Date: September 1, 2008
Vol. XII, No. 17

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TABLE OF CONTENTS

COMMENTARY: SCRAPBOOKING, OR MEMORY? 

Could we please replace the term scrapbooking with memory? Here's why: memory greatly expands the possibilities of what we are, the products we make and sell, and the services we can offer. It will help us appeal to a wider audience.

Not every customer wants to put all of her photos in an album. She may want to frame some of them, turn them into an iron-on and attach them to clothing, or use them in jewelry.

And not all of her memories are photographs. My prize possession as a kid was a home-run ball hit by my idol, Minnie Minoso, of the Chicago White Sox. It wouldn't fit in an album, but would have looked nice in a shadow box or memory box.

If there was one thing I could point to that caused most cross-stitch specialty shops to fail, it was their narrow, rigid definition of needlework. Let's not make the same mistake again. Branching into cardmaking and other forms of paper crafting is a start, but only a start.

Kate's Collage. Details of two great causes: A) Coats & Clark's project to provide scarves for the athletes and volunteers at the Special Olympics Winter Games in Idaho, and B) the online auction of fabulous knit and crochet items made by the industry's top designers – with proceeds benefiting the Rwanda Knits project.

"Vinny Da Vendor". Below is an update on crooks – scammers – who are trying to bilk small businesses. Here's the original example send by a vendor.

Scene & Heard. Ellie Joos reports on the highlights and the trends at the recent New York International Gift Show.

(Note: If a column appears to be something other than what's described above, click on the Reload or Refresh button on your browser.)

How do you read CLN? Do you go to the site and read it online? Or do you print the issue and read a hard copy? Are you reading more online these days, and reading less hard-copy material? CLN and no doubt many publishers want to know if your reading habits have changed. To vote, click on Industry Polls in the right-hand column or click HERE. (Reminder: If you want a hard copy, click on Printer Version and then print. The printer version has much wider margins, so you'll save paper and ink.)

The industry is not very optimistic about the coming Fall/Holiday season. A mere 3.2% believe their profits will increase substantially over 2007, and 16.1% predict profits will be "somewhat" better than last year. On the other end of the spectrum, 12.9% think their business will be much worse in terms of profits, and a whopping 48.4% predict their profits will be "somewhat" worse. The remaining 19.4% believe their business will be about the same.

For the second quarter ended Aug. 2, the company had a net loss of $11.7 million ($0.47/share) versus a net loss of $18.4 million ($0.76) a year ago. Operating loss for the second quarter was $16.5 million versus a $26.2 million loss for the prior year’s second quarter. Net sales rose 3.7% to $403.0 million, and same-store sales increased 3.3% compared with a 7.0% increase for the same period last year.

Those are the overall figures. Jo-Ann’s sewing business, which accounts for 51% of the overall sales, rose 4.5% on a same-store sales basis. The craft business – 49.1% of total sales – had a same-store sales increase of 1.3%. Sales in the large-format stores rose 3.1% to $209.0 million, and same-store sales increased 2.3%, compared with an increase of 9.2% a year ago. Small-format stores' sales increased 0.6% to $186.9 million, and same-store sales rose 4.4% compared with a 4.8% increase in 2007.

The stock jumped 12% the morning after the earnings announcement and conference call with analysts, and the securities firm Soleil-Stein Research upgraded its rating to Buy from Hold.

For the first two quarters of the fiscal year, overall sales rose 4.5% to $849.1 million, and same-store sales increased 3.9%. Large-format stores' sales rose 4.1% to $439.2, and same-store sales were up 2.8%. Small-format stores' increased 1.0% to $394.6 million from $390.6 million, and same-store sales were up 5.2%.

Chair/President/CEO Darrell Webb said, "I am proud of our team for delivering another quarter of significant earnings improvement in this challenging economic environment. Our balance sheet continues to grow stronger each quarter, with improving cash flow, lower inventory levels, and reductions in debt. While the economic environment remains uncertain, I am confident that by continuing to revitalize our stores, while keeping a tight focus on expenses and inventories, we will not only weather this economic downturn, but strengthen our competitive position in both crafts and sewing."

During a conference call with analysts Webb said "Our team continues to bring in better quality, better looking, and more compelling fall seasonal merchandise. I think fall looks a lot better compared to fall a year ago," Home Textiles Today reported. But Webb expressed reservations regarding seasonal and home dec merchandise because of the economy.

Gross margins improved to 47.6% from 45.7% due to lower sales of clearance merchandise. Selling, general and administrative expenses were $191.6 million, compared to $188.1 million a year ago, but they improved to 47.5% of net sales from 48.4%, due to expense leverage from the increase in sales and cost control efforts.

During the quarter, Jo-Ann opened three large-format stores and closed one, and closed six small-format stores. Year-to-date, the company has opened three large-format stores and closed two large-format and seven small-format stores. Jo-Ann remodeled 11 stores in the quarter and year-to-date, has remodeled 22 stores, of which four were enlarged from a small-format to a large-format layout. For fiscal 2009, the company expects to open 21 new stores and close approximately 30 stores, remodel 25, and transition five from a small-format to a large-format layout. The current store count is 201 large-format and 567 small-format stores.

Michaels' net loss for the second quarter ended Aug. 2 was $25 million compared a $44 million loss for the same quarter last year. Fiscal year to date, the loss was $45 million compared to a $67 million loss a year ago.

Net sales for the quarter increased 1.0% to $796 million, but same-store sales declined 2.6%. The decline in same-store sales was caused by a 1.0% decline in the average ticket and a 1.6% decrease in transactions. Sales for the year-to-date period are up 1.0% to $1.643 billion, but same-store sales are down 2.8%. That decline was due to a 2.2% decrease in transactions, a 0.4% decrease in average ticket, and a 0.2% decrease in custom frame deliveries. A favorable Canadian currency translation offset the decline in average ticket by approximately 0.5% for the second quarter and approximately 0.8% year to date.

Michaels' bonds fell sharply the following morning. Its 10% senior notes due 2014 traded at about 74 cents on the dollar, according to S&P, and its 11.375% notes due 2016 were trading at about 63.5 cents on the dollar Monday, Financial Week reported.

CEO Brian Cornell said, "Overall, the soft economic environment continues to adversely affect the business, particularly with respect to certain high-ticket discretionary items and home-related categories. While a number of our product categories performed well, such as Kids Crafts, Jewelry & Beadmaking, and Bakeware, sales declines in home-related categories including Floral, Home Décor, and Custom Framing more than offset these increases on a comparable store basis."

The gross margin rate fell from 36.8% to 34.9% in the quarter due primarily to a decrease in merchandise margins and a deleveraging of occupancy and distribution costs due to declining same-store sales. Selling, general, and administrative expense in the second quarter increased $4 million to $246 million, or as a percent of sales, to 30.9% compared to 30.7% a year ago. Year-to-date SGA expense increased to 31.5% of sales from 30.6%.

Average inventory/Michaels store at the end of the quarter, inclusive of distribution centers, was down 3.3% to $899,000, due to reduced yarn inventories, ongoing benefits from the Hybrid Distribution model, and lower inventory values associated with direct sourcing efforts.

For the second quarter, adjusted EBITDA, a measure of cash flow, declined approximately $17 million to $73 million, 9.2% of sales, from $90 million, 11.4% of sales, a year ago. Year-to-date, adjusted EBITDA declined to $170 million, 10.3% of sales, from $203 million, 12.5% of sales.

Long-term debt rose from $3.734 billion to $3.748 billion, but interest expense was lower by $19 million and $37 million for the quarter and first half, respectively, due to a lower average interest rate on the company's floating-rate debt and lower average debt levels.

The second half of the year is expected to be similar to the first half. The earnings statement said, "Low consumer confidence and increased economic volatility are expected to have a continued adverse effect on the business for the remainder of the year, causing the forecasting of future results with any level of certainty to be difficult. However, we now expect the first half trends for same-store sales, adjusted EBITDA, net income, and cash flow from operations to continue for the second half."

During the first half of the fiscal year, Michaels opened 28 new stores, relocated six, remodeled one, and closed two Aaron Brothers stores.

Cornell added, "With the Halloween, Fall, and Holiday seasons approaching, our focus will be squarely on the customer. Our goal is to provide a compelling product assortment and excellent execution in our stores while conservatively managing our expense structure and inventory commitments. We will, however, continue to invest time and resources towards our key strategic initiatives, such as our consumer insight and category management programs, in order to assure the long-term growth and success of the Michaels brand."

The complete earnings report is available on Michaels' website, www.michaels.com.

Software from Lucidiom has been installed in Ritz Camera stores that enable the stores to expand their "memory" services and products. The company now offers a one-hour photo book cover, proof books, note cards, and banners. The covered photo book is a full-bleed jacket for 11"x8.5" and 8"x6" photo books. Customers can combine photos and text or choose a photo-only jacket, and can personalize the inner flaps. Proof books, which Ritz refers to as the customer’s "photo library," are a photo archive and replace the traditional index print. The photo library consists of unbound, double-sided sheets with 9-12 photos per side, and is offered in four sizes. Folded note cards, designed to have a photo on the front and a blank inside for hand-written notes, are available in 10-packs. In addition to the 36"x12" and 30"x12" banners, the stores can now offer 72"x24" banners that can be text/photos or text-only.

Ritz Camera Centers is the largest specialty camera and image chain in the U.S. with approximately 1,000 locations in 45 states and the District of Columbia. The chain includes Ritz Camera, Wolf Camera, Kits Camera, Inkley’s, and The Camera Shop. To see what the stores offer, visit www.ritzpix.com. Lucidiom's site is www.lucidiom.com.

(Note: The industry – and CLN – has been filled with stories and complaints about slow sales. Here's an independent who is bucking that trend.)

I have Scrapbook Village in Glasgow, KY. It's rural – a farm and a lake area. Our sales slid in 2007, but we came up with more features and ideas to keep customers traveling to the Village. Our sales were up 7% in the first quarter and another 8% in the second quarter.

We are very hopeful and won't let the doom-and-gloom reports take us down! I read it all and pray a lot and do not want to go out of business. Re-adjusting; creative, wonderful customer service; and reading Kizer and Bender ALL THE TIME keep me focused and on track.

We continue to have staff meetings, conduct surveys, and talk to the customers to learn what they want and need. We try a major weekend event to make up for a slow day during the week – something old and something new. Check the website at www.scrapbookvillage.net (not a good one, but it will show you some of the different events).

Georganne [Bender] would tell you "we like food" and we have lots of it at every event. We just had a Fiesta, catered by a Mexican restaurant, and it sold out. We had a PiZata filled with scrapbook supplies, music, a crop, Fiesta bingo, and door prizes from leftover products. Cost us almost nothing and increased sales by four figures in one day. Fantastic for us.

Also, we've started to work with a local bed and breakfast for a scrappers weekend; we're already sold out for three weekends – and we haven't even started yet. Retreat weekends (separate from the b&b) bring in $12,000 just on registration, not counting the sales (another $10,000). We have them twice a year.

And each week I make contact with scrapbook clubs that are popping up everywhere in churches. I invite them to a free crop, offer a nice make-it/take-it, and refreshments – and give them a bounce-back coupon. My email list grows each time and I have at least two new ones a month. Word spreads and my business increases. Get them in the store and we all win.

This summer I serve lemonade and cookies; the men have a waiting area with a tv and a refrigerator with free drinks. (All ideas were taken from Kizer and Bender – great, aren't they!)

We also started a Bible study group and it is awesome. After hours, to not be disturbed, prayer-and-share scripture scrapbooking, and on and on.

My website is not the best, but the backroom tells me consumers are opening it often. My sight doesn't offer online sales, just information about the "happiest place to be."

Women need relationships and that is what we have building here, as always.

Oh, and we've raised our prices and no one has complained. – Bonnie Wilcome

(Note: Anyone else have positive news to report? Let CLN know what it is and how you achieved it. Email your thoughts to mike@clnonline.com. Rich Kizer and Georganne Bender's website is www.kizerandbender.com.)

In "Vinny Da Vendor" a manufacturer described how he had been approached by a retailer supposedly in Australia who wanted to place an order. Now the vendor reports he's receiving similar emails from "stores" in Japan and Spain. He traced one that originated from a server in Columbus, OH. Here's the latest example:

(Note: The spelling and punctuation are left as is.) "Hello, Our company name is MOORE INVESTMENT INC. We will like to order some of your products to our store in Tokyo Japan, Do you ship to Japan ? If NOT there is this courier service that have shipped for us before and their service is very good, fast, reliable and secured.But before we proceed with the order, we will like to know the type of credit card you accept in your company cos.our mode of payment will be via credit card. Have a wonderful day as we await your quick response."

Even CLN has been approached by scammers. This unedited email arrived last week: "Sales, Am Frank George from Germany,I browse through your contact and I found some interested items,I want to know if you can ship direct to germany or if you can ship to my freight forwarder in U.S, I also want to know the cost per product and if you do accept credit card payment e.g master card or visa card. I await your fast response so I can proceed with my needed items and quantity. Best Regards. Frank George."

Another recent scam: A "travel/event" company is contacting CHA members saying CHA's blocks of hotel rooms for the Anaheim show in February are sold out, but this company has rooms available, so make reservations with a credit card through this company.... Although CHA rooms are being snapped up more quickly than they were a year ago, plenty of rooms are still available at CHA-negotiated rates and on the CHA shuttle bus routes. To see the list of available rooms, visit www.chashow.org and click on "Show Info," then "Hotel & Travel."

ScrapBiz is offering a new program, PhotoBookBiz. The wholesale Photobook Biz program is supported by Visan Industries, the creators of Rocket Life (www.rocketlife.com). Visan provides the creative software plug-in, product printing, and fulfillment, while ScrapBiz provides the business support and marketing materials.

"The scrapbook industry has changed rapidly in the last five years," said ScrapBiz founder Kim Guymon. "Digital scrapbooking and photo books have become very popular ways to preserve your memories. The majority of scrapbookers have digital cameras and for some of them, it makes more sense to print a photo book rather than individual photos. Retailers in the traditional scrapbook industry have struggled to figure out how to capitalize on this trend. The PhotoBookBiz Program is that answer to that question."

Retailers can offer their customers photo products such as mugs, calendars, cards, and collages in addition to the photo books. "The plug-in or creative platform used to make these products is very user friendly yet innovative," said Guymon. "Visan's exclusive 'Smart Arrangement Technology' makes creating a beautiful product or book easy for anyone who knows how to click and drag."

Currently, the program is only available to ScrapBiz members but will be launched this October to all retailers in the scrapbook industry. Interested retailers may sign up at www.scrapbiz.com.

In January 2006, former Vice Chair of Wal-Mart Tom Coughlin pled guilty to five counts of wire fraud and one count of tax evasion. He had been accused of having employees manipulate employee-travel-reimbursement and vendor-invoice accounting systems to embezzle money, gift cards, and products for his personal benefit.

Although he pled guilty to six felony charges, Coughlin was sentenced to five years' probation, with 27 of the months on home detention, plus 1,500 hours of community service. He was also ordered to pay a $50,000 fine, $306,822. 40 in restitution to Wal-Mart, and $104,395.60 to the IRS.

Wal-Mart, understandably, voided Coughlin's retirement package worth $17 million, since he had pled guilty of misappropriating hundreds of thousands of company dollars and caused a public relations nightmare.

Coughlin sued and recently settled with the company. Now he will only receive $6.75 million, according to the Northwest Arkansas News. (Comment. Sure glad the IRS got that extra 60 cents. Now we don't have to worry about the federal deficit.)

It is kinda frustrating to see chains increasing deductions from vendor compliance with no proof to validate their claims. They will just deduct regardless. I started seeing vendor compliance deductions from a chain we have been doing business with for a long time using the same routing guide. I see a drop in sales reports, and I could not help thinking, is this a way to maybe get something to offset the drop in sales?

I wonder if they ever read about the lawsuit with a well known chain of stores regarding chargebacks. I just wish there were rules to govern these types of invalid deductions. – Name Withheld

1. A book publisher is looking for industry companies who have gone "green." CLN has profiled the efforts of some companies – Duncan, Walnut Hollow, Plaid, and Mrs. Grossman's, to name a few. But I hope there are others, too. If your business has gone green, let me know and I'll pass along the info to the publisher.

2. The Martha Stewart products are in Wal-Mart now, and the retailer's approach is much different than the way Michaels merchandises her products. There is no special sign, and the products are not grouped together; some are in the wedding aisle and others are in scrapbooking. It does not appear that Wal-Mart expanded its overall craft department to add Martha's goodies, which means some vendors probably lost space to make room. But like the products in Michaels, Martha's SKU's seem pricey.

3. For independents who think it's probably easier to operate a chain rather than an individual store, look at the list of recent retail bankruptcies: Boscov's, Mervyns, Steve & Barry's, Linens 'n Things, and Sharper Image.

4. As the economy stalls, some retailers are adding seemingly unusual product lines to their inventory, thinking gas-conscious consumers will do more one-store shopping. Best Buy has started selling musical instruments, Walgreens added a clothing line, and Menards is selling frozen pizza. Makes you wonder if non-industry stores out there might, for the first time, be interested in selling scrapbook and kids craft supplies.

AWARDS. At Michaels' recent 12th annual CEO Summit, the company gave Vendor Partnership of the Year awards to Crayola, Horizon Group USA, and me & my BIG ideas. Carrier of the Year awards were given to APL Limited and Con-way Truckload.

CORRECTION. The previous issue quoted a retailer who said she was told by a Hobby Lobby manager that the chain was discontinuing single sheets of cardstock and printed paper. Not true, HL's Randy Green told CLN. "In fact, our stores are just now receiving many new styles that we are excited about and believe that our customers will be, too," Randy said.

GOOD WORKS. Family Circle's Sept. issue profiled Linda Swinford, who started Operation Helmet Liner – volunteers knitting helmet liners for U.S. soldiers fighting in the Afghan/Iraq winter, and neck coolers for the summer. The operation has shipped 60,000+ items to soldiers. For more info, including the pattern for the correct size helmet liner, visit www.geocities.com/helmetliner.

NEEDLEWORK. Sept. 10 is the deadline for applications to host an intern in The National NeedleArts Assn.'s Pathways into Professional Needlearts program. Visit www.tnna.org.

WEARABLE ART. Technology has hit the category. The shoe company, Keds, will make a custom pair of shoes for customers who have uploaded photos and images and chosen from a selection of patterns and colors at www.keds.com. ... A new store, Fashionology L.A. opened in Beverly Hills this summer. It's an interactive make-your-own clothing shop designed for teen and tween girls who use a touch-screen display to choose illustrations, crystals, pins, chains, etc., for sweatshirts, t-shirts, and even dresses. Then the item is made for the customer in the store while she waits. Visit www.fashionologyla.com.

SHOWS. Interweave Press' Bead Fest in Philadelphia last month had a unique feature, a "Bead Slam" in which entrants had five hours and a room full of beads to create a piece of jewelry, while the audience cheered them on. The first 100 projects were critiqued for technique and creativity by judges, and the 20 finalists advanced to the final round. There were prizes for the top three winners, and the first prize winner, Diane Worthington, will be featured in the 2008 Bead Star magazine. The "Bead Slam" was sponsored by Fire Mountain Gems and Beadalon.

PEOPLE. Jerry Bowman was promoted from VP of Sales to President of Spellbinders Paper Arts. Prior to Spellbinders he worked for Bazzill Basics Paper and Xyron. In 2006 Jerry founded the Christian Missions & Outreach (www.cmo-info.org), a non-profit foundation that builds/manages orphanages and supports prison and homeless ministries in Guadalajara, Mexico. MARTHA. Martha Stewart Living Omnimedia announced most U.S. and Canadian Wal-Mart stores are now selling Martha's scrapbooks, jewelry-making kits and other craft products – almost 400 SKU's. Martha continues to expand her licensing deals because her largest deal, towels and other home products at Sears/Kmart, expires in 2010, and guaranteed royalty payments from that deal fall from $65 million this year to an estimated $20 million next year, the Wall Street Journal reported.

AUDIO. Knitting out Loud has released two new audio books, KnitKnit: Profiles + Projects From Knitting's New Wave by Sabrina Gschwandtner read by the author, and Knitting Lessons: Tales From the Knitting Path by Lela Nargi read by Julia Olson. Interweave Press will distribute the books. For more info, visit www.knittingoutloud.com and www.interweave.com/books/default.asp.

WORKSHOPS. CHA extended the deadline for sponsoring a workshop at the Winter Show until this Fri., Sept. 5. Visit www.chashow.org to download the application form. For more info, email Avery Dykman at adykman@craftandhobby.org or call 201-835-1204.

REPS NEEDED. A manufacturer of embellishments for paper crafting needs reps in Northern CA, UT, AZ, CO, WY, KS, Northeast U.S. Email mchiu@creativecharms.com.

STOCKS. A.C. Moore: $8.08, up $0.01 ... Jo-Ann: $24.15, up $2.38 ... Wal-Mart: $59.37, up $1.62 ... Dow Jones: 11,659.90, up 2.9%. CLN will now resume reporting on Hancock's stock now that the company has emerged from bankruptcy. The stock trades under the symbol HKFI and closed Friday at $1.45. (Note: All changes in price are since 8/15 and are exclusive of dividends.)

To see the latest listings by the only personnel recruitment firm specializing in our industry, click on Jobs in the left-hand column or click HERE.

Law of Biomechanics: The severity of the itch is inversely proportional to the reach.

Law of the Theater: At any event, the people whose seats are furthest from the aisle arrive last.

The Starbucks Law: As soon as you sit down to a cup of hot coffee, your boss will ask you to do something which will last until the coffee is cold.

Murphy's Law of Lockers: If there are only two people in a locker room, they will have adjacent lockers.

Law of Physical Surfaces: The chances of an open-faced jelly sandwich landing face down on a floor covering are directly correlated to the newness and cost of the carpet/rug.

Law of Logical Argument: Anything's possible if you don't know what you're talking about.

Brown's Law of Physical Appearance: If the shoe fits, it's ugly.

Oliver's Law of Public Speaking: A closed mouth gathers no feet.

Wilson's Law of Commercial Marketing Strategy: As soon as you find a product that you really like, they will stop making it.

Doctor' Law: If you don't feel well, make an appointment to go to the doctor, and by the time you get there you'll feel better. Don't make an appointment and you'll stay sick.

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