Date: April 3, 2006
Vol. X, No. 7

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TABLE OF CONTENTS

COMMENTARY: IS YOUR FATE IN YOUR HANDS?  

This is a unique period in our industry; three of our largest retailers – Michaels, Jo-Ann's, and A.C. Moore – are or will be looking for new CEO's. For vendors who sell to the chains and independents who compete against them, soon their success or failure will depend in part on those hiring decisions. If three dolts are hired, many vendors will eventually be in trouble. On the other hand, if the three CEO's can do for their chains what Michael Rouleau did for Michaels, the vendors will have great years and independents will have tougher competition than ever.

Everyone likes to think they control their own destiny, but the near future of the industry – and its retailers and vendors – will depend in part on people who haven't been hired yet.

NEW COLUMNS THIS ISSUE

"Benny Da Buyer". Wal-Mart opened a new prototype superstore in Plano, TX to attract more upscale buyers. But did the craft department shrink to make room for the sushi bar? Is the sewing area smaller because of $500 bottles of wine? Industry pro Brenda Lugannani walked the store and sent this report.

Business-Wise. Industry veterans – and Wall Street analysts – evaluate the Michael Rouleau era at Michaels, his announced retirement, and the company's possible sale..

Store Design Tips. Advice on signage, store front windows, and more.

Industry Research. A compilation of all of the various market research studies sponsored by trade associations – and how not to read research studies. NEW: A brief history of how the craft industry grew (according to the market research) to $30+ billion.

The U.S. Congress is divided about what to do about the country's estimated 12 million illegal immigrants and the continuing flow of immigrants across the borders. The House of Representatives and the Senate are debating bills with markedly different approaches. Which, do you prefer? How serious is the issue of illegal immigration? Express your opinion by voting in CLN's poll. Click on Industry Polls in the right-hand column or click HERE.

CLN readers are confident scrapbooks will remain a major factor in the industry for a long time. Almost 26% (25.93%) predict it will continue to grow and prosper; 61.11% think it will not decline sharply, but it will fade until it stabilizes into a consistently strong product category. Only 9.26% predict it will evolve into a minor product category, while 3.7% think it will almost disappear as consumers revert to simply placing photos in albums or creating digital scrapbooks.

Thanks in part to Michaels possibly placing itself on the auction block, the CLN Index outperformed all of the major indices for the first quarter of 2006. The CLN Index rose 6.9%, while Nasdaq climbed 6.1%. The Dow and the S+P 500 both rose 3.7%

A.C. Moore led the way with a 26.4% increase; Jo-Ann's rose 14%, while Michaels, which had declined earlier in the quarter, was up 6.5%. Wal-Mart continued its relatively flat stock performance, up only 1%, and Hancock fell 11.5%.

In other industry-related stocks, Primedia, which announced its Craft Division magazines were for sale, was up 26.4%. Rival publisher Meredith rose 6.7%. Martha Stewart declined 3.8%. Target fell 5.5%, the first time in recent memory that it was outperformed by Wal-Mart.

A.C. Moore. Patricia Parker sold a quarter of a million shares of A.C. Moore stock for more than $4.4 million in the first quarter of 2006, according to Vickers Stock Research. President Larry Fine sold 6,1434 shares for $291,374.

Wal-Mart. During the quarter CEO Lee Scott sold 100,000+ shares of company stock for $4.76 million. John Menzer, former head of the old Ben Franklin operation, sold almost 44,000 shares for $2+ million. Other Wal-Mart execs directly or indirectly sold almost 62,000 shares for $2.94 million.

Others. None of the execs at Michaels, Hancock, or Jo-Ann's sold any of their company stock in the first quarter.

Now the rumors are flying. After Michaels announced it's "exploring strategic alternatives" (a euphemism for selling the company), Wall Street is guessing about potential buyers. Analyst Carol Levenson with independent research firm Gimme Credit told the Chicago Sun Times that Sears/Kmart could be interested.

(Comment: That theory is probably based on Martha Stewart's relationship with Kmart and her new deal with EK Success to first produce a line of scrapbook supplies and later additional lines of craft supplies.)

Michaels hired securities firm J.P. Morgan Chase to assist in the sale. The Wall Street Journal said motivation for the sale is that the company is worth more on the auction block than its current market cap of $4.61 billion.

"The Irving, Texas, company should be a welcome target for leveraged-buyout firms, who have flooded into the retail space armed with cash and an appetite for taking on debt to buy ever-larger retail targets," the Journal wrote. "Michaels has no debt, which leaves substantial financial room in which any LBO shops can operate."

Michaels posted earnings before interest, taxes, depreciation and amortization (Ebitda) of approximately $550 million. A sale for 10 times the Ebitda would bring $5.5 billion, almost $1 billion more than the market cap of $4.61 billion.

"With a rapidly evolving retail market, we are focused on all opportunities to enhance the strength of the Michaels business, attract new customers, and more effectively respond to – and shape – their changing arts and crafts interests," Chairman Charles Wyly said.

Michaels also announced the retirement of President/CEO Michael Rouleau, 67, whose contract had previously been extended to 2008, and the appointments of Jeffrey Boyer and Gregory Sandfort as co-presidents. The position of CEO will remain vacant for the time being. Boyer will continue as CFO and Sandfort will also be COO.

Michaels operates 896 Michaels, 165 Aaron Brothers stores, 11 Recollections stores, and four Star Wholesale operations. Michaels was founded in 1973 when Mike Dupey converted his father's Ben Franklin into an all-craft store. His father sold the chain in 1983 to Peoples Restaurants, run by the Wylys. Peoples spun the chain off to its shareholders the following year when there were fewer than 20 stores. Charles Wyly and his brother Sam, the Vice Chair, are now in their 70s and hold about 8.5% of the company. Two of the largest institutional shareholders are Wellington Management with almost 12.7 million shares at year-end 2005, and Putnam Investment Management, with 10.2 million shares.

In fiscal 2005, which ended Jan. 28, the company's profit fell 35% to $131 million, despite an 8% increase in revenue to $3.68 billion, the Associated Press reported. The Friday before the Monday-morning announcement, Michaels stock closed at $33.96, down 4% for the year. The 52-week range is $30.38-$43.61. Shares jumped to $38.35 by Monday's close.

A week after announcing the above news, the Michaels board of directors appointed a committee to investigate and make decisions on the company's behalf regarding potential liability issues tied to the stock ownership of off-shore family trusts controlled by Chair Charles Wyly and Vice Chair Sam Wyly, reported Dow Jones News.

As CLN reported earlier, overseas trusts controlled by the Wylys are being investigated by New York City prosecutors and the Securities Exchange Commission. The trusts allegedly own stock in Michaels but that information was not reported to the SEC prior to 2005.

The board committee has hired the law firm of Debevoise & Plimpton LLP and negotiations between the two groups have begun. The Wylys have offered to settle any potential liability without admitting any liability to the company, Dow Jones News reported.

New Co-Presidents Jeff Boyer and Greg Sandfort will receive salaries of $500,000, according to Dow Jones News. Rouleau, who came to Michaels from Lowe's and has spent 45 years in retail, will remain as special advisor to the board of directors.

Aaron Brothers President Harvey Kantner was promoted to Exec VP/Chief Merchant, assuming Sandfort's former position, and Tom Bazzone, President of the Recollections and Star Wholesale divisions, was promoted to Exec VP/Specialty Businesses, including Aaron Brothers.

In a letter to vendors, Boyer and Sandfort said, "These changes should have no major impact on our relationship or our business with you, as we expect a completely seamless transition to this new management team. We remain focused on pursuing every opportunity to enhance the strength of the Michaels brand, attract new customers, and more effectively respond to – and shape – their changing arts and crafts interests, while continuing to build a world-class retail organization and infrastructure."

Michael Rouleau said, "After a decade as CEO of Michaels, I leave very proud of what we've achieved. Moving forward, I believe that the company is perfectly positioned to innovate, to broaden our reach, to expand the industry and to better serve customers as a truly world-class retailer. Jeff and Greg are ready to capitalize on the enormous opportunities that lie ahead for Michaels, and now is the time to pass the baton."

Boyer, 47, has worked for Sears, Kmart, Pillsbury, General Foods, Kraft, and Quaker Oats. He joined Michaels in January 2003 as Exec VP/CFO. Sandfort, 50, joined Michaels in January 2004 as Exec VP/GM after working in various positions at Kleinert's Inc., Sears, and Federated Stores. Kanter, 44, has been President of the Aaron Brothers division since April 2003. Prior to that, he worked for Eddie Bauer, Sears, Carter Hawley Hale Department Stores, Filene's, and Dayton Hudson. Bazzone, 39, became President of the Recollections and Star Wholesale divisions in May 2004. He had worked for Restoration Hardware, Red Envelope, Williams-Sonoma, and Grossman's.

In a filing with the Securities Exchange Commission last week, Michaels announced it planned to open 45 new stores and pay for them from ongoing operations. The average cost of opening a new store recently included roughly $703,000 in leasehold improvements, furniture, fixtures and equipment, and pre-opening costs, and an estimated initial inventory investment of about $599,000, Dow Jones News reported.

Meanwhile, Wal-Mart will spend approximately $17.5 billion in fiscal 2007, most of which will be used to open 20-30 discount stores, 270-280 supercenters, 15-20 Neighborhood Markets, 30-40 Sam's Clubs and 220-230 international units. Relocations or expansions account for some of the new stores. Like Michaels, Wal-Mart would also pay for the stores from cash flow, reported the Arkansas Morning News.

The industry's oldest trade magazine, CNA, announced that beginning in July it will drop from 12 issues/year to six and cease publication of its Scrapbook Insider and Sewing & Quilting Retailer supplements. CNA is owned by F+W Publications, which recently acquired Scrapbook Retailer, a bi-monthly trade magazine.

"This change enables us to better address customer demand, and to include more category-specific information in the pages of the magazine itself," said VP/Publishing Director Joel Toner in a letter to advertisers. "And each issue will have more pages, with added features, columns and a new overall design."

CNA will also have a redesigned website, special advertising sections, a searchable online version, and will publish its annual Directory on a CD mailed to subscribers.

The Michaels situation is not unique. There have been seven retail buyouts of more than $1 billion dollars in the past year. Among the more well known retailers who have been purchased by investment companies in recent years are Rag Shops, Toys R Us, Nieman Marcus, Albertson's, Mervyn's, and ShopKo, to name a few. What's going on?

First, the investment community is awash with money, in part because some investors have pulled out of the retail estate market and think they'll earn a better return than on Wall Street. Second, It's not just retail. Investment companies have purchased EK Success, Provo Craft, and numerous other industry-related companies.

For some public companies, retail and Wall Street don't mix. "Being a public company ain't fun," Richard Hastings, a senior retail analyst at the New York retail credit ratings agency Bernard Sands told SmartMoney.com. "Retailers are fleeing for the private universe, because they speak a different language than [Wall Street] analysts. There's a dynamic volatility that retailers are comfortable with, and that really tests their patience when they deal with the urge toward smoothness and predictability that analysts want. There are a lot more people in private investment banking who understand your language."

And Michaels won't be the last. "In this environment companies that can't retool quickly enough, or those that are threatened by shareholder revolt, will get scooped by private equity firms," retail consultant Fred Crawford told CNNMoney.com. He cited Borders, Barnes & Noble, BJ's Wholesale Club, Pier I, Rite Aid, Academy Sports & Outdoors, and WaWa as other potential buy-out candidates.

As CLN "goes to press," the U.S. Senate was scheduled to vote on a bill proposed by Lindsay Graham (R-SC) and Chuck Schumer (D-NY) which would impose 27.5% tariffs on Chinese imports if the Chinese government does not allow its currency, the yuan, to float freely vis-a-vi the dollar, yen, euro, etc. Critics say the exchange rate is up to 40% too low, giving Chinese exporters an unfair price advantage and contributing to American job losses and a record $202 billion trade deficit with China in 2005.

Chinese leaders say they plan eventually to let the yuan trade float freely, but doing so too quickly would cause financial turmoil, hurting the Chinese economy, the London Times reported.

But Stephen Roach, chief economist for the investment bank Morgan Stanley, told the Times that such tariffs could cause China to reduce its purchases of U.S. Treasury bonds, which could weaken the dollar and cause interest rates to rise. "At a time when the U.S. is more dependent on foreign capital than ever before," Roach said, "to impose tariffs not just on a major provider of goods but a major lender of capital I think would be close to economic suicide."

While we were not part of the creditors committee, we went along with the settlement as indicated. To my knowledge, there really hasn’t been a plan to bring them back, other than the $5 million investment by Sun Capital. It certainly would be nice to really have seen a plan on what they were going to do moving forward because as a group, we lost 75% of our collective receivables. I’m surprised this wasn’t a condition of the creditors committee. It appears that they went for a quick fix in order to prevent a bankruptcy. – Name Withheld

(Note: The Society of Creative Designers voted to dissolve and work with the Craft & Hobby Assn.'s Designer Section. Veteran designer/author Ann Kristen Krier comments on this, yet another change in an ever-changing industry.)

Borrowing from the wisdom of Dr. Spencer Johnson, someone has moved my cheese and it is not just a little nibble, but a large hunk. The Society of Creative Designers has voted to dissolve.

For many reasons, mostly fiscal, SCD and CHA will become one entity. There are so many reasons that this is great news, however saddened we might be to see SCD go. Many designers, myself included, belong to both organizations. One group focused on the needs of the cheese as a part of the wheel; the other focused on the functions that create the cheese. Either way, the new cheese will be stronger, larger and most likely more palatable than the old. Think of it as an entirely new flavor of cheese.

Change is business. The world moves and so must your business. Whether you are a microcosm like Design One World or you are Michael’s, you need to fess up to this fact. If you stand still in a race, your competitors will run by and not only will they finish before you, but will be snacking on your cheese.

Change is a function of movement. If your cheese is moved, find it and find it fast.

Designers are icons of change. We have styles and preferred mediums, but most of us work with something new all the time. Looking for better ways to slice the cheese, present the cheese, and market the cheese – our business is also an evolution of efficiency driven by change. I am far better at what I do today because of professional organizations such as CHA and SCD, whose members are willing to spend valuable time and finances on the education of change.

Education is vital to the Creative Industry, especially as it evolves. With each wave of change comes a slew of fresh ideas for products and techniques. New products represent a need for marketing and sales evolution. Retailers make physical changes to promote the product and the designers, at any stage of the game, must be ready to accommodate any or all of these needs.

Designers make a difference in the industry. Their world is a little misplaced right now, but this Change will do you good. – Ann Kristen Krier, Design One World, "Design, Writing and Consulting for the Creative Industry" (Note: Ann is a former Exec VP for a multi-billion dollar consumer product company. She will have two books published this October, a new paper crafting book (C & T Publishing) and Totally Cool Origami (Sterling). Ann also speaks on marketing and business issues relevant to the creative industries.)

1. Think our industry is just a U.S. industry? Think again. CLN now has subscribers in Algeria, Argentina, Australia, Brazil, Canada, China, Croatia, France, Great Britain, Hong Kong, India, Japan, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, Spain, Taiwan, Thailand and, oh yes, the U.S.

2. I've had calls recently from scrapbook vendors who are between a rock and a hard place. They are tired and would like to sell their businesses, or they realize they can't move their company from Step A to Step B without an outside investor. The rock is, they need help selling their business or attracting an investor; the hard place is, they're too small to interest merger/acquisition firms that sell companies, or the numerous large investment companies who buy companies.

Anybody have any suggestions? Email your thoughts to mike@clnonline.com.

SHOWS. The CHA Summer Show (July 21-23, Rosemont, IL) already has 500+ exhibitors in 1,200 booths and is expected to attract 5,000+ buyers. New features include the Beading Pavilion and Needle Arts Pavilion which will include exhibitors with a wide range of related craft products, learning showcase exhibits, and complimentary demo areas on the show floor. There will also be related workshops and an industry seminar on the latest consumer trends. Exhibitors will be featured in special directory listings and buyer promotions are planned to stimulate sales. For info, call Exhibit Sales Manager Nadine Schwartz at 800-822-0494 or 201-794-1133, ext. 220; email nschwartz@craftandhobby.org, or visit www.chashow.org. On-line registration begins April 17.

RECALL. Rose Art has voluntarily recalled its Magnetix brand of magnetic building sets after a 20-month-old boy died after swallowing magnets. Three other children were also hospitalized after swallowing magnets. About 3.8 million were sold at retailers including Wal-Mart, Target, Toys "R" Us, and A.C. Moore between Sept. 2003 and Mar. 2006. Consumers were advised to contact Rose Art at 800-779-7122 or visit www.roseart.com. Lawsuits are pending. Rose Art was sold last year to Mega Bloks.

AWARDS. 4 Kids Co. won Wal-Mart's 2005 International Supplier of the Year Award for Dept. 44/52 in recognition of the company's innovation, quality, value, and service ... Wrap Style: Innovative to Traditional, 24 Inspirational Shawls, Ponchos and Capelets to Knit and Crochet, edited by Pam Allen and Ann Budd and published by Interweave Press, was a first-place co-winner of the prestigious Western Regional Book Design and Production Award, How-to Book Category.

SCRAPBOOKS. Li’l Davis Designs (LDD) will conduct a cross-country Summer Roadshow Tour. A recreational vehicle wrapped in LDD signage will stop at scrapbook stores and conventions from California to Tennessee. Each stop is designed to inspire the scrapbooker and will include product demos, make/it-take/its and classes conducted by LDD designers and, at some locations, scrapbook celebrities. Tour stops have already been scheduled for AR, OK, TN, TX, CO, UT, NV and CA from April through June. For more info, call 480-223-0080 or email sales@lildavisdesigns.com.

BOOKS. To see new releases from Jeanette Crews, Fiona Jude cross stitch flowers and knitting purses with felt, visit www.jeanettecrews.com/results.cfm?Subcategory=165.

SCRAPBOOKS. A new Internet television series, Scrapbook LifeStyle, premiers this month. Each three-minute episode will feature designers creating pages in front of a live audience. The host is Tony Barber. Visit http://scrapbooklifestyleinsiderblog.blogspot.com.

NEGOTIATIONS. AdAge.com published an article claiming Target is increasing its use of reverse auctions and "strong-arm" tactics, and quoted an unnamed vendor sales VP for a major consumer products company: "Target was once easier to work with than Wal-Mart. They were more into developing a business plan. You did it with them. Wal-Mart was more into dictating what they wanted. That's changing now and Wal-Mart is more approachable than Target." (Comment: in a reverse auction, a retailer lists requirements for a product, perhaps a bath mat of a certain size and material in six colors. Vendors then bid on the business and the lowest price wins.) Target responded by telling AdAge.com, that reverse auctions put "vendors on equal footing so that the vendors who deserve the business get the business."

YARN. Kmart is testing a yarn department in approximately 75 stores.

ROLODEX. New phones for Tracia Williams – Tracia & Co.: 407-401-9023; fax 407-401 9025.

HOME DEC. The 498-store chain Bombay posted a $25.1 million loss in its fourth quarter and announced it will close 33-38 stores this year.

MEDIA. The spring edition of Martha Stewart Weddings magazine shows the Xyron 250 Create-a-Sticker "in action" using organdy decorative ribbon to create a custom accent for a plain gift box.

IMPORTS. Wal-Mart is increasing its surprise inspections of foreign factories from 20% to 30% to make sure suppliers uphold labor-environmental standards, the Associated Press reported. The company said it conducted 13,600 factory inspections in 2005.

AWARDS. Kudos to Playthings magazine for winning the Jesse. H. Neal National Business Journalism Award for its coverage of Toys R Us being sold. The award is just about the business press' version of a Pulitzer Prize. 

YARN. Best-selling author Debbie Macomber will appear at the Knit & Crochet Show in King of Prussia, PA, July 13-16. Macomber, the author of A Good Yarn and The Shop on Blossom Street, both knit/crochet-related novels, will speak at the show's Thursday evening Market Street Preview and will be available to sign autographs. For more info, email knitandcrochetshow@offinger.com, visit www.knitandcrochetshow.com, or call 740-452-4541.

AWARD. Vicki Schreiner has won the 2006 Plaid Horizon Award. The Award, a $3,000 educational grant, is a personal development grant exclusively for members of the Society of Creative Designers. It's awarded to the member exhibiting the strongest combination of personal development goals and history of past achievements. Vicki has published numerous books and projects and wrote for the SCD newsletter. She's served on the SCD board and the exec board as Secretary/Treasurer. She plans to create a line of her artwork into a collection of angel figurines to honor children with cancer, donating a percentage of her proceeds to St. Jude's Hospital.

COLART. Michael Henderson will retire as CEO of the ColArt Group at the end of this year. He will continue to be a member of the ColArt board and will chair the boards of ColArt Tianjin and Bonny ColArt. Erik Urnes, who has been General Manager of ColArt Americas for the past two years, will succeed Henderson. Effective July 1, Justin Wraight has been promoted to General Manager of ColArt Americas where he has served as VP of Marketing since 2004. He will report to the President of ColArt Americas, Richard Goodban.

DESIGNER. Noted needlework designer Lois Winston's novel, Talk Gertie To Me, goes on sale tomorrow and has already received rave reviews. (Dorchester Publishing, ISBN: 0-505-52684-0) Available on Amazon and in book stores. Visit www.loiswinston.com. On her acknowledgment page Lois cites Priscilla Hauser because a story Priscilla once told at a Society of Creative Designers' meeting inspired a portion of the book.

INTERWEAVE. Anne Merrow was named Books Editor ... Ann Budd, former Sr. Editor of Interweave Knits and author of The Knitter's Handy Book of Patterns, was also named Books Editor ... Paulette Livers was named Art Director, Books ... Rebecca Campbell was hired as Managing Editor, Books ... Laura Levaas, former marketing manager of the company's Beading Group, was named Marketing Manager for Books and the Weaving Market Group ... Annie Bakken was named Marketing Manager, Knitting, Needlework, and Spinning Market Groups ... Rae Dawn Olbert was hired as Marketing Manager, Beading Market Group.

PEOPLE. Marvy/Uchida's CEO/President, Andy Fujisawa retired, succeeded by Hiro Kasai formerly of Uchida Yoko in Tokyo and the current VP of Marketing. Andy remains as a consultant and advisor ... Dale Atherton was named VP of Finance and Administration for the Craft & Hobby Assn. She worked for 20+ years for the American Institute of Certified Public Accountants, finally becoming CFO ... Tony LaSpada moved from Activa to be National Sales Manager for Savoir-Faire ... Duckwall-ALCO promoted Michael Marcus to VP/CFO from Financial Planning Manager.

To see the latest job 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*: 18.39 ... Change**: +1.92
Hancock Fabrics (HKF). Last*: 3.62 ... Change**: +0.02
Jo-Ann Stores (JAS). Last*: 13.45 ... Change**: +0.95
Michaels (MIK). Last*: 37.59 ... Change**: +3.63
Wal-Mart (WMT). Last*: 47.29 ... Change**: +0.60
CLN Retail Index. Last*: 120.34 ... Change**: +6.3%
Dow Jones Index. Last*: 11,109.80 ... Change**: -1.5%

Dear IRS:

Enclosed is my 2005 tax return showing that I owe $3,407.00 in taxes. Please note the attached article from USA Today, wherein you will see that the Pentagon is paying $171.50 for hammers and NASA has paid $600 for a toilet seat.

I am enclosing four toilet seats (value $2,400) and six hammers (value $1,029), bringing my total remitted to $3429. Keep the change. It has been a pleasure to pay my tax bill this year, and I look forward to paying it again next year.

Sincerely, A Satisfied Taxpayer

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xxx

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