young Survival Coalition held recently in Denver. For more info, call 740-455-6773, email tnna.info@offinger.com, or visit www.tnna.org.

CORRECTION. The Bead & Art Glass Fest and Memories Scrapbooking Expo are co-located in Orlando, Nov. 10-12, not Anaheim. The shows are not combined; it's simply two shows under one convention center roof. For exhibit info contact Chris Reinke at creinke@offinger.com. Promotional and even sponsorship opportunities are also available.

KUDOS. Congrats to Wolfie Rauner and his wife, Rose, who will be celebrating their 50th wedding anniversary on Mar. 11. A long-time mfrs' rep, Wolfie says he's been on the road so much, he's only celebrating his 25th.

To see the latest listings from the only personnel recruitment firm specializing in our industry, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 17.54 ... Change**: -0.29
Hancock Fabrics (HKF). Last*: 3.87 ... Change**: -0.35
Jo-Ann Stores (JAS). Last*: 12.68 ... Change**: -1.27
Michaels (MIK). Last*: 32.99 ... Change**: +1.04
Wal-Mart (WMT). Last*: 45.34 ... Change**: -0.76
CLN Retail Index. Last*: 162.46 ... Change**: -1.4%
Dow Jones Index. Last*: 11,021.51 ... Change**: -0.1%

1. The World Is Flat, by Tom Friedman. The clearest explanation yet of the causes, consequences, and challenges we face thanks to the Internet, outsourcing, and other business developments – a clear, cogent explanation of doing business in the 21st century.

2. A Shopkeeper's Manual by Mary Liz Curtin – A must read for independent retailers. It's filled with practical, common-sense advice on virtually every aspect of operating a store. Mary Liz is a retailer, columnist for Giftware News, and has spoken at the last two CHA winter shows. Published by Wicked Queeen Press – www.wickedqueenpress.com.

3. The Wal-Mart Effect, by Charles Fishman (Penguin Press). Whether or not you sell to Wal-Mart or compete against it, Wal-Mart is affecting you, your business, and our culture. The book is fascinating, instructive, well written, and objective. It also includes interviews with former craft industry veterans, ex-DMC exec John Fitzgerald and Nancy Ridlin, widow of the late Don Ridlin, whose company, Ridlin Adhesives, was an important craft manufacturer in the late 1980s. Excerpts are available at www.walmarteffectbook.com.

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xxx

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