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Art of the craft industry

Michaels stores as well as others find do-it-yourself market profitable

Knight Ridder Newspapers

CEO Michael Rouleau, who had a varied retail career before joining Michaels Stores, plans to increase the average store's sales to $5 million a year by 2006.

By Maria Halkias

The Dallas Morning News

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Michael Rouleau didn't have a hand in starting up Michaels Stores Inc., but six years ago he decided that he could give the arts and crafts retail chain a future.

When he got the offer in 1996 to become chief executive of the struggling Irving, Texas-based company, Rouleau phoned friends and family from coast to coast with the same question. "I asked them if they'd ever heard of Michaels," he said. "Over and over they said, 'Oh yeah, I love that store.'"

Then he visited "a Michaels store (in Winston Salem, N.C.) for a whole week. I saw lots of customers, the lines backed up and service was awful," Rouleau said. "OK, so the customers love us and we're awful. I could do this."

Analysts say he has, and the company is now the nation's dominant craft chain.

"They're beyond the turnaround stage," said Dennis Telzrow, a retail analyst at Stephens Inc. "Their numbers are pretty positive in this environment especially."

Michaels reported in August that it more than tripled second quarter net income and posted earnings that beat Wall Street estimates by 11 cents a share. Second quarter net income was $21.5 million for the period that ended Aug. 3 compared with net income of $4.7 million in the same period last year.

"Michaels Stores is knocking the cover off the ball," Merrill Lynch retail analyst Douglas Neviera said Aug. 27, the same day that his firm downgraded 16 other retail stocks over concerns about consumer spending.

Michaels is riding renewed consumer interest in arts and crafts. It's a bright spot in a retail industry that is suffering from a glut in stores and weary consumers.

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No category is recession proof, but "we're not going to stop someone from buying a car or paying the mortgage," Rouleau said. Michaels rings up $19 per average sale.

Regional chains such as MJDesigns, also based in Irving; A.C. Moore Arts &; Crafts Inc. in New Jersey; and as Oklahoma City-based Hobby Lobby, all say business is good.

At the same time, Jo-Ann Stores Inc., a fabric chain, is adding crafts to its sewing-based inventory.

"Results have been very good for us," said Brian Carney, chief financial officer of Ohio-based Jo-Ann. The growth in craft supplies has been a big factor in the chain's 16 months of same-store sales gains, he said.

Wal-Mart Stores Inc. also is stocking more craft products, such as silk flowers and dried flowers, and captured a huge slice of the business. Discount chains accounted for 24 percent of craft industry sales last year.

The whole category is getting a boost from the growing number of craft magazines and books, decorating periodicals and cable television channels such as HGTV and DIY. BBC America's big hit, "Trading Places," which focuses on room remodeling projects, is giving viewers courage and ideas, craft industry executives said.

Television programming "has done a lot toward taking away any apprehensions that people might have about do-it-yourself projects," said Lea Cavender, chief executive officer of E-Z Bowz. LLC. The Tennessee-based company, which Cavender founded in 1993 with her E-Z BowMaker invention, reported $4 million in sales last year. The company is a Michaels supplier.

Cavender said the craft business is also booming because "people want their homes to be a reflection of their families."

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"You don't just put your children's drawings on the refrigerator with a magnet. Now you have them professionally frame them at Michaels and hang them around the house," Cavender said.

Rouleau said that when he took the reins, Michaels wasn't good at keeping products in stock, and inventory wasn't consistent from store to store. "We're a lot more interesting store now," he said.

"When Michael came to Dallas to interview, he basically told us then what needed to be done to make Michaels a top U.S. retailer. And he told us he was sure that he was the person for the job," said Michaels chairman Charles J. Wyly Jr.

Michaels dominates the craft marketplace with 734 Michaels stores in 48 states and 148 Aaron Brothers framing stores. The company also is enthusiastic about its new Star Decorators Warehouse, a wholesale operation for wedding and event planners, decorators, retail florists and gift shops, hotels and restaurants.

The first Star store, which isn't open to the public, is at Stemmons Freeway and Mockingbird Lane in Dallas. Duane Hiemenz, Michaels' senior vice president for new ventures, says plans are in the works for a second one in a yet to be disclosed major market.

Michaels also is developing a small-store concept called Village Craft. These stores would be about half the size of the typical Michaels and are being designed to serve cities with populations under 100,000.

"We're having fun and everyone else is scrambling for their lives," Rouleau said. "They're on the defensive and we're on the offensive."

Rouleau, 64, had a storied retail career before coming to Michaels. He was one of the first 23 hires at the original Target, where he stayed for 20 years. Rouleau then co-founded Office Warehouse, which later merged with Office Max. He was running Lowe's Companies contractor division when he got the call from Michaels in 1996.

Rouleau said it was a risky offer. In retail, he said, turnaround attempts are ubiquitous but are rarely successful.

In Rouleau's first year, Michaels' average sales per store were $2.9 million, which is low for the industry. Last year, they were $3.7 million per store.

"What's really going to make me excited is when our average Michaels stores sales reach $5 million," Rouleau said. His on-the-record prediction is that the company will reach that goal by 2006.

In fact, he's staking his career on it: "At my age," he said, "I don't want my last job to be my worst."

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