Jo-Ann Stores' Crafty Growth Strategy
By Amy Tsao
2002 was no banner year for retailers. But egged on by the "nesting" trend, the stock prices of companies that provide craft and hobby supplies had a spectacular run. Tops in the bunch: Jo-Ann Stores, best known as a fabric retailer. It led all issues on the New York Stock Exchange last year, with its class A voting shares (JASa ) jumping 227% from the start of 2002 to close on January. 13, 2003, at $24.98.
With that kind of performance, Jo-Ann (the name is a combination of the founders' two daughters Joan and Jackie Ann) did something right in the tough retailing environment and lackluster economy. Investors bid up the stock, thanks to the strides Jo-Ann made on a turnaround plan and consumers' swelling interest in home-focused activities. Martha Stewart popularized crafting in the '90s, and the September 11 terrorist attacks helped turned Americans into busy homebodies. More than a year later, the trend shows little sign of abating.
After Jo-Ann's stock more than doubled from $10 at the start of 2002, investors shouldn't expect it to come close to a similar run-up this year, says Jenny Hubbard, analyst at Avondale Partners. But for those with a long-term perspective, the retailer still has great potential for growth. Hubbard recommends the stock even though she thinks 2003 will be a transition year.
"Until they get more of their [bigger] stores running, [the stock likely] will stay in the low to high $20 range." If Jo-Ann's strategy works, however, which seems realistic at this point, shares could hit the high $30 range over the long-term. Avondale may provide banking services to Jo-Ann.
The chain is making an interesting bet. Instead of increasing its store base, which is a retailer's main vehicle for growing, it's replacing most of its fabric-focused stores with larger ones that sell craft supplies and floral and framing products, along with fabrics. Overall store footage will have grown 1% to 2% in the last fiscal year and will be in the ballpark of 3% to 4% this fiscal year, says Jo-Ann CEO Alan Rosskamm. So far, the outfit has changed more than 72 stores of a total of 940 to the larger format, which it calls Jo-Ann etc. It plans to open 20 of these superstores over 2003, and analysts expect 40 to 50 new stores in the 2004.
Rosskamm says over the next several years he can replace 600 to 700 locations with superstores. The earliest of these were 45,000 square feet and turned out to be too big, but the current format of around 35,000 square feet is yielding more attractive returns. These stores generate sales of $5 million to $6 million. The traditional stores, which carried mainly fabric and a small offering of crafts, are about 14,000 to 17,000 square feet and generate about $1.4 million in sales each. Rosskamm says the bigger stores generate $150 in sales per square foot while the smaller ones bring in about $99 per square foot.
Jo-Ann, which reported a loss of 81 cents per share on $1.57 billion in sales in the fiscal year ended February, 2002, recently raised its earnings guidance for the 2003 fiscal year. Still, Jo-Ann is working its way out of a rough patch. In the late 1990s, profits slipped as it digested a string of acquisitions. Around the same time, its transition to a new supply-chain-management system damaged its ability to keep track of inventories. To recover, Jo-Ann embarked on a turnaround plan that included closing 148 underperforming stores over the last two years.
Lowering debt levels was a high priority of the plan. In 1998, after bingeing on debt-funded acquisitions, Jo-Ann was left with a high debt-to-total-capital ratio of around 50%, says David Rodgers, analyst with McDonald Investments. That ratio is still high at 35%, but he expects Jo-Ann to ratchet it down to 25% by fiscal yearend. "They're paying down debt and generating free cash flow. This allows them to be self-funding," Rodgers says. His firm expects to receive fees from Jo-Ann this year.
Record levels of home-buying should continue to bolster retailers that sell supplies for do-it-yourself crafts and sewing projects. Over the past two years, shares in Jo-Ann, No. 1 crafts chain Michaels Stores (MIK ), A.C. Moore Arts & Crafts (ACMR ), and Hancock Fabrics (HKF ) all gained upwards of 200%, while the S&P 500-stock index has declined more than 30%.
Baby boomers, who are beginning to retire in record numbers, are expected to drive market growth. Jan Davison McCullagh, a former telecom executive who's now retired in Laurel, Md., started sewing at age seven when her mother gave her a doll sewing kit. "It was very creative, relaxing, and a great way to save money." She was an avid sewer until the demands of work and raising four children took all of her free time. Now that she's retired, she's happy to return to hobbies like gardening and sewing.
Boomers, however, aren't the only ones interested. Erin Kiefer, 27, says she started sewing about a year ago. "The excitement is in being creative and making something on your own, and having a finished product to be proud of," she says. The Brooklyn (N.Y.) interactive media planner has plenty of designer clothes and store-bought home furnishings, but she has been making time to sew, too. Other frequent visitors to the stores include mothers with young children, who pick out items not just for themselves but for their kids, too.
Jo-Ann will increasingly compete more directly with the crafts-only retailers, says Laura Richardson, analyst at Adams, Harkness & Hill. However, she adds that all players should keep gaining ground since the crafts market is still highly fragmented. Michaels has about a 12% share, Jo-Ann has just 3%, and the rest belongs to small businesses. In the 12-month period ending in September, crafts and sewing was a $27.5 billion industry, up 18% from $23.2 billion in year-ago period, according to the Hobby Industry Assn.
Despite Jo-Ann's stunning 2002 performance, some investors think stronger short-term gains are still possible. Christmas sales at Jo-Ann outpaced those at most retailers, so in early January, it raised guidance for its 2003 fiscal year by 15 cents, to a range of $2.15 to $2.25 per diluted share, or $43 million to $45 million. "They're getting good numbers from fixing what they've got," says Allen Klee, portfolio manager at First Investors.
At 10 times the current fiscal year's earnings per share estimates of $2.47, the stock may still have more room to run, says Klee. He began buying shares of Jo-Ann in October and recently added more to his position at the end of December for about $23 a share.
Crafting is proving to have mass appeal -- regardless of the health of the economy. "There's a misimpression of people in this group," Rosskamm says. "The idea that they sew to save money is not true. It's a passion where they get gratification from the activity." Plus, it's "pretty inexpensive entertainment," he adds. Ultimately, that bodes well for retailers like Jo-Ann, even after turning in a stellar performance in 2002.
Tsao covers financial markets for BusinessWeek Online in New York
Edited by Beth Belton
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