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Mike's often irreverent, thought-provoking analysis of the industry.

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The Michael Rouleau Era

Industry veterans and Wall-Street analysts evaluate Michaels retiring CEO and the board's decision to seek potential buyers.

By CLN Subscribers and Mike Hartnett (April 3, 2006)

A Vendor.

David Blumenthal, President of Lion Brand Yarn, has known Michael Rouleau longer than anyone in the industry. David's uncle, George Blumenthal sold yarn to Rouleau in 1962 when Rouleau was a junior buyer at Target. "I look back at the last 10 years," David said, "and three words come to mind. The first is focus; he would focus a problem until it was solved. The second is prioritized. And he was fair.

"He was a workaholic who loved his work," David added. "He was genius. He took a company on the verge of bankruptcy, and he's done a lot better in the last 10 years than Kmart, Home Depot, and a lot of other companies. And his wife, Susan, is a tremendous asset the epitome of a corporate wife in the best sense of the term."

An Independent Retailer.

Bob Ferguson of Ferguson Merchandising served on the Craft & Hobby Assn. board of directors with Michael Rouleau who would periodically send staffers to Bob's Ben Franklin store in Redmond, WA to glean ideas.

"I am sure you are getting all kinds of reactions to [his announced retirement] from elation to sadness but one thing is known for sure, the industry will miss Michael Rouleau. Whether you are an employee of Michaels, a competitor, a vendor, or a member of an industry organization that he belongs to, he has made an impact!

"Remember our conversation of just a few months ago when we joked about what Jo-Ann's needs in the way of future direction and leadership? You don't suppose that could actually take place do you? If so, I want a huge block of stock in Jo-Ann's right now.

"Anyway, as an independent retailer, I am sad to see Rouleau retire. While Michaels will always be a threat to any retailer in the crafts business, one could easily see the vision of Michael Rouleau and know that there were niches in the business that independents could stay within and be successful. Some would say that in recent years, Michaels has been a predatory competitor. I would say that if there were more Michael Rouleaus in the business, with his vision and focus and class act, the entire industry would take a giant leap forward.

"I would hope you will know of some kind of giant going away party for Michael and if so, I would be one that would like to attend to pay honor to the one guy who has had more to do with the current successes in the craft industry than anyone in the business since Mike Dupey in his heyday."

A Journalist.

CLN's Mike Hartnett has probably written more about Michael Rouleau than any other CEO. Some random thoughts:

1. It wasn't apparent at the time, but Michaels was very close to bankruptcy when Michael Rouleau became CEO. I can't imagine what the industry would look like today if a lesser exec had taken over and Michaels had gone bankrupt.

2. A sign of the Rouleau era: The announcement that Michaels may be up for sale was huge news in the business media. I have never seen so many newspapers, magazines, and dot.coms report on some craft industry news. If that had happened 10 years ago when Rouleau became CEO, it wouldn't have caused a ripple in the media.

3. Late last year I raised the question, where does Michaels go from here? That's still a valid question, no matter who owns and operates the company. Consider a) the company is running out of places to add Michaels stores; b) the Village Crafts concept smaller stores in smaller towns doesn't seem to have worked; c) if the company had perfected the Recollections scrapbook store formula it would have opened more stores by now; d) the Star Wholesale concept appears to be a good one, but it can probably expand only to one or two stores in major cities; e) the company has more than $450 million in cash or equivalents; so what's next?

4. According to Business Week. Rouleau "was paid more than $1.4 million in salary, bonus, and other compensation and received options for 200,000 shares of stock in 2004, the last year for which figures are available. He also gained $8.3 million worth of shares by exercising options in 2004 and held other options valued last spring at nearly $20 million."

But before you complain about CEO's outrageous salaries, consider this: Michaels has had nine consecutive years of record financial performance and when Michael arrived, the company's market cap was $310 million; today it's approximately $4.5 billion.

5. Soon after Rouleau arrived, the company announced a new policy. (I don't remember what it was.) A number of vendors called me, complaining that it would be a real hardship especially for small companies. We talked on the phone and I pointed out that he might not be aware of the effect of the new policy. I suggested that he hold a meeting at the upcoming ACCI show with these vendors so he can hear from them firsthand.

A few minutes later his office called back and asked for a list of vendors I thought should be at the meeting. I gave him a list and he held the meeting. At one point I was told a small vendor asked, with tears in her eyes, was she going to get paid because if she wasn't, she'd lose her house. Rouleau gave his word that she'd be paid, even if he had to pay out of his own pocket.

6. Ever listen in on the conference calls CEOs have with analysts when the quarterly reports are released? Rouleau is the best at handling analysts. He's blunt and never seems to sugarcoat a problem. (And he's patient when analysts ask unbelievably picky questions.)

7. A couple of market analysts implied that Rouleau was pushed out because the stock hadn't done much lately. If that's true, then Charles and Sam Wyly, Michaels' Chair and Vice Chair, aren't as smart as I thought.

8. I think Rouleau's strongest asset is his ability to focus like a laser beam on the main problem. First it was getting the company on a stronger financial footing, which he did; then it was the company's infrastructure, which he turned into a state-of-the-art operation; and lately it's been improving merchandising/customer service; I bet he would have accomplished that, too.

9. I wouldn't want to work for Michael, but you have to respect his accomplishments.

Wall Street Analysts.

1. "It makes complete sense. Right now, private equity has never had more money and has never been more hungry to use it. The Wylys know that." Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting/investment banking firm (Bloomberg News)

2. "Clearly, the board feels that the company is undervalued and Michael (Rouleau) has done a great job with operations, but maybe taking it to the next level with the merchandising and the marketing is a job for someone else." Joan Storms, an analyst with Wedbush Morgan Securities (Reuters)

3. "We continue to be bothered by the company's propensity to shine a more positive light on results and growth rates than the numbers may support." Gary Balter, a Credit Suisse analyst (Dow Jones News)

4. "One of the attractions to potential investors is that Michaels is not best in class in its category.'' Gary Balter, citing Michaels' gross margin, 36.97%, compared to A.C. Moore's 39.46% (Bloomberg News)

5. "With smaller competitors achieving higher store productivity, there's room for the two executives {Boyer and Sandfort] to close that gap by improving the company's service, prices and merchandise." James Covert, Dow Jones News

6. "I was surprised, but not shocked [at Rouleau's retirement]. But given the balance sheet and cash flow this company generates, and the fact that its stock has been languishing for the last six to nine months, I'm not shocked." William Armstrong, a retail analyst for C.L. King & Associates (SmartMoney.com)

7. "Shareholders like (the announcement). I don't think Wall Street had recognized the value of the company and I think this is a very sensible strategy to pursue to unlock that value." Morningstar analyst John Owens (Reuters)

(Note: Would you like to add your comments on the Michael Rouleau era at Michaels? Email your thoughts to CLN at mike@clnonline.com. To read previous Business-Wise columns, click on the titles in the right-hand column.)

xxx

 

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