Date: March 5, 2007
Vol. XI, No. 5

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TABLE OF CONTENTS

COMMENTARY: CONSUMERS ARE LIKE THE TIDE 

A stock broker asked me if I was concerned about A.C. Moore after it released its fourth quarter and fiscal year results (see below). I am not particularly worried; my concerns are wider and deeper than any one company.

1. Many new investors and top execs have recently come into the industry during a time of strong growth. They paid big money on the assumption that the growth would continue unabated. But they may not understand that craft consumers are like the tide. When something's hot (cross stitch, wearable art, scrapbooking), the tide rolls into our stores. When we go through a fallow period between hot trends, the tide rolls out, something the newcomers haven't seen, yet.

I think we may be entering one of those fallow periods; scrapbooking is still strong, but does not appear to be growing as it once was, and it is certainly consolidating. Something else will come along – it always does – but not right away. This ebb and flow has gone on for decades, but it will be new for the newcomers.

2. Because of pressure to produce growing sales and profits now, regardless of the ebb and flow, we may see companies make short-term decisions that help meet overly optimistic quarterly budgets, but hurt in the long term. Then we may see competent managers lose their jobs through no fault of their own. They didn't suddenly become stupid; the tide simply ebbed a bit.

3. Because of the pressure they are under, some retailers are putting extra pressure on vendors, particularly U.S. vendors. When I hear reports of retailers threatening to source products themselves overseas, raising fines for incorrect shipments, or demanding even lower prices, the phrase "squeezing blood out of a turnip" comes to mind.

The net effect is causing some vendors to close or look to other industries, or reduce their new product development and marketing efforts. That means less innovation and fewer new products. When it's not profitable for vendors to develop new lines, it may be a long time before the tide rolls in again.

"Vinny da Vendor". Reactions to CLN's proposed code of ethics from chain store execs, manufacturers, sales reps, and others.

Business-Wise. The ethics code that prompted "Vinny's" responses is still online.

Kate's Collage. Karen Ancona has been in the industry for 20+ years. As Editor of CNA, she's had a unique perspective on the changes and evolutions in the industry. Excerpts: "... I also fear that this is no longer the easy-entry industry it was, and that means the true entrepreneurs, the risk takers, may be looking elsewhere to grow an idea or float a business." Despite the changes, "I still believe that accurate trend prediction is the most important driver for profits for companies ...."

Note: To read the columns, click on the titles in the left-hand column. If it appears to be an "old" column, click on the "Refresh" or "Reload" button on your browser.

These three categories have made the most news in recent months. Where are they going from here? Make your predictions and cast your votes by clicking on Industry Polls in the right-hand column or click HERE.

Apparently retailers and vendors are now more positive about the year, after having attended the January trade shows, than they were about the shows themselves. Almost a fifth of the retailers, 18.8%, in this unscientific poll predict their sales will now improve 10% or more in 2007, and 37.5% believe sales will rise 1-10%. Almost a third, 31.3%, believe sales will be flat, and 12.5% think sales will decline.

Slightly more than a fifth of the vendors, 21.7%, think their sales will increase 10% or more, and 47.8% predict their sales will rise 1-10%. Only 17.4% believe sales will be flat, and 13.1% think sales will decline.

(Comment: This may be another example where the results may be skewed positively, that some readers who are worried about the future are too depressed to vote.)

In a conference call with analysts in conjunction with the release of Martha Stewart Omnimedia's quarterly earnings report, CEO Susan Lyne said the company would expand beyond its initial craft offerings to include jewelrymaking, wearables, and yarn. Lyne did not mention a timetable or if the expansion was in partnership with any industry company.

The initial phase of the Martha Stewart Crafts line, created with EK Success, consists of scrapbook/paper craft-related products which are scheduled to be in Michaels in May and in EK Elite stores in the fall.

The quarterly earnings report revealed profits had increased 500+% from a year ago. Earnings were $16.21 million ($0.31/share) and revenue rose 15% to $97.04 million. Analysts polled by Thomson Financial expected earnings of 25 cents/share on revenues of $95 million.

Sales for the year ended Dec. 31 rose 9.0% to $589.5 million, and same-store sales were flat. Net income was $2.4 million ($0.12/share), down from $10.0 million ($0.50) a year ago. Results include costs of $3.4 ($0.09) million related to management changes and $2.8 million ($0.07) for stock-based compensation expense.

For the fourth quarter, sales grew 5.0% to $197.8 million, but same-store sales fell 3.0%. Net income declined 38.3% to $6.6 million ($0.33), due in part to costs of $1.4 million ($0.04) related to the closure of one store location and a lease termination. Income was also hurt by expenses of $524,000 ($0.01) for stock-based compensation, and $461,000 ($0.01) in management-change costs.

Rich Duprey of The Motley Fool Wall Street firm reported, "Management said on its conference call that in some of their stores, the storage areas were so full of merchandise that they couldn't use their loading docks. That forced them to liquidate the stockrooms beginning around Halloween and continuing throughout the rest of the year. A.C. Moore held huge clearance sales with discounts of as much as 75% to 90% which subsequently resulted in gross margins declining 220 basis points for the quarter. Management has admitted its inventory controls are simply out of control."

In a note to clients, Laura Richardson of BB&T Capital Markets wrote, "We continue to think A.C. Moore has meaningful store growth and profit improvement opportunities, but it make take longer to achieve than investors expect given that some necessary steps to profit improvement, such as implementing merchandising systems and building up store penetration in newer markets, have multi-year timetables."

CEO Rick A. Lepley stated, "During the last quarter we focused on reducing our out-of-line inventory condition and improving our year-end cash position, and we are gratified with those results. In 2007, we are continuing to focus on expense control and working on improving our operational efficiencies to lay the ground work for improved profitability."

The current store count is 122.

Despite the company's problems detailed in the media the past year, Wal-Mart reported record sales and earnings for the quarter ended Jan. 31. Net sales rose 10.9% to $98.090 billion and income from continuing operations increased 8.8% to $3.940 billion ($0.95/diluted share). Wall Street had expected earnings of $0.90/share.

For the fiscal year, sales rose 11.7% to $344.992 billion, and income from continuing operations increased 6.7% to $12.178 billion ($2.92).

Wal-Mart's U.S. stores saw sales rise 6.7% to $64.228 billion for the quarter and rise 7.8% to $226.294 billion for the year. Operating income (income before net interest expense, income taxes, unallocated corporate overhead, minority interest, and discontinued operations) rose 11.3% to $5.248 billion for the quarter; for the year it rose 11.1% to $17.029 billion.

The company predicted for the first quarter of fiscal 2008 U.S. same-store sales would increase 1%-3%.

In a recorded statement CEO Lee Scott said the U.S. stores's strategy of discounting hot items and adjusting stores to fit local demographics is correct. "I believe in the strategic plan that is guiding our U.S. stores," Scott said.

Target's 53-week fiscal year earnings rose 18.5% to $2.79 billion ($3.21) compared to the previous year which was 52 weeks. Sales rose 13.1%; same-store sales were up 4.8%. Earnings for the fourth quarter rose 21.7% ($1.29) to $1.12 billion as sales rose 16.3% to $19.71 billion and same-store sales rose 4.8%.

Mary Engelbreit's Home Companion has expanded its coverage of "the creative arts." New sections: "Next"– up and coming artists with a fresh point of view ... "The Art of Business" – interviews with art-based entrepreneurs ... "Pins & Needles" – quick needlecraft projects ... "Noteworthy" – the latest in paper goods, focusing on seasonal themes ... and "Top Stitch" – recognizing creative artists who express their vision in the fabric arts, primarily quilts.

"Every issue will strive to inspire readers to pursue a creative life, and to follow their own heart and instincts, rather than worrying about what's in or out," Ms. Engelbreit said. "No other magazine showcases artists, collectors, and multi-talented, creative women living with their art the way we do. I am thrilled about increasing this coverage."

The magazine is celebrating its 10th anniversary and has a circulation rate base of 295,000. It's published by Belvoir Media Group. Visit www.homecompanionmag.com.

The Seattle Times is the latest media outlet to chronicle the increase in sewing by kids and teens, but there are important implications for every type of store in our industry.

1. "A skirt made out of old ties. A purse fashioned from a pair of jeans. A department-store jacket gussied up with handcrafted designs of beads and sequins. Sewing is frumpy no more.... Children and teens are ripping up T-shirts and re-crafting them into dresses; adding new details to thrift-store finds; and embellishing handbags, jeans and scarves with tassels, beads, and embroidery," writes reporter Jolayne Houtz.

That may explain why fabric sales aren't necessarily increasing along with the general interest in sewing.

2. Sixty-four year old sewing teacher Flo Burnett explained it to Houtz this way: "My generation wanted it to look like we hadn't made it. Now, they're reveling in the fact that they can design it themselves and wear what they made – I love that! It's not like before, when we all had to do it in lock-step."

That "I made it myself" attitude that is fueling the rise in sewing can certainly be capitalized on by stores that do not sell fabric. Read the article HERE.

Yarn Renaissance in Fargo, ND. Former nurse Gretchan Hoffman opened in 1999 and has 8,000 SKUs, reported the Fargo Forum. "It feels like the old Cheers bar when you walk in there," customer Jane Grove told the Forum. "People know you and it’s nice." Visit www.yarnrenaissance.com.

Scrapbook n Such in Wichita Falls, TX was named Scrapbooking Roads' Store of the Month. The 4,500-sq.-store is six years old and offers classes, retreats, and crops. Last year the store, operated by Terri Doyle and her daughter, Misty Hooten Doyle, was honored as the #1 store for the most students graduating from its SDU® classes (Scrapbook Design & You) sponsored by EK Success. Visit www.scrapbooknsuch.com and www.scrapbookingroads.com.

(Note: Know of an interesting industry-related store. Send CLN a note and the URL. Send to mike@clnonline.com.)

When CHA updated its Attitude & Usage study, which pegs the size of the industry at $30+ billion, have you ever wondered how that compares to other industries? Denver Post columnist Al Lewis researched various groups and reported these numbers – in billions:

Restaurants, $537 ... Tobacco, $115 ... Gambling, $68 ... Wholesale alcohol sales, $56 billion ... Weddings, $50 billion ... Music recordings, $49 ... Electronic gaming, $30 ... Toy industry, $20.1 ... Sales of televisions, $20 ... Floral industry, $20 ... Sales of computers, $19 ... Pornography, $12 ... Funerals, $11 ... Motion pictures, $9 billion.

To read the updated Attitude & Usage study, visit www.craftandhobby.org/research.html.

The following was suggested by Alyson Udell of Duncan:

I am 13 years old. I am not a crafter – what’s a crafter anyways? – oh, wait, I think my grandma does that stuff! I love MySpace, my cell phone, my Ipod ...my, my, my. My mom says, like, that the world doesn’t revolve around me, but I know it really does. Don’t you dare buy me clothes and accessories that my friends have – I’ll be horrified and totally embarrassed. I want things that express what I’m about. I want to stand out. I want to be seen and heard. I count.

I am 26 years old. I don’t consider myself a crafter but I love to be creative. I love fashion but am horrified if I walk into a room and someone is wearing my top. I love to give gifts, but they must be unique – and with a unique wrapping – and they must have meaning to the recipient. I work full time, attend grad courses at night and study on the weekends, and I find that creativity provides a stress relief. In just about everything that I do, I strive to do it in a different way than others.

I am 38 years old. My family is my life, my life is my family. I want the best for them and I tend to forget about myself – but I don’t want to forget about myself. My wardrobe more closely resembles my single days in the 80’s than today’s Chanel, Gucci, or even Isaac Mizrahi for Target for that matter! I spend more time, energy, and money on my home, probably because it’s for my family. I do love to find unique items for the home, but it’s hard to find them. I want to find the time to be creative and make those unique items. I need projects that are quick and easy. I want my friends to ask, "Where did you get that?" and say proudly, "I created it myself."

I am 55 years old. Yes, I’m a boomer! I am a grandma, but not a granny. Please, don’t call me "young at heart" – I am young! I am redefining what mid-life looks, feels, and sounds like in American society. I am embracing technology; I have email, a MySpace account (to stay in touch with my children and grandchildren), an eons.com account (to stay in touch with my friends), an Ipod, a digital camera – yeah, I’m cool. I’ve always crafted in some way, but these days, I tend to craft for or with my grandchildren. I want to pass along my creativity, but I know that my family isn’t crafting in the same way I always have. Heck, I don’t even want to craft the way I have been!

(Note: The following came from Mike Dolan of Scrapbook 911, an independent store in San Antonio, TX.)

I also wanted to say that the insight you have on where the scrapbooking market is going is right on the money. More and more of our classes are on using "scrapbooking" products on non-scrapbooking crafts. As an example, Teresa Collins is going to be teaching three classes this week at our store. None of them are on layouts. The most popular one so far is a recipe book, and while the price of $70 seems high, we had no trouble signing up 30 customers for it. Our class calendar for the next two months has almost 50 classes, of which about half are on traditional scrapbooking and the other half on craft projects. If scrapbook stores aren't flexible enough to do this, it will likely hurt them.

(Note: Retailers, have you found success offering classes that aren't specifically geared to scrapbooking, such as Mike's recipe book class? If so, tell CLN so other retailers can benefit. Email your class titles to mike@clnonline.com.)

Beads. To read jewelry pro Katie Hacker's report on new bead products at the CHA Winter Show, visit http://katiehacker.blogspot.com/2007/02/cha-winter-roundup.html.

Dow Chemical, exclusive manufacturer of Styrofoam brand foam, has a newly expanded, frequently updated, online floral design project library. Visit www.styrofoamflorals.com. Dow has also added a wide variety of how-to projects at its site, www.styrofoamcrafts.com. There are projects for parties/entertaining, kids, needlefelting, home dec, gifts, teens/tweens,

Duncan has a tour of its CHA Winter Show booth at www.insightfilmvideo.com/duncan/page15.html.

Interweave is sponsoring three "Knitalongs" (KALs) in conjunction with the publication of its Spring 2007 knitting books. Readers can share photos, suggestions for yarn substitutions, pattern variations, and other creative ideas related to the books’ topics, and they don’t have to purchase the books to join. Lace knitters are invited to the Lace Style KAL; non-woolies might join No Sheep For You KAL; and sock knitters who have made any of the socks from the past ten years of Knits could post their favorites at the Favorite Socks KAL. Visit www.lacestylekal.blogspot.com, www.favoritesockskal.blogspot.com, and/or www.nosheepkal.blogspot.com. To join, email the moderator at knitalongs@interweave.com with the name of the KAL in the subject line.

Leisure Arts ' new releases: scrapbooking, knitting, crochet, painting, cross stitch, quilting, and needle felting. Visit www.leisurearts.com/all_skills/new_releases.

Magnetic Poetry is moving into the garden. The new Make Your Own Stone Faces kits provide supplies to create classic-looking concrete visages (Serene Buddha or Greek God) out of tinted concrete. The molding process is simple and the mold can be re-used. Crafters can make Stone Face Planters, Stone Face Wall Totems, etc. Visit www.magneticpoetry.com.

Sign of the Times. For decades the industry axiom was that our female customers do not want to use tools. But now the wave of younger consumers means a new audience. Walnut Hollow's Designed For Her™ tools line, which won a Craftrends Award of Creative Excellence, includes Creative Drill™, Creative Screwdriver™, Creative Soldering Tool™, Creative HotKnife™, Creative Hand Sander™, Creative Mini-Vac™, Creative Rotary Tools™, and Creative Craft and Home Tool Kit™. Each was designed for a woman's hand. Visit www.walnuthollow.com/products/newproducts.html.

Sino Harvest, manufacturer of Makin's Clay and related products, announced Makin's Clay USA will be its U.S./Canadian importer and distributor. Walnut Hollow will no longer distribute Makin's Clay products. Annie Mangelsen, the third generation of the Mangelsen family to be involved with crafts, is the Managing Director of the U.S. operation. For info, contact Annie at the Makin's Clay warehouse/office in Omaha by calling 402-891-0085 or emailing annie_mangelsen@makins-usa.com. Visit www.makinsclay.com.

1. Do you enjoy the tv commercials for Geiko Insurance (with the gecko, the caveman, and the celebrities helping customers tell their stories)? That ad agency recently won the ad contract for Wal-Mart.

2. In the previous issue CLN reported that John Criner, the retired manager of a Hobby Lobby, had been elected mayor of Enid, OK. An HL exec thanked me for reporting it, and as we exchanged emails, we realized more of our politicians ought to have a retail background. That way they'd have plenty of experience dealing directly with the public, rather than sitting in a fancy office thousands of miles away.

3. Every once in a while something comes along that makes you think, "Why didn't someone think of this years ago?" This time it's Duncan's virtual tour of its booth (see above). Companies spend a fortune on their booths, then tear them down after four days. Why not spend a little more, film a tour of the booth, then put it on the website so the booth keeps working long after the show is over.

CLN STOCK INDEX. A.C. Moore: 19.52, down 0.49 ... Hancock: 2.90, down 0.52 ... Jo-Ann's: 21.64, down 1.91 ... Wal-Mart: 47.85, down 0.63 ... CLN Index: 91.91, down 3.7% ... Dow Jones: 12,114.10, down 5.1%%. (Note: All changes in price are since 3/02 and are exclusive of dividends.)

QUOTATION. "There is no direction [at Wal-Mart], so they are taking drastic measures at this point and closing the [fabric] department in some stores. But the word at store level is that if a store location gets enough customer requests, they will reconsider closing the department. I find that hard to believe, too. But department associates are giving the 1-800-wal-mart number to customers hoping they will call and complain." – Former buyer for Wal-Mart

PBS. Cutters Productions announced Walnut Hollow is a new underwriter of the PBS series, Paint, Paper & Crafts and Sakura of America is returning as an underwriter. Visit www.cutterstv.com.

A.C. MOORE. Promoted Daniel Maguire to VP of Store Operations from VP of Store Planning and Visual Presentation. Maguire had been Chief Store Development Officer of DOTS, a retailer of women’s fashions, and VP, Store Transformation and Planning for Jo-Ann's ... Announced the retirements of three board members, Richard Bauer, 81; Richard Drake, 73; and Richard Lesser, 72. The board appointed new members – Neil McLachlan, President of the Consumer & Office Products Group of MeadWestvaco, and Thomas Rittenhouse, former exec of the Strawbridge & Clothier retail chain.

PEOPLE. Denice Steinmann is the President of Polyform Products, replacing Mark Haiduch, who resigned.

CRAFTS. The North County Times (CA) published an excellent profile of Crafty Productions, manufacturer of kits for kids, jewelry making, etc. The business has grown from annual sales of $50,000 to $6 million. (Comment: It's a great entrepreneurial success story.) Visit www.nctimes.com and type in Crafty Productions in the search engine.)

TV. Mrs. Grossman's was profiled on the Made in America series on the Travel Channel. Andrea Grossman started the company 27 years ago on her kitchen table.

QUOTATION. "Make your beadwork as durable as you can. Think about where your beadwork will go when it leaves you. A hundred years from now, it might end up in an antique dealer's case or become part of the cherished collection of another bead fanatic. Make no mistake, beads will come and go in popularity as surely as the sun rises and sets, just as they have for 75,000 years." –Diane Fitzgerald, a columnist for Bead & Button magazine

SHOWS. The Calgary show sponsored by the Canadian Craft & Hobby Assn. has been cancelled. The Toronto show is Aug. 26-27. Details to be released shortly. Visit www.cdncraft.org ... TNNA members can now register online for the show June 2-4 in Columbus. Visit www.tnna.org.

MEMORY. Fun Fact Publishing is back after a hiatus. Written by Sue DiFranco, the issues are filled with interesting facts and news for every business connected with scrapbooking. Visit www.funfactspublishing.com ... Online registration for the Mar. 30-31 Memories Scrapbooking Expo in Columbus ends Mar. 15. Visit www.memoriesscrapbookingexpo.com.

CONTESTS. Winners of the Toner Designer Challenge: CraftLace™, Phyllis Sandford ... Fun Wire™, Barbara Woolley ... Hemp, Linda Hess. The Grand Prize winner is Terry Ricioli. Entries can be seen at www.tonercrafts.com.

HANCOCK. After receiving an extension through Feb. 28 for filing its 10-Q report for the first three quarters of fiscal year ended Feb. 3 to the Securities and Exchange Commission, the company has asked for another extension of four to five weeks.

YARN. To read a glowing review of the Craft Yarn Council of America's Knit-Out & Crochet at the Mall of America in Minneapolis, visit http://stchingarten.blogspot.com and scroll down to the Feb. 19 and Feb. 18 entries.

INDEPENDENTS. Here's the latest example of independents joining forces to prosper: Ace Hardware. The 83-year-old hardware company, with two-thirds of its stores independently owned, just concluded its best year since 1998: retail sales were almost $12 billion, wholesale sales rose 6.5% to $3.4 billion, and profits were a record $104+ million, according to the Associated Press. So much for not being able to compete against Home Depot and Lowes.

PAINTING. The Ft. Worth Star-Telegram published a lovely profile of painting teacher Katherine Stephens of Tulia, TX who teaches once a week at a Hobby Lobby in Amarillo. Katherine is 89. Read her story at www.dfw.com/mld/startelegram/news/state/16788597.htm.

HOBBIES. The Hobby Manufacturers Assn., sponsor of iHobby Expo™, and Robotics Trends, sponsor of RoboBusiness 2007, have agreed to endorse and co-promote their respective 2007 events. HMA offer two seminars on hobby robotics, "How to Incorporate Robotics into a Hobby Store" and "The Emerging Hobby Robotics Market – How to Educate and Sell this Exciting New Product Category to Consumers." iHobby Expo™ will be Oct. 18-21 in Rosemont, IL (Oct. 18-19 are trade only). RoboBusiness 2007 is May 15-16 in Boston. For info on the two shows, visit www.robobusiness.com and www.ihobbyexpo.com.

STAMPS. Look for postage rates to increase as early as May, depending on the weight of a first-class letter. The Postal Regulatory Commission wants the cost of the first ounce of a first class letter increase to 41 cents, but the cost of the second ounce to drop from 24 to 17 cents.

TAXES I. Looks like the Internal Revenue Service is cracking down on small businesses, reported the website All Business, which focuses on small business issues. Last year the number of small businesses audited by the IRS jumped 100+% to 17,867. Last year, only 10,878 large companies (assets in excess of $10 million) were audited, a 14% increase. Why the increase? IRS Commissioner Mark Everson told Business Week magazine the agency is trying to close a $250 billion "tax gap."

TAXES, II. Consumers are filing their tax returns earlier than usual, according to a survey sponsored by the National Retail Federation, but they won't spend much of their refunds in stores. According to the survey, 43.1% will use their refund to pay down debt; 38.6% will save some of it; 26.5% will use it for everyday expenses; 11% will dedicate a portion of their return to major purchases or a vacation (13.3%). (Respondents could choose more than one option.)

QUOTATION. "We may need to modify our antitrust laws to stop credit card companies from engaging in collusive or conspiratorial activities to gouge or jack up the prices." – U.S. Senator Arlen Specter (R-PA) in the PA Patriot-News.

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. 

There is a dangerous virus being passed around electronically, orally, and by hand. This virus is called Worm-Overload-Recreational-Killer (WORK). If you receive WORK from any of your colleagues, your boss, or anyone else via any means, DO NOT TOUCH IT. This virus will wipe out your private life completely.

If you should come into contact with WORK, put your jacket on and take two good friends to the nearest grocery store. Purchase the antidote known as Work-Isolating-Neutralizer-Extract (WINE) or Bothersome-Employer-Elimination-Rebooter (BEER). Take the antidote repeatedly until WORK has been completely eliminated from your system.

You should send this warning to five friends. If you do not have five friends, you have already been infected and WORK is controlling your Life. 

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xxx

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