Date: March 17, 2008
Vol. XII, No. 6

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TABLE OF CONTENTS

COMMENTARY: HOW THE "NEWS" CHANGES 

Many of the articles in this issue have been re-written numerous times. I wrote the sad news about Bill Mangelsen, and then another tribute to him would arrive, then another. I thought the article about Jo-Ann's earnings report was done, but then one analyst after another voiced their opinions, so the article was re-written, again.

It's a conundrum I face often. Do I send out the news immediately, via a blast email? Or do I wait until I have a more complete picture? Sometimes you don't know when the picture is complete. Were the TNNA and CHA winter shows successful for exhibitors? Often it's months before retailers and ultimately consumers vote with their orders and wallets.

Memory, Paper & Stamps. A conversation between CLN and Charlotte Roby; she and her husband Ron are transforming Roby's Photo & Scrap store into a digital services store.

Designing Perspectives. Cindy Groom-Harry, Dora Ohrenstein, and Ann Krier weigh in on the discussion of fair pay for designers, and Mike Hartnett adds some historical perspective.

Kate's Collage. Kim Mitchell, a former employee of Bill Mangelsen's, has fond memories of Bill – and an important lesson for all importers; Bill Shugarts remembers Bill's charity work and personal kindness; and Bob Ferguson explains why Bill was a visionary and an icon.

Tech Topics. In the previous issue CLN reported on "Marketing in the 21st Century." Now read how Caron Int. is using the Internet to launch and brand its new line of yarn, NaturallyCaron.com.

Industry Research. The Professional Scrapbook Retailers Organization has released its 2007 National Scrapbookers Trend Report.

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

As you'll read below, Michaels is dropping its class program in favor of more in-store demos, events, and make-it/take-its. Will this help independents? Will it help or hurt the industry? To vote, click on Industry Polls in the right-hand column or click HERE.

Apparently the winter trade shows helped calm CLN voters' nerves. In this unscientific poll, 21.1% now think 2008 will be an excellent year, and 26.3% believe it will be a good, but not great year. Only 15.8% think it will be a poor year, and no one predicts it will be a very bad year. More than a third, 36.8% expect the year to be similar to 2007.

Bill Mangelsen, 64, died of complications from pneumonia in Hong Kong. He was preceded in death by his daughter Mary and his son Paul, and is survived by his children Annie, Jennifer, and Michael.

He was the oldest son of Harold and Berenice Mangelsen, who opened a Ben Franklin variety store in Omaha in 1961. That was the beginning of the Mangelsen influence in the craft industry, an influence that will continue for years to come.

The Mangelsen family lived behind the 11,000 sq. ft. store which included a luncheonette and, a rarity in those days, a drive-up window where customers could purchase hamburgers for 15 cents and coffee for a nickel.

Many years ago Mike Dupey, the eventual founder of Michaels, visited the store. Mike was operating his father's Ben Franklin store in Dallas and wanted to see what a larger, more craft oriented store was like. Mike returned to Dallas and opened what is considered the first craft superstore.

Bill eventually opened another Mangelsen's, which quickly became one of the largest, most important importer/distributor companies in the industry. The company was one of the first to hold an "open house" which included workshops that educated hundreds of independent retailers. Bill's brother Hal carries on the import tradition with his company, Midwest Design Imports.

The retail store, now operated by another brother, David, was expanded to 37,000 sq. ft. in 1991 and continues to be one of the largest independent stores in the industry.

A third brother, Tom, is one of the world's foremost nature photographers.

Services were held in Hong Kong, but the family is planning a memorial service in July in Omaha.

"His motivations seemed not to be making a huge profit from everything he touched, but instead he seemed to want to do anything possible that he could to further creativity within our industry," said Bob Ferguson of Ferguson Merchandising. "His passion for the 'little guy' or the independent was well known," Bob added, "and his disdain for the 'rules of the game' as dictated by the largest operators in the crafts industry is also part of his legacy."

Brian L. Adkinson, VP of Sales/Marketing for Walnut Hollow, said, "He was a passionate man, clearly believing in his cause. He loved his family dearly, and truly cared for people. I learned a lot during our relationships."

Walnut Hollow President Dave Ladd said, "Walnut Hollow has known Bill Mangelsen and his extended family for over 35 years. Mangelsen's was one of our first distributors, and they were always very supportive of our product line. Our condolences to all of the Mangelsen family. May Bill rest in peace."

"It was a passing of a legend for our industry," Brian concluded.

Priscilla Hauser, founder of the Society of Decorative Painters, said "Bill was one of my heroes and a hero to this industry. I remember wonderful days at Mangelsen's distributor open houses. We sold, sold, sold! My daughter, Kimberly, played with Mary Mangelsen, running up and down the aisles of the warehouse." (Note: Kim later worked for Bill. To read Kim's and Bob Ferguson's memories of him, click on Kate's Collage.)

"Those were some of the very best days," Priscilla added. "He will be greatly missed."

Amen to that.

(Memorials and cards should be sent to Annie Mangelsen, 4630 N. 138th St., Omaha NE 68164. Donations in honor of Bill should be given to the charity of choice or the American Cancer Society.)

Net earnings for the fiscal year ended Feb. 2 were $15.4 million ($0.62/diluted share), compared with a loss of $1.9 million (-$0.08) the prior year. 2007 was a 53-week year; 2008 only 52. Sales were $1.879 billion vs. $1.851 billion the prior year. On a comparable 52-week basis, same-store sales increased 3.5% versus a same-store sales decrease of 5.9% last year.

Large-format stores for the year ended increased 6.6% to $954.5 million. On a comparable 52-week basis, same-store sales increased 3.9% versus a same-store sales decrease of 8.0% last year. Small-format store sales decreased 4.5% to $912.4 million compared to the prior year. On a comparable 52-week basis, same-store sales for small-format stores increased 3.0% versus a same-store sales decrease of 4.1% last year.

For the quarter, earnings were $27.5 million ($1.10), above analysts expectations of $1.08, compared to earnings of $25.8 million ($1.05) a year ago. Sales decreased 2.5% to $585.9 million, but on a comparable 13-week basis, same-store sales increased 3.3%.

Large-format stores net sales for the quarter decreased 1.5% to $293.2 million compared to the same period last year. On a comparable 13-week basis, same-store sales for large-format stores increased 2.4%, versus a decrease of 7.2% in last year's fourth quarter. Small-format stores net sales decreased 7.4% to $280.8 million compared to the same period last year. On a comparable 13-week basis, same-store sales for small-format stores increased 4.2% versus a decrease of 5.1% in last year's fourth quarter. Internet sales through Joann.com were $11.9 million in the fourth quarter of fiscal 2008.

Gross margin for the fourth quarter, 45.0%, was the same as last year – higher in stores but lower in the Internet business. Selling, general, and administrative expenses (SG&A) for the quarter decreased to $202.1 million from $215.4 million and improved to 34.5% of net sales from 35.9%. The addition of sales from Joann.com, which has a lower expense structure than the retail stores, contributed to the improved leverage. Operating profit for the quarter increased to $46.8 million from $42.3 million.

Chair/President/CEO Darrell Webb stated, "We expect to continue delivering balanced, consistent, and sustainable sales and earnings growth over the long term," Webb added. "While fiscal year 2009 will be somewhat unpredictable due to the economic environment, we believe our company is partially insulated from a downturn due to competitive withdrawals from the fabric industry, the higher income demographic of our customers, and the solid performance of craft retailers in past recessionary periods."

In a conference call with analysts Webb said fabric and craft stores had better same-store sales increases during the recessions in 1991 and 2001, than they did before and after. "Clearly, I’m not suggesting that we’re going to expect some big benefits from a recession," Home Textiles Today reported, "but I do think this industry, this segment of retail, is a little bit insulated from the overall downturn compared to other retailers,"

During the quarter Jo-Ann opened six large-format stores and closed one large-format and 32 small-format stores. The year-end store count was 196 large-format stores and 578 small-format stores. This year the company expects to open approximately 12-15 new stores and close approximately 25 stores. Jo-Ann remodeled 26 stores last year and expects to remodel 25-30 stores this year.

Execs expect this year to show same-store sales growth of 1-3%; improved gross margin rate; improved selling, general, and administrative expense as a percentage of net sales; capital expenditures of $50-$55 million; and earnings/diluted share of $0.70-$0.85. Analysts polled by Thomson Financial expected income of $0.84/share, the Associated Press reported.

On the heels of the Jo-Ann earnings report, the Baltimore Sun reported on the increased interest in sewing, citing a doubling of clothing construction classes offered by Baltimore City Community College and a 34% increase in Jo-Ann's Sewing I class.

Why the resurgence? "Patterns that yield perfectly fitting garments save time, money and frustration," wrote reporter Donna Beth Joy Shapiro. The Project Runway tv series and computerized sewing machines have helped, too, plus "the inherent pleasures and benefits of this art and craft – creativity, customization, self-sufficiency, sustainability, [and] following a family tradition...."

The article cited a Fabric Place in Mount Washington, MD which has stopped selling patterns because of the growing use of pattern software and the availability of patterns on the Internet. Other stores cited in the article include Bear's Paw Fabrics and Blank's Fabrics.

To read the article, visit www.baltimoresun.com and type Donna Beth Joy Shapiro in the search engine.

The week before Jo-Ann's earnings announcement, Soleil Securities Group initiated coverage on Jo-Ann with a Buy rating, then after the announcement wrote to clients, "We see no signs of heightened price competition and expect Jo-Ann stores to continue to benefit from Wal-Mart fabric-department closings."

In a note to clients, BB&T Capital Markets analyst Laura Richardson said the "modest" outlook on same-store sales and margin improvement "seemed to disappoint some investors, but we think reasonable given the weak consumer environment."

BB&T maintains its Hold rating "primarily out of caution in an iffy stock market environment where one of the few consistent investor beliefs is that the consumer is in trouble." But Richardson warns, "... while craft and fabric retail sales have historically fared well during recessions, they have fared poorly when product [category] cycles are unfavorable, and for the first time in the 25 years of data, we have found the craft industry could be facing both in 2008."

Richardson reported that fourth-quarter fabric sales were up, seasonal goods were down, and core craft categories were essentially flat.

Wachovia Capital Markets analyst Ralph Jean told clients he was maintaining a Market Perform rating. "We believe the company's execution has improved significantly over the last two years. In addition, we believe the company is benefitting from consolidation in the fabric/sewing business leaving Jo-Ann Stores as the consumers' primary source for related merchandise," the Associated Press reported.

Wedbush Morgan Securities also maintained its Hold recommendation, "yet warming up to the story due to increased visibility of ongoing benefits from competitors exiting the fabric business, which should also help offset the challenging macro environment."

The Motley Fool summarized the earnings report this way: "I wouldn't call this a gusty tailwind for Jo-Ann, more like a minor breeze. But with systems upgrades on tap for 2008, cleaner stores, and some much needed merchandising discipline -- a few more stitches in time may help the company get back on track."

Jo-Ann's stock sold for $13.66 when the report was issued at the end of trading. The next morning it fell to $12.42 and then recovered to $13.46.

Michaels is dropping its class program with the exception of classes by Wilton and is increasing its demos, events, and make-it/take-its. April Willers, Manager of In-Store Events, explains:

"Over the past year, as part of our Consumer Insight strategy, we have asked customers what they like most about our stores, how we can improve, and what we are missing. When asked about classes, they had lots to say.

"Currently the customers' experience varies so greatly from store to store," April added, "that we are taking their feedback to heart and implementing a class and event program that can deliver an outstanding experience in all stores, which is a good challenge for a chain of our size (nearly 1,000 stores).

"Michaels is transitioning from a heavily class-driven program into a program offering more free demos, events, and make-it/take-its for all of our customers to enjoy. We are focusing our efforts on building better programs that customers have told us they would like to see at Michaels. For example, we are working closely with our vendors to create more excitement outside of the classroom and share the joy of crafting with their products with more people. This is but one way that Michaels is working hard to make certain that we offer our customers the best products, creative outlets, and overall store experience they deserve."

One new program is The Knack Saturday program. "Under The Knack umbrella where kids can come into the stores on given Saturdays between 10:00 am-12 noon and complete a craft for $5, including supplies," April explained. "Target ages are 5-12 and the projects take approximately 30 minutes to complete." The program has been posted on the Michaels website at www.michaels.com.

(Note: Scrapbook Retailer recently published the results of a survey of stores and their classes. Visit www.scrapbookretailermagazine.com/article.aspx?id=280. To read some comments from the blogosphere about Michaels dropping classes, visit a) www.crafttestdummies.com/category/craft-news and read the Mar. 8 comment; b) community.livejournal.com/craftgrrl/11334140.html; c) www.etsy.com/forums_thread.php?thread_id=5507672; d) the Michaels' message board at http://forums.michaels.com; e) The HGTV board at http://boards.hgtv.com; f) The Split Coast Stampers' thread at www.splitcoaststampers.com/forums/showthread.php?p=9038021.)

Michaels has introduced The Knack, an online and in-store program for parents and teachers to help children discover their creativity.

"Parents are looking for ways to spend quality time with their kids while also developing their children's talents and skills in a fun way," said Michaels CEO Brian C. Cornell. "The Knack will spark creativity, stimulate children's minds, and offer enjoyable, affordable activities that bring families closer together."

In concert with the launch of The Knack is "The Crayola Store Only at Michaels," which offers more than 250+ Crayola products, the largest of any store, including new products such as Color Explosion, Color Surge, Model Magic modeling material, and Crayola Beginnings for toddlers, plus traditional products such as markers, pencils, and crayons.

Crayola President/CEO Mark Schwab added, "Crayola and Michaels share a mission of bringing families together through creative, interactive play. From offering the largest selection of our products, to fun events that engage families, Michaels and Crayola brings kids and creativity together under one roof."

Last Saturday the stores held "The Knack Free Family Event" at Michaels from 10 am to 3 pm, during which time children could create three craft projects for free, including a magic wand, a door hanger, and a card to make and give to loved ones.

Parents can sign up for The Knack for free online or in Michaels stores. Those who sign up between Mar. 5 and Apr. 30 will be entered into "The Knack/Crayola Sweepstakes." Five winners will each receive approximately $1,400 worth of Crayola products. Parents can see official rules and register at www.michaels.com/theknack.

In a memo to employees dated Mar. 7, CEO Brian Cornell announced that the company is "realigning merchandising teams into four comprehensive business units." Each will include Category Directors (formerly Sr. Buyers); Category Managers (formerly Buyers); Category Management Associates; and Category Support Associates from Finance, Inventory Management, Marketing, Sourcing, and Pricing.

"Through our customer insights, we have learned a great deal about the reasons, or missions, that customers come to Michaels to shop," Cornell wrote. "Our customers' mission must become our mission."

The four business units will be led by a Business Unit General Manager who will report to Harvey Kanter, EVP Managing Director. The new structure:

General Crafting, led by Eric Dickenson: Craft Paints, Decorative Art, Adhesives, Books, Wood Crafts, Yarn, Stitchery, Jewelry, Beads, and Apparel Crafts.

Frames and Fine Arts, led by Alison Norton: Wall Frames, Wall Decor, Table Top Frames, Custom Framing, and Fine Art.

Seasonal Home Decor, led by Patty Fletcher: Floral; Stems; Custom Floral Garden; Home Accents; Baskets; Decor; Container Greenery; Christmas Trees; Fall, Spring, Holiday, and Christmas Decor; Dried Floral; Candles; and Glass Containers.

Kids, PaperCrafting & Celebrations will be led by a new Business Unit General Manager to be named shortly: Bakeware, Impulse, Wedding & Ribbon, Papercrafting, Kids.

Kathy Lacks will be the Business Unit Division Manager for Papercrafting and Rich Gartmann was promoted to Business Unit Division Manager for Kids. Susan Van Benten has left Michaels.

The Blackstone Group, which along with Bain Capital borrowed heavily to buy Michaels and later went public, reported quarterly earnings dropped 89% in the last quarter of 2007 and warned that the credit crunch was unlikely to improve soon.

Blackstone shares have dropped more than 50% since the initial public offering last June. "Investors fear that some of the companies that these firms bought on credit could, like millions of American homeowners, begin to buckle under their heavy debts now that a recession seems almost certain," the New York Times reported.

"Now, the bankers and investors who financed the boom in corporate takeovers are running for the exits," the Times added. "Loans and junk bonds that deal makers used to pay for the acquisitions – debts that must be repaid by the companies, not the deal makers – are sinking in value."

The Times quoted junk bond expert Martin Fridson who said private equity firms are "staring into the jaws of hell," but Blackstone CEO Stephen Schwarzman told the Wall Street Journal that a tough economy "creates enormous future opportunities for firms like ours to buy assets cheaper."

The drop in the Blackstone stock price has caused Schwarzman, a primary stockholder, a paper loss of $3.9 billion, but he appears to be ok. According to a filing with the SEC, Blackstone gave its top execs bonuses of $38 million and paid them $648 million in cash distributions, $350.2 million of that to Schwarzman, who then donated $100 million to the New York Public Library.

Speedball Art Products has completed its acquisition of Houston Art, a 43-year-old art/craft manufacturer. Houston's major brands are Mona Lisa, Messenger, and Athena. Speedball, founded in 1899, manufactures a variety of art/craft products.

Houston CEO Tim Mulvey said, "I can't imagine a better home for the company my uncle founded 43 years ago. Speedball has all the resources and capabilities to really expand what we have built. At our first meeting it was clear that they would continue to operate with the principles and values that have guided us. I know my valued customers and friends will be in good hands with Speedball."

Speedball CEO Walt Glazer said, "Speedball is focused on offering niche leading products to the fine art and craft markets. Products that lead in quality, that lead in innovation, and that lead in delivering superior value. Houston Art is a perfect fit because Tim Mulvey and his team have shared the same values in building their business. We are thrilled and honored that we were selected to carry the Houston Art torch."

Houston Art will continue to operate as normal in Houston for the next few months, then the entire operation will be transferred to Speedball's 220,000 sq. ft. facility in Statesville, NC. Tim will remain as a consultant for a few months to insure the transition is complete. Visit www.speedballart.com and www.houstonart.com.

"This change allows me to focus on an industry that is so dear to my heart," Tim told CLN, "the decorative artist industry. Decorative painting has been one of the many foundations that has made our company so successful. My passion and involvement towards the decorative artist industry suddenly becomes stronger than ever. My goal is to continue to work hard by making the Artist Expo Houston convention the best it can be, giving so many the opportunity to share their passion with others."

(Note: The Artist Expo Houston is July 22-26. For exhibitor, class, and hotel info, visit www.artistexpohouston.com.)

MEGA Brands, the Canadian toy manufacturer who purchased Rose Art in 2005, has put the division up for sale. "The sale of the company's stationery and activities business is being considered as a means of generating meaningful cash proceeds to reduce its existing debt and allow the company to place increased focus on its core toy business," said Marc Bertrand, President/CEO.

Product lines include art materials (crayons, colored pencils, highlighters, and markers) sold mainly under the ROSE ART brand; writing instruments (pens, mechanical pencils, and wood case pencils) sold mainly under the ROSE ART, SRX, and USA GOLD brands; dry-erase and cork presentation boards, organizers, and accessories sold mainly under the BOARD DUDES brand; and ROSE ART craft and activity sets. The company claimed the business generated sales of $200+ million in 2007.

The company's recent history has been rocky. The acquisition of Rose Art for $350 million eventually resulted in lawsuits with the previous owners, Lawrence and Jeffrey Rosen, and the company has suffered from product recalls.

The Toronto Globe and Mail reported the most likely buyer is the Rosen family, who issued a press release expressing interest in buying back the company.

"Private equity funds are chock-a-block with companies right now that are proving to be duds – think of just about any acquisition in the home building space, or consumer discretionary companies," the Globe and Mail reported. MEGA Brands is traded on the Toronto Stock Exchange under the symbol, MB. The website is www.megabrands.com. To read more, visit www.megabrands.com/en/corpo/pdf/20071211.pdf.

1. I find it ironic that Michaels is apparently dropping all classes except for Wilton. How did Wilton get to be such a dominant force in the cake decorating category – and maintain that position for years if not decades? Classes. (To read the Wilton story, click on Business-Wise.)

2. In the previous issue, CLN described how Kathy Cano-Murillo brought to Duncan an entire Internet marketing apparatus for its Crafty Chica line, thanks to her website, blog, and MySpace page. Now she's just returned from a Crafty Chica cruise – and guess whose products the guests were using. To see photos, visit http://flickr.com/craftychica.

EASTER. March and April same-store sales results compared to the previous year is like comparing apples to oranges because of the changing date for Easter. This year will be no exception, since it's the earliest Easter since 1818.

PEOPLE. Artist/Curator Marci Rae McDade has been named Editor of Fiberarts magazine,  published by Interweave Press. President and Fiber Group Publisher Marilyn Murphy said, "We are delighted to bring someone of Marci's experience and caliber to Interweave. We feel confident that she will bring tremendous new energy and enthusiasm to her position and we're excited about the future. She brings a curatorial perspective and one of a maker—a combination that Fiberarts welcomes as it continues to bridge art and studio craft." 

INSURANCE. For tips on buying insurance for your business in case of a fire, flood, etc., visit www.toydirectory.com/monthly/article.asp?id=3109.

WAL-MART. The retailer has quietly launched a blog written by its buyers at http://checkoutblog.com. So far nothing has been written about crafts or fabric.

CREATIVE MEMORIES. The Antioch Co. sold off one of its smaller divisions, Antioch Publishing Co., to Trends Int. President Lee Morgan told the Yellow Springs (OH) News the company can now focus on Creative Memories' most rapidly growing business, custom framing and digital scrapbooking. The company has approximately 850 employees in the U.S. and eight other countries and reports annual revenues of $250 million.

YARN. The Knit & Crochet show is July 25-27 in Manchester, NH. Online registration begins Mar. 24. For info, visit www.knitandcrochetshow.com.

CRAFTS. Ann Kristen Krier's syndicated newspaper column, Creative Weekly, has now been picked up by Kingston This Week in Ontario, Canada. (Note: To read Ann's thoughts on pay for designers, click on Designing Perspectives.)

QUOTATION. "The discretionary dollars that (consumers) have are just simply less. We are gaining momentum because people need us more than ever." – Wal-Mart CEO Lee Scott (Reuters)

STOCKS. A.C. Moore: $6.43, down $2.14 ... Jo-Ann's: $13.11, down $3.39 ... Wal-Mart: $49.82, up $0.23 ... Dow Jones: 11,951.09, down 2.6%. (Note: All changes in price are since 3/14 and are exclusive of dividends.)

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.

JUST LIKE HIS MOTHER

He didn't like the casserole, and he didn't like my cake.
He said my biscuits were too hard, not like his mother used to make.

I didn't perk the coffee right, he didn't like the stew.
I didn't mend his socks the way his mother used to do.

I pondered for an answer, I was looking for a clue.
Then I turned and smacked the daylights out of him,
Like his mother used to do.

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