Date: April 2, 2007
Vol. XI, No. 7

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TABLE OF CONTENTS

COMMENTARY: OUR PRODUCTS MAKE A BETTER WORLD 

One thing I absolutely love about our industry is the way people turn to our products, tools, and techniques to help others. Whether it's crocheting afghans for homeless shelters, knitting caps for babies, establishing knitting cooperatives for widows in Rwanda, creating scrapbooks for Make A Wish chapters, or teaching painting to wounded military vets, often when good people see a need, they use our products to make the world a better place.

The latest example is Ginger Doesdel, founder of Sew Much Comfort, which organizes volunteers to make or adapt clothing for wounded veterans, clothing "that will accommodate medical devices and situations - braces, fixators, casts, prosthetics, and burns. Many of the wounded troops are left with a hospital gown as their only clothing option," the organization's website explained.

ABC News cited this example: "... to make a shirt more accessible for a wounded veteran, they rip out the side seam, insert Velcro, and a burn victim doesn't have to pull on the shirt over tender skin."

For her efforts, Ginger was named Person of the Week on ABC World News. To read the article, visit http://abcnews.go.com/WNT/PersonOfWeek/story?id=2977470&page=1. To learn more about Sew Much Comfort, visit www.sewmuchcomfort.org.

Kate's Collage. Karen Ancona continues her look back on her 20 years in the industry in Pt. III. Who influenced her, what concerns her now about the industry, and much more.

Thought Leader. Where will your business' next big idea come from? It might be much closer than you think, says Kathy Lamancusa.

Scene & Heard. An unhappy CHA and Quilt Market exhibitor vents to CLN – and receives some answers – from CLN and CHA.

"Vinny Da Vendor". A vendor reacts to the Provo/Cricut controversy with some advice for independent retailers.

Designing Perspectives. GC Universe is an opportunity for designers and retailers' card-maker customers to sell their greeting card creations without having to print them. Read how, then visit www.greetingcarduniverse.com.

Legal Q. & A. A warning from CHA. Members have been contacted by an Austrian company claiming to compile a directory. By completing the form, you are inadvertently signing a contract costing thousands of dollars. Read the details here.

Note: If a column appears to be an "old" column, click on the "Refresh" or "Reload" button on your browser.

It appears that the number of consumers visiting our stores is down (see article, below), while market research studies indicate overall sales are not down. Three possible explanations: consumers buying via the Internet and/or home shopping channels, and at consumer shows. Do these three inspire consumers to become more involved with crafting, painting, scrapbooking, beading, etc., or do merely they siphon off sales from brick-and-mortar stores? Cast your vote! Click on Industry Polls in the right-hand column or click HERE.

CLN voters believe kids crafts has the greatest growth potential in 2007. More than half think the category will grow this year – 26.5% believe it will increase substantially and 52.99% it will see an increase. "Remain the same" was the prediction by 17.7%. No one voted for a moderate decrease, and only 2.9% thought the decrease would be substantial.

No one thought painting would show substantial growth, but 41.7% thought there would be an increase. Another 41.7% predicted painting sales would be flat, 11.1% saw a decline, and 5.6% thought the decrease would be substantial.

Voters weren't as positive about needlework "Substantial increase": 7.7%; "Increase": 35.9%; "Remain the same": 35.9%; "Decrease": 18.0%; and "Decrease Substantially": 2.6%.

In an apparent dramatic change in policy, the Bush administration is imposing duties on two Chinese makers of high-gloss paper, one at 10.9% and the other 20.4% percent, the New York Times reported. The percentages were calculated by adding up the supposedly illegal subsidies. High-gloss paper is used for printing catalogs, brochures, etc. China will appeal.

Tariffs on Chinese paper could be only the first step. " ... trade and industry officials say future actions based on the department’s new policy could lead to duties on imports of Chinese steel, plastics, machinery, textiles, and many other products sold in the United States, if as expected those industries seek relief and the department finds that they are harmed by illegal subsidies," the Times reported.

The U.S. trade deficit with China reached a record $232.5 billion last year. Commerce Secretary Carlos Gutierrez denied that the change was due to pressure from the now Democratic-controlled Congress. "This is simply an application of our law," he told the Times.

(CLN has reported on a similar case in our industry regarding stretched artist canvas, which is still apparently still pending. As we understand it, a company or industry can level a charge of illegal subsidies against a foreign competitor which allow the competitor to sell the products below the cost of producing them. If a ruling is made in favor of the U.S. company, the government imposes a tariff on the imported products; the size of the tariff is determined by how much the illegal subsidies help lower the price of the products. Any tariffs collected are given to the U.S. manufacturer.)

As CLN reported in a newsbrief, Hancock and its subsidiaries filed a voluntary petition for Chapter 11 relief. The company reported $242 million in assets and $161 million in debts in its bankruptcy filing. The retailer has negotiated a consensual $105 million DIP debtor-in-possession) financing arrangement with Wachovia Bank, which the bankruptcy court approved. Hancock is also in the final stages of negotiating an additional loan of up to $17.5 million with another lender.

President/CEO Jane Aggers said, "The process of reorganizing Hancock Fabrics under Chapter 11 is a necessary step to reposition the company for the future. It allows us to focus our attention and resources entirely on further improving our better-performing stores and right-sizing our back-office operations and distribution center. We intend to complete the reorganization as quickly as possible, while taking the actions necessary to preserve value for our creditors, customers, employees, and other stakeholders."

The filing on Mar. 21 came one day after Hancock announced it was closing another 104 stores, in addition to the 30 store closings announced in early February. When all of the closures are completed, the store count will have dropped from 420 to 286.

On Mar. 20 Hancock also announced it had defaulted on its $110 million credit line with Wachovia Bank, due to the previously reported delay in filing its quarterly financial statements for 2006 (some of which are still outstanding nearly 10 months later, according to the Tupelo Daily Journal), and due to Hancock's inability to comply with a financial covenant that requires Hancock to maintain at least $25 million of excess availability.

The additional store closings represent approximately $75 million in annual sales. Hancock expanded its existing engagement of a national liquidation firm to assist it with inventory liquidation sales in these stores over the next three-four months, and hired a national real estate firm to assist it in the disposition of the leases for the closing stores.

History. Hancock Fabrics was founded in Tupelo in 1957 by Lawrence Hancock. The company acquired the Balwyn facility in mid-2002. In 2003 and 2004 the company added the office building and another 100,000 sq. ft. of warehouse space. The distribution operation moved to Baldwyn early in 2004 and the office people moved in September. Meanwhile, the point-of-sale was being gradually installed during that period. Larry Kirk, who had been with Hancock 33 years, the last eight as CEO, announced his retirement a few months later and Jane Aggers became CEO in late January, 2005.

Stats. In 1994, Hancock had 500 stores and annual sales of $366.82 million. In 2006, the store count had fallen to 403 and sales to $388.3 million. Earnings have gone from $17.3 million in 2003 to $1.69 million in 2004, to a loss of $30+ million in 2005. Hancock's stock hit $20 in late 2002, and has generally declined since then. It rose to $4.36 in late January, but fell to $0.91 after the bankruptcy filing.

The Journal reported that Joseph Harrosh of Fremont, CA had recently filed paperwork with the Securities and Exchange Commission reporting that he has bought 1.6 million shares, more than 8.5% of the company's shares, just days before the filing. "Harrosh is known in the investing world to buy out companies for a low price right before they file for bankruptcy protection," the Journal said.

In the 3/19 issue, CLN reported CFO/Exec VP Bruce Smith resigned effective Mar. 30 to take another position. After the filing Hancock named Jeff Nerland as Interim Exec VP/CFO and David Hull as Interim Exec VP/COO. They are both partners in Corporate Revitalization Partners a company that assists "under-performing" companies.

Hancock cited the following as its largest unsecured creditors and the amount owed:

$700,000+: Wright Ltd. ... $500,000+: Textile Creations, Fabric Editions, Fairfield Processing, and PricewaterhouseCoopers ... $400,000+: P/K Lifestyles, Fabri-Quilt, and Carat USA ... $300,000+: Springs Industries, World Dynasty Int., Blumenthal-Lansing, Fabric Traditions, Baum Textile Mills, Three Hands Corp., Universal Sewing Supply, Prym Dritz, Hirschberg-Schutz, and Silkcrafts ... $200,000+: Simplicity Pattern, Confortaire, CPE, Richloom Fabrics, David Textiles, Janome America, Blank Textiles, Robert Kaufman Fine Fabrics, Lucerne Textiles, Lion Brand Yarn, Jaftex, and Offray & Sons.

Under traditional bankruptcy procedures, representatives from at least some of these companies will serve on the unsecured creditors committee.

There appears to be growing evidence that our industry's stores are not attracting as many shoppers as the industry wants – and needs – in order to grow. Consider:

Jo-Ann's same-store sales in the fourth quarter of its recently completed fiscal year declined 6%. The company turned a profit thanks to gross margins improving to 45% from 41.9%, but consumers did not buy as much as they had a year ago.

In the same quarter, the number of transactions at Michaels declined 2.3%. Again, profits were ok (minus the expenses related to the sale) because gross margins increased from 37% to 38.4%, but the cash registers weren't quite as busy.

A.C. Moore's same-store sales fell 3% in the fourth quarter.

Wal-Mart does not release sales by department, but the fact that the company is eliminating bolt fabric and merging crafts with party goods in many stores says something about the customer traffic and sales volume in those departments.

Hancock had to declare Chapter 11 bankruptcy and close a number of stores, probably in part due to lower store traffic.

CLN's informal poll of independent retailers revealed that they, too, have noticed a decline in the number of consumers visiting their stores.

The traditional strategy – heavy discounting and coupons, coupled with increased pressure on vendors – appears to have run its course. Margins may be improving, but as one vendor asked, "Does this mean [Jo-Ann's] doesn't need more customers as long as they keep pounding their vendors for margin?"

Sales on the Internet have reduced some consumers' need to shop in our stores, while some scrapbookers, beaders, and others may be spending their money at consumer shows.

CHA recently completed its annual March National Craft Month promotion, which resulted in numerous newspaper articles and tv appearances by spokesperson Terri O. What else needs to be done to drive more traffic into our stores? What should retailers do? What should trade associations do? Can individuals do anything? Email your thoughts, on or off the record, to CLN at mike@clnonline.com.

More than 50,000 consumers crowded into the Mall of America in Minneapolis over President's Weekend to attend the Knit-Out & Crochet sponsored by the Yarn Council of America.

CYCA Chair John Laurie (Coats & Clark) said, "With such a positive response to the Mall of America site, the Executive Committee agreed that it was time to travel around the country with our Knit-Out. We will return to the Mall of America [Feb. 16-17]. We will not hold a traditional New York Knit-Out this fall, however, we are considering other options for the Big Apple."

Like the traditional Knit-Outs, there were fashion shows, special events, authors, "Learn to Knit" and "Knit Doctors" areas, plus booths for 16 CYCA members; Michaels, which has 14 stores in the area; the Minnesota Knitters Guild; Warm Up America!; and Save the Children.

The event generated widespread publicity. There were six reports on local tv news channels, a radio interview, and an article on the front page of the Weekend section of the Minneapolis Star. To see photos, visit www.craftyarncouncil.com/knitoutbrochure.html.

Aldik's senior management, in conjunction with Encore Consumer Capital, has purchased Aldik and its Hong Kong subsidiary from Decorative Concepts. The acquisition includes Aldik's core domestic and international business, along with its Hong Kong subsidiary, which has been renamed Sourcedécor Ltd.

The Aldik senior management team remains intact. "As an independent company, Aldik will be able to further capitalize on its unique strengths which include unsurpassed design capabilities, superior sales and marketing organizations and its renowned customer service," says Aldik CEO Larry Gold. "With this change, Aldik is poised to become the clear market leader in the floral and home décor industry."

The CHA summer show is growing. Officials report that, as of Mar. 26, the number of exhibitors is up 18.6% compared to the same date a year ago, and square footage of exhibit space is up 20.0%. The theme of the show, July 20-22 in Rosemont, IL, is "Celebrations: Crafting for Holidays and Special Occasions." Genevieve Gorder, designer from Trading Spaces on The Learning Channel, will be the keynote speaker. Organizers of Gorder said, "Her barefoot approach to design has given rise to her 'resident free spirit' status. You can find her work just about anywhere, from a bottle of Tanqueray 10, a line of illustrated greeting cards and blue jeans, to a kitchen in a home near you. Genevieve will provide her unique perspective on design and discuss the latest trends impacting the industry. "

More than 460 exhibitors are expected. There will be 50+ workshops (card-making, home dec, art materials, gift-giving, etc.) which begin July 19, and 20+ business seminars, whose topics include marketing and branding, digital scrapbooking, and industry trends. CHA will also release the latest market research findings on the teen and Hispanic markets.

New buyer services include special onsite kiosks to help attendees locate exhibitors by product or service and a VIP Buyers' Lounge with computers and light refreshments. The CHA Member Linkage Booth, staffed by CHA staff and board members, will also be featured to give members an open forum to provide feedback on the show and the association.

Visit www.chashow.org. For exhibit info, call Nadine Schwartz at 800-822-0494, ext 220, or email nschwartz@craftandhobby.org.

Jo-Ann's was the big winner in the first quarter of 2007. In fact, it was just about the only winner. Its stock rose 11.7% while Wal-Mart increased 1.7%. A.C. Moore slipped 1.5%, and Hancock, whose stock stopped trading when the company filed for bankruptcy, dropped 73.5%. The CLN Index rose 0.8%, about the same as the Dow (+0.9%), the S+P (+0.2%), and the NASDAQ (0.3%). In other industry-related stocks, Target rose 3.9% and Meredith increased 1.8%. Martha Stewart Omnimedia fell 22.3%.

In 2005 designer Laurie D'Ambrosio (LD D'Esignworks) did some work for an industry company and was paid $625. But either the company or the IRS – Laurie doesn't know which – made a typo and she received a letter from the IRS saying the company paid her $625,000 – and now Uncle Sam wants his share, adding, "We will charge you interest from April 2006."

"It's a really good thing that I kept the check stub stapled to the invoice stapled to the printouts of the instructions for all of the projects that I did," Laurie said. "I also have a 1099 filed with my other tax info.... All of my paperwork matches the $625.

"Companies that you do contract labor for don't have to send you a 1099 for taxes unless they pay you more than $600. Make sure you keep all documentation – especially if it was just a 'little' job that is under the $600 limit. Keep hard copies or back-ups of emails, invoices, and check stubs," Laura advised.

"Imagine what would happen if the IRS had your income pegged at $100,000 because of a typo but you couldn't prove that it was only $100."

"I want you to know that Hancock is the best company we have ever dealt with as they entered bankruptcy. Through all their financial weakness, they have continued to pay their bills on time, all the time. Most customers that experience financial weakness, on the other hand,

begin to stretch their vendors out slowly, and then more quickly, until we really get stung in the end. Not Hancock. They have continued to pay on time." – Name Withheld

Around here, the word "crafting" has come up quite a bit lately. It's been disturbing to me that so many well educated and informed people can conjure up such a distasteful vision of what crafting is. To me, we all have a talent – we all ply our craft. We may be artists with paint, sewing machines, knitting needles, ovens, pens, computers, books (to read to a child and inspire their mind is an art, a craft), musical instruments, the list goes on. I am so passionate about this issue that I came up with the following acronym to ponder: Crafting is the Creative Reaction to Artistically Fundamental Techniques Interpreted and Negotiated with Gusto. – Barbara E. Swanson, Marketing Manager, American Traditional Designs

(Comment: Meanwhile the Kansas City Star announced that a local brewery, Boulevard Brewing, is going to release what it's calling the Smokestack Series – five high-end CRAFT beers. Hmmm. Some day will a consumer walk into Michaels and say, "I'll take a bottle of Aleene's Tacky Glue and a six pack"?)

1. In the last two issues, CLN 's unscientific poll has asked about six product categories – would they increase or decrease this year from where they are now. I looked at the results and added them the way schools figure students' grade point averages. Kids Crafts rated highest, followed, in order, by Beads, Painting, Needlework, and Scrapbooking.

2. Here's another example of people turning to our products to help the world. Many years ago one winter, my mother-in-law, Mary Witczak, saw a segment on a local Chicago tv station about a Catholic school in a very poor neighborhood. She became so upset at seeing little kids at recess without hats or gloves in winter that she knitted caps and mittens and sent them to the school. She kept on knitting for years, until old age and carpal tunnel syndrome caught up with her. The family estimates she made about 600 sets of mittens and caps. No organization, no publicity, just one woman trying to make Chicago winters a bit warmer for little kids.

CLN STOCK INDEX. A.C. Moore: 21.34, up $0. 84 ... Hancock: $0.91, down $0.34 ... Jo-Ann's: 27.25, up $2.94 ... Wal-Mart: 46.95, up $0.74 ... CLN Index: $96.45, up 4.5% ... Dow Jones: 12,354.35, up 2.9%. (Note: All changes in price are since 3/30 and are exclusive of dividends. Hancock stock is no longer traded since the bankruptcy filing.)

PEOPLE. Industry veteran Jerry Payton joined Widget Products as President. Jerry's experience includes Exec VP for Creativity, COO for P&M Products, VP of Merchandising for Michaels, and operational positions for Wal-Mart and Kmart. Widget manufactures the Knit Lite, (www.knitlite.com), Crochet Lite, and other craft and general merchandise products.

EMPLOYEES. On Mar. 22 Wal-Mart awarded bonuses of more than $529.8 million to a total of 813,759 Wal-Mart and Sam's Club employees as part of Associate Celebration Day. The company has about 1.3 million employees in the U.S.

STOCK. Private equity giant The Blackstone Group, who purchased Michaels with Bain Capital last year, announced it was going public. The initial public offering could raise as much as $4 billion, the New York Times reported.

STORES. A new survey by Nielsen Trade Dimensions, a division of The Nielsen Co., reveals U.S. retailers will open 94,000+ new store locations in the next five years.

MARTHA. Michael Meltz of Bear Stearns increased his rating for Martha Stewart Omnimedia from Underperform to Peer Perform, in part because of the company's rollout of scrapbook products at Michaels next month, Business Week reported.

PEOPLE. A.C. Moore promoted Rodney Schriver from Controller to VP/Controller and hired Michael Zawoysky as VP of Financial Planning and Analysis. Zawoysky had been Exec VP/CFO of Foot Locker Europe. Both report directly to Exec VP/CFO Marc Katz ... ... Anna Griffin will be the keynote speaker at the National Stationery Show, May 20–23 in New York. She will speak at a breakfast on Monday, May 21. For more on the show, visit www.nationalstationeryshow.com ... Deborah Murphy was named Dir. of New Business Development at Moire Studio a leading design firm in Washington, DC. She has also been accepted in the graduate program in Anthropology at American U., where she will study branding on North American consumers – using ethnological and analytical strategies to unlock the dynamics of brand messaging. She's seeking corporate funding for her research.

STORES. Scrapbooking Roads, a scrapbook store directory/resource website, named Memories From the Heart as the March 2007 winner of the Favorite Store of the Month program, as voted by visitors to www.scrapbookingroads.com. Visit www.memoriesfromtheheartwi.com ... The Columbia (MO) Tribune profiled the Hillcreek Yarn Shoppe & Fiber Studio. Visit www.hillcreekfiberstudio.com/Index.html. To read the Tribune article, visit http://columbiatribune.com/2007/Mar/20070331Busi002.asp.

MEMORY. SolonicStyle teamed with noted illustrator Gail Green to create and distribute the Sweet Petatoes line of memory products for dog, cat, and pet owners. The line includes photo scrapbook kits and "Brag Books," a photo calendar kit, note pads, gift wrap and gift bags, a pet record keeper/organizer, and more. Visit www.sweetpetatoes.com, call 650-583-5833 or email omer@solonicstyle.com.

CONDOLENCES. Jason Ruebens, founder of Pioneer Photo Albums, passed away of natural causes at the age of 99.

BOOKS. Wal-Smart, What It Really Takes to Profit in a Wal-Mart World, by William Marquard and published by McGraw Hill. Charles Fishman, author of The Wal-Mart Effect, to CLN's knowledge the best book ever written about Wal-Mart, told Reuters about Wal-Smart: "There's no excuse for not understanding what's going to happen to you and your business as you step into the Wal-Mart arena. That's why you read a book like this."

PROMOS. Interweave Press, which has become an industry leader in creative marketing, is promoting Amy R. Singer’s book, No Sheep for You, by organizing the first "Sheepless Yarn Swap." Participants in "Swap" will receive two skeins of non-wool yarn – one in June and one in July 2007 – from their anonymous secret pal; they also mail two nonwool skeins (hemp, linen, cotton, silk, rayon, bamboo, corn, Lyocall, Modal, Seacell, soy fiber yarn, etc.) in two months to their assigned pal. Registration is open until May 1 online at www.interweave.com/knit/books/No_Sheep/swap/nosheepsignup.asp.

MEDIA. HGTV.com is launching two broadband video channels featuring episodes of The Carol Duvall Show and Simply Quilts. Visit http://hgtv.com/simplyquilts and http://hgtv.com/carolduvall. Also, both series have moved to the DIY Network..

TV. On a "Good Thing" segment of her tv series, Martha Stewart used Xyron's 510 Creative Station to make copper-trimmed magnets, and her website, www.marthastewart.com, listed project instructions and a supplies list. Xyron gave a 900 Creative Station to every member of the studio audience.

TV. National City Bank and CK Media are new sponsors of the PBS series, Paint, Paper & Crafts, produced by Cutters Productions. They will introduce National City Bank's Scrapbook Reward Visa® card, the first loyalty card for scrapbookers.

CATALOGS. Plaid's new catalogs (6,000+ SKUs) for paints, stencils, stamps, needlework, fashion embellishments, and more are now online at www.plaidonline.com. Click the "Catalogs" button on the navigation bar.

PR. To read a remarkable New Yorker article on Wal-Mart's public relations machine, visit www.newyorker.com/reporting/2007/04/02/070402fa_fact_goldberg.

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.

Emailed from a CLN subscriber:

1. One day I was walking down the beach with some friends when someone shouted, "Look at that dead bird!" Someone looked up at the sky and said, "Where?"

2. While looking at a house, my brother asked the real estate agent which direction was north because, he explained, he didn't want the sun waking him up every morning. She asked, "Does the sun rise in the north?" When my brother explained that the sun rises in the east, and has for sometime, she shook her head and said, "Oh, I don't keep up with that stuff."

3. I used to work in technical support for a 24/7 call center. One day I got a call from an individual who asked what hours the call center was open. I told him, "The number you dialed is open 24 hours a day, 7 days a week." He responded, "Is that Eastern or Pacific time?"

4. While eating lunch in the company cafeteria, I overheard another employee talking about the sunburn she got on her weekend drive to the shore. She drove down in a convertible, but, "didn't think I'd get sunburned because the car was moving."

5. My sister has a tool in her car that's designed to cut through a seat belt if she gets trapped. She keeps it in the trunk.

6. My friends and I were on a beer run and noticed that the cases were discounted 10%. Since it was a big party, we bought two cases. The cashier multiplied two times 10% and gave us a 20% discount.

7. I couldn't find my luggage at the airport baggage area. So I went to the lost luggage office and told the woman there that my bags never showed up. She smiled and told me not to worry because she was a trained professional and I was in good hands. "Now," she asked me, "has your plane arrived yet?"

8. While working at a pizza parlor I observed a man ordering a small pizza to go. He appeared to be alone and the cook asked him if he would like it cut into four pieces or six. He thought about it for some time before responding. "Just cut it into four pieces; I don't think I'm hungry enough to eat six pieces."

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xxx

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