Date: August 20, 2007
Vol. XI, No. 16

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TABLE OF CONTENTS

COMMENTARY: CHINESE IMPORTS AND YOU 

Last week Mattel recalled another 7.5 million toys that contain lead paint. Add that to the recall of additional millions of toys, the tires, the toothpaste, the fish, and so on. Then add the enormous, sometimes hysterical media coverage, and I suspect the result will be millions of consumers very hesitant to buy anything from China – including many of our industry's products.

Before last week's recall, there have been six recalls of Chinese toys since March, 18 recalls of kids' jewelry, and 60% of all of the products recalled so far this year were made in China, the Consumer Production Safety Commission reported.

Consumers may overreact – Mattel issued this latest recall even though there were no reports of injuries or damage. But it doesn't matter if it's a logical reaction or hysteria; consumers aren't always logical and you will have to deal with their attitudes.

I suspect kids' crafts might be most affected, but it could be more extensive than that. So what to do?

Retailers need to ask tough questions of their vendors, so they will know the answers to the consumers' tough questions.

Vendors must test every product before shipping to retailers. Better to catch a problem before it's on store shelves or in kids' mouths. One recent recall occurred because a European retailer discovered lead paint on toys. It's not the retailer's responsibility, it's the vendor's.

And if there is a problem with products already on store shelves, act quickly. The Motley Fool reported the Consumer Product Safety Commission fined Fisher-Price $975,000 in March for not notifying the CPSC quickly enough about a choking hazard in a toy, and $1.1 million in 2001 for delaying notification regarding safety defects in another toy.

This, too, shall pass. But in the meantime, everyone in our industry needs to be proactive.

Business-Wise. Why are some categories up and others down? Why is there a trend to take apart old clothes and remake them? The new generation of consumers is changing the old order of things. What does it mean for the future? "The New Generation" is the third installment in CLN's series on the industry's biggest influences of the past decade.

Category Reports. Yarn is not only good for our industry's sales, it's good for your health, too, says the Harvard Medical School and other scientific researchers.

"Vinny Da Vendor". An example of how one successful company, Plaid, gives back to the community. What does your business do?

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.

Will the food/toy/tire/toothpaste recalls affect our industry? Will consumers' growing fear cause them to think twice about buying Chinese-made kids crafts and other industry products? To vote, click on Industry Polls in the right-hand column or click HERE.

CLN voters ain't happy about the effect Wal-Mart's stitchery decision will have on the industry. Only 13.8% thought it would have a strong positive effect short term, and 20.7% believed there would be a slight positive effect in the near term. Only 6.9% thought the pro's and con's would cancel each other. The remaining voters in CLN's unscientific poll were negative; 31.0% said it would have a somewhat negative effect, and 27.6% thought it would be a strong negative effect.

CLN subscribers were a little more encouraged about the long-term effect of Wal-Mart dropping stitchery. One quarter thought it would have a strong positive effect, and 12.5% thought the effect would be somewhat positive. Almost a fifth, 18.8%, think the pro's and con's will cancel each other, while 28.1% thought the effect would be somewhat negative, and 15.6% believed the effect would be very negative.

Net sales for the second quarter ended Aug. 4 rose 7.0% to $388.5 million and same-store sales increased 7.0%, versus a same-store sales decrease of 8.4% for the quarter last year. Net sales for the first half of the year were $812.7 million, up 3.1%. Year-to-date, same-store sales have increased 4.2% compared to a decrease of 6.0% for the same period last year.

Analysts had expected sales to be $270.8 million, TheStreet.com reported, and Jo-Ann's stock rose following the announcement.

"We are pleased with our sales performance during the second quarter," said CFO Jim Kerr. "Sales were driven by our new marketing programs and by capturing volume from competitor store closures and category changes. The process we implemented this year to sell through clearance merchandise in a more timely manner also contributed to sales growth, but impacted gross margin, as expected. We will continue to execute our plans to enhance profitability over the long term through a balanced approach to sales growth and margin improvement."

"JAS took share from Hancock Fabrics and Wal-Mart," CL King & Associates analyst William Armstrong told Reuters. Armstrong has a Strong Buy rating for Jo-Ann's.

Second-quarter earnings will be announced Aug. 29.

Sales for the second quarter ended June 30 were $124.4 million, down 4.1%, and same-store sales decreased by 10.0% versus the same period in 2006. But gross margins improved, so the net loss was $0.3 million ($0.02/share), compared with a net loss of $1.8 million ($0.09) a year ago. The results include a charge of $0.03/share related to a one-time legal settlement, and costs of $1.8 million ($0.05) related to the changes in management. The company's cash position improved by $29.8 million, principally due to a 21% reduction in inventory per store.

Analysts had expected a loss of 5 cents a share on revenue of $132.9 million, so the stock rose 17.6% the day after the announcement, TheStreet.com reported. "We think weather and Rag Shops store closings were both bigger-than-expected drags on sales during the quarter," wrote BB&T Capital Markets analyst Laura Richardson. "In addition, we think the craft environment remained difficult and A.C. Moore's price increases appear to have impacted sales more negatively but gross margins more favorably than we expected."

Richardson added, "We think A.C. Moore's strategy of focusing on profitable sales is paying off for the company, with two quarters in a row now of improved operating margins."

Sales for the first half of the year were $259.8 million, down 1.1%, and same-store sales decreased by 7.4%. Net income was $0.2 million ($0.01) versus a net loss of $1.5 million ($0.08). Results include $0.4 million ($0.01) related to the changes in management, versus $2.0 million ($0.06) a year ago.

CEO Rick Lepley stated, "We are pleased with our progress in improving gross margins, inventory, and our cash position. We believe our results indicate that our focus on improving store profitability continues to be the right course for us at this particular time."

For the quarter ended July 31, net sales rose 8.8% to $91.99 billion and income from continuing operations was $3.11 billion, up 4.1%. Same-store sales rose 1.9%. The net income was $3.10 billion ($0.76/share), compared with $2.08 billion ($0.50) a year ago. The income was in line with analysts' expectations, the Associated Press reported.

"Although some people will report that Wal-Mart has had record sales and earnings, our underlying operating performance this quarter is not what we expect of ourselves, and not what our shareholders expect of us," said CEO/President Lee Scott. "For the remainder of this year, our management team is focused on inventory improvements, delivering quality products at low prices, and store execution at the highest standards."

Net sales for U.S. Wal-Mart stores rose 6.5% to $59.013 billion for the quarter, but same-store sales rose only 1.2%. For the first half of the fiscal year sales rose 6.1% to $114.45 billion, but same-store sales have risen only 0.6%.

The company lowered its estimate for the full year, now projecting earnings/share from continuing operations to be $3.05-$3.13. The initial forecast was $3.15-$3.23. Eduardo Castro-Wright, CEO of Wal-Mart’s U.S. operations, blamed poor apparel sales. Grocery sales were strong, he said, but that's a low-margin business, and sales of higher-margin items such as apparel were disappointing.

Michaels has partnered with teen idol Hilary Duff to launch stuff by hilary duff, a 40+ SKU line of charms, patches, and iron-on transfers. The collection includes chain-link bracelets and necklaces and vintage-inspired charms to personalize T-shirts, hand bags, and hats with iron-on graphics, studs, and stones. Military and heraldic-inspired crests are also included.

"My new line of DIY fashion crafts at Michaels under my stuff by hilary duff label allows you to get creative with your style – so you can always wear something new to highlight your own individuality," said Hilary.

Horizon Group USA is the exclusive licensee for the line. Products include premium designed charms and jewelry accessories, as well as fashionable iron-on transfers, embellishments, and surfaces. A company spokesperson said, "Horizon is happy to announce the addition of Hilary Duff to their impressive portfolio of premium quality craft kits and components, and look forward to growing Hilary’s brand presence in the fashion crafting marketplace."

Michaels stores will host in-store demos of how to personalize T-shirts and handbags on Sun., Aug. 26 from 1-3:00 pm local time.

"Hilary embodies the spirit of the Michaels’ customer with her individual sense of style and her creative edge," said Michaels Sr. Marketing VP David Abelman. "Tweens and teens are embracing crafting as part of developing their identity. The stuff by hilary duff DIY fashion collection fuels their personal creativity and imagination, and it further enhances our DIY crafting assortment."

To see the new line, visit www.michaels.com/art/online/static?page=stuff_hilaryduff.

The Nominating Committee of the Craft & Hobby Assn. named the following for election to the CHA board: Linda Augsburg (Kalmbach Publishing), Mike Birkholm (Darice), Elizabeth Boyle (Treasury of Memories), Joe McCabe (DMC), Sara Naumann (Hot off The Press), and Mark Peters (Duncan Ent.). Naumann and Peters currently serve on the Board as temporary replacements for Richard Brown (Sunrise Craft and Hobby) and Jori Hartwig (Fiskars) who resigned. Naumann and Peters will serve until the new election, at which time they will be eligible for the three-year term along with the other candidates.

Election of the candidates, as outlined in the CHA bylaws, will take place at the annual business meeting to be held in Anaheim, CA at the CHA Winter Show.

The Nominating Committee consisted of three members elected by the Board of Directors and three elected from by membership. Board members were Chair Mike McCooey (Plaid), Bob Ferguson (Ferguson Merchandising), Maureen Ruth (Creative Marketing Solutions). Members elected by the membership were Georgeanne Bender (Kizer & Bender), Julianna Hudgins (Julianna Productions), and Barbara Woolley (Creations by Barbara).

Kalmbach Publishing is coming out with a new craft magazine, Make It Mine, designed for crafters who embellish readymade products. Industry pro Linda Augsburg is the editor. The website is currently live at www.makeitminemag.com and the first issue will hit the newsstand Nov. 13. Linda says she will accept submission from freelancers, (submission guidelines for projects and other articles are on the website) and she's planning "idea galleries," too.

For ad info, call 888-558-1544. To sell MIM in your stores, email tss@kalmbach.com or call 800-558-1544 x 818. Email Linda at editor@makeitminemag.com.

"We're having so much fun putting the magazine together!," Linda said. "With the variety of craft techniques being used to embellish clothing, accessories, and home decor, we get to play every day while we recreate projects for the step-by-step photos that accompany every technique and how-to article. We really want to help the reader through every project by offering tips to ensure success and alert her to possible pitfalls, and we're doing it in a friendly, chatty way, as if her best friend is sitting next to her walking her through the project. Whether she's looking for sassy, sweet, or sexy, we think we'll offer something for every attitude."

(Comment: We may be seeing the beginning of a resurgence of the general craft magazine that offers projects in a variety of categories. Crafts 'n Things, now published by Amos Publishing, will unveil a revamped, re-designed magazine this fall; All American Crafts's Create & Decorate recently celebrated its 4th anniversary; and Creative Home Arts, the official publication of the Creative Home Arts Club, published by the recently sold North American Membership Group.)

Jo-Ann's signed a letter of intent to purchase the remaining 62% interest of IdeaForest.com, the parent company of Joann.com, giving the retailer full ownership of the company.

According to a company press release, Joann.com attracts an average of 2 million unique visitors per month and offers 65,000 products including fabric, sewing and quilting items, scrapbooking supplies, crafts, knitting and crochet materials, and home dec goods. Joann.com was ranked the 208th online retailer and the number one e-commerce craft retailer in Internet Retailers' "Top 500" for 2007.

"Since launching Joann.com with IdeaForest in 2000, we have developed a strong presence on the Internet," said Jo-Ann's Chair/President/CEO Darrell Webb. "Our site combines inspiration and commerce to make Joann.com the creative industry leader online. By more closely integrating the online business with our brick-and-mortar stores, we will not only improve customer satisfaction, but also deliver earnings accretion for shareholders."

"This is a great opportunity for Jo-Ann's to bring our neighborhood stores to life online," added Travis Smith, Exec VP, Merchandising and Marketing. "We will continue to inspire our online customers with project ideas and great merchandise, while also aligning the Web site to be more reflective of the Jo-Ann brand."

Jewelry. Morex introduced a special line of ribbon for beading jewelry. The Ribbon to Bead line of sheer, satin, and taffeta narrow ribbons has permanently attached thin wires at one end for stringing beads with 2mm, 2.5mm, or larger holes. Visit www.morexcorp.com.

Color. The Color Wheel Co. is offering the Magic Palette Color Mixing Guides to take the guesswork out of mixing color. The Personal Mixing Guide shows how to mix 324 colors from 18 tube paint colors and Titanium White. The Studio Mixing Guide shows how to mix 841 colors using 29 tube paint colors and Titanium White. Visit www.colorwheelco.com/guides.

Gifts. Loew-Cornell offers a variety of kits and art sets for consumers looking for gifts for family and friends, kids to aspiring artists, and cartoonists. Visit www.loew-cornell.com.

Silk Screening. Rupert, Gibbon & Spider has introduced the Jacquard Screen Ink kit and the Versatex Screen kit to produce screened prints on paper, fabric, and other surfaces. Visit www.jacquardproducts.com.

Clay. Polyform has launched its Studio by Sculpey clay and tool line and coordinating Home Dimensions education program featuring Donna Dewberry. Visit www.studiobysculpey.com.

(Note to vendors: If you have new products explained/displayed on your website, tell CLN and we'll link to the url. Email the info to mike@clnonline.com.)

1. The recent import scares bring to mind Tom Friedman's book, The World Is Flat. If you're wondering how to recognize and take advantage of the changing world, I highly recommend the book; an updated version was just released in paperback last week. It's the most important book I've read in years.

2. There will be a lot of finger-pointing about the recalls of imports. Who's to blame? Before consumers get too hysterical, they should look in the mirror. Americans' unrelenting demand for cheap, cheap, cheap is paying off. Consumers pressure the retailer, who pressures the importer, who pressures the overseas factory, who pressures his sub-contractor.

3. The Hillary Duff line at Michaels looks like a winner. The key will probably be the price compared to similar, non-licensed products. It ties in perfectly with the younger generation's attitude, as does the concept of the new magazine, Make It Mine. You can read more about this generation in Business-Wise.

QUOTATION. "Quality and product safety come at a cost. For some importers and some manufacturers, 'don't ask, don't tell' has been the operating parameter. This is particularly true for low price point or low-margin items. Lead-free ink and non-toxic plastics cost more than the unacceptable alternative. The initial step in controlling this problem is in the details of the product development specification. It is impossible to impose quality standards if they don't exist in the first place." – Don Delzell, Principal, Retail Advantage (Retail Wire)

LEGAL. Moritz Embroidery Works agreed to pay $500,000 and its sales manager pleaded guilty to conspiracy for falsely claiming American flag patches sold for military uniforms were made in the U.S., the New York Times reported. There's a law that all clothing procured by the Defense Department must be made in the U.S. Moritz won a contract in 2004 to supply the Department with millions of shoulder patches for 22 cents each. Turns out the American flag patches were made in Thailand, the Associated Press reported.

JULY SALES. According to tracking firm Retail Metrics, 61% of retailers missed expectations that had already been lowered, with 39% exceeding forecasts, Reuters reported. Wal-Mart's same-store sales rose 1.9%, surpassing analysts expectations, due to cutting prices on back-to-school items.

WAL-MART. Agreed to pay $3.9+ million to about 50,000 current and former employees in California who were underpaid overtime and other wages, and $198,900 in civil penalties to the state, Reuters reported. In 2005, Wal-Mart voluntarily notified the labor commissioner that payroll errors led to underpayment and pledged to correct the problem. "This is a matter we discovered and reported ...," a Wal-Mart spokesman told Reuters. "Everyone who was owed money is being paid with interest and we have added safeguards so that these errors don't happen again."

SCHOOLS. Jo-Ann's has expanded its Teacher Rewards discount program. Now the free discount card gives teachers 15% off all purchases and is good throughout the 2007/2008 school year, and provides advance notice of sales and special events. "The out-of-pocket costs that teachers spend on classroom supplies increases every year," said Marketing VP Riddi Kline. "Crafts offer an outlet for children to develop important life skills while allowing them to express their creativity and imagination," added Director of Education Rachel Wright.

IDENTITY THEFT. Apparently no one is immune. Charles Wyly, former Chair of the Michaels board of directors, was a recent victim. Igor Klopov, 24, of Moscow posed as Wyly and contacted the banking unit of JPMorganChase requesting a new checkbook be sent to the Houston address of one of his partners, Dow Jones News reported. Karpov then wrote a check for $7 million before being caught.

CHRISTMAS. A recent Houston Chronicle article detailed how many crafters shop for Christmas earlier than most consumers. Consequently, an area Hobby Lobby began setting up for Christmas in June and a local Jo-Ann's began in May. The Chronicle cited Hobby Lobby co-manager Earl Johnson, who estimated that his store sells $6 million to $8 million just in Christmas products from June to December. The Chronicle cited a study in which 14% of consumers said they started shopping before September; 6.5% started in September; almost 20% started in October; and 37% began in November.

YARN. Westminster Fibers and SR Kertzer have joined forces, with Westminster's Nashua and Shepherd being sold in Canada by Kertzer sales reps, and Kertzer's SRK, Stylecraft, Super 10, and Twilleys being sold in the U.S. by Kertzer and Westminster reps. Retailers should continue to place their Kertzer orders at 800-263-2354 and their Westminster orders at 800-445-9276. Richard Brown was named North America Sales Director for the companies.

QUOTATION. "There are two types of people – those who come into a room and say, 'Well, here I am!' and those who come in and say, 'Ah, there you are.'" – Frederick Collin, lawyer and judge

GREAT AD. "The new Mercedes S Class with 6 air bags, 7 if you listen to talk radio."

PRODUCT TESTING. Vendors, looking for an inexpensive way to test consumers' response to a new product? Visit www.shespeaks.com. Consumers sign up for free and receive new products, then evaluate them.

TAXES. Congress is considering The Sales Tax Fairness and Simplification Act that would make it easier to require Internet merchants, mail-order houses, and other "remote sellers" to collect sales tax across state lines.

CLN STOCK INDEX: A.C. Moore: 18.77, up 2.10 ... Jo-Ann's: $25.05, up $0.65 ... Wal-Mart: $43.49, down $2.03 ... CLN Index: 88.22, up 0.8% ... Dow Jones: 13,079.08, down 0.01%. (Note: All changes in price are since 8/17 and are exclusive of dividends.)

ACQUISITION. Pilot Group, a New York private investment firm, has purchased the North American Membership Group (NAMG), which publishes HomeArts, the official publication of the Creative Home Arts Club and the largest general craft magazine. Currently NAMG operates 11 national enthusiast membership clubs – and accompanying magazines. "We believe that highly-focused, for-pay enthusiast clubs are the perfect way to provide advertisers with the most committed and targeted audiences," said Pilot Co-Founder Robert Pittman. "NAMG, as the largest enthusiasts membership club company in the country with almost 5 million paying members and multiple avenues to reach its members – from focused print magazines and electronic media to Internet and promotions – has already reached critical mass in accessing this audience for the benefit of its advertising partners."

SHOWS. Time to start thinking about the CHA Winter Show – Feb. 10-13 in Anaheim. Once again the show will be in sections – Scrapbooking/Paper Crafts, General Crafts, Art Materials/Framing, Fabric/Quilting/Needlecrafts, Digital Imaging, New Exhibitors, and an expanded and enhanced License & Design section. For exhibit info, call Nadine Schwartz at 800-822-0494, ext. 220 or email nschwartz@craftandhobby.org.

TEACHING. MyCreativeClassroom.com is a new virtual classroom for training manufacturers, retailers, and independent craft instructors, and is currently recruiting teachers in a variety of craft mediums. Positions are available for 20 instructors. Teaching benefits, requirements, and applications can be found at http://mycreativeclassroom.com.

SHOWS. The Photo Marketing Assn. Canada Expo, Sept. 23-25 in Toronto, will include seminars sponsored by the Professional Scrapbook Retailers Organization, a PMA member association: "Supersize your Scrapbooking Sales" and "The 1-2-3 Marketing Plan" with Tamara Lipori; "Crunching Numbers, Creating Profits" with Roger St. Germain of Open Page Wholesalers; and "Customer Connections" with PSRO Director Jeanne Wines-Reed. For registration and info, visit www.pmai.org.

TREND. Knittingdaily.com, the new website from Interweave Press, offers 100+ patterns. In the first month of activity, the most popular downloads were shawls and wraps, with one pattern for a lightweight summer twin set.

LOOKING TO HIRE. Quayside Publishing Group is looking for a Marketing Specialist for its craft/hobby titles. The ideal person will know crafts, the product lines, the retailers, the blogs, the newsletters, the media, etc. The job can be based in Boston/Beverly MA or in Minneapolis/Chanhassen MN. Email Ms. Tara Connelly at jobs@rockpub.com. Put ''Marketing'' in the subject heading.

NEEDLEWORK. The 25th series of America Sews with Sue Hausmann uplinks to PBS stations Sept. 30. Episode features include fabric theme jackets, surface techniques, felted fantasy, table linens, vintage patchwork, etc. There will also be quilting features – applique, kaleidoscope, and illusionary bar quilting. The series is produced by Husqvarna Viking and KS, Inc. Productions and sponsors include Robison-Anton Textile, Sulky of America, Kaleidoscope Collections, Laura Star/Viking Distributing, Rowenta, The Warm Co., Carol's Creations, Havel's, Coats and Clark, David Textiles, and Kandi Corp.

MAGAZINES. The Fall 2007 issue of Interweave Knits has a unique slant: It guides knitters through the rapidly growing world of organic options – a knitter's guide to going green. New editor Eunny Jang has launched a blog, too. Visit www.interweaveknits.com.

MEMORY. On September 1, Maps2Memories will launch its new and improved website. It will feature weekly projects/layout ideas by its vendor sponsors, complete instructions and materials lists. There will be a new picture and project "recipe" each Monday. Visit www.maps2memories.com.

NEEDLEWORK. Dates in 2008 for The National NeedleArts Assn. shows: Jan. 11-13 in Long Beach, CA and June 7-9 in Columbus, OH. Visit www.tnna.org.

TV. What's it like to be on QVC? Georgeanne Bender of Kizer & Bender accompanied Terri Gordon, president of StoneCreek Creations, for Gordon's first appearance on QVC, selling her Krafter's Komfycush. Visit www.kizerandbender.blogspot.com.

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.

The occasional problem with products made in the Orient, often by workers who don't speak or read English, is not new.

Years ago when the cross stitch "look" was the rage, an importer of seasonal products showed CLN a small Christmas ornament that read "Home Sweet Home" in a cute cross-stitch-looking typeface. The importer said when the shipment arrived, he quickly checked a box or two and they seemed ok, so he shipped them to his retail customers.

One retailer gave a box of them to a clerk and told him to hang them on a Christmas tree in the front window of his shop.

Shortly after the clerk, who wasn't paying much attention, had finished hanging the ornaments on the tree, angry customers began storming into the shop saying they were not amused and certainly wouldn't be shopping in that store again.

The puzzled retailer looked at the tree and realized the ornaments didn't say, "Home Sweet Home"; instead, they said "Home Sweet Homo."

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xxx

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