A Stitch in Time : House of Fabrics Seeks to Sew Up Bigger Share of Market With Super Stores

House of Fabrics, the nation’s largest chain of retail fabric and sewing stores, has been selling its products to industrious housewives since 1946. The company has grown from a single store on Wilshire Boulevard into a chain of 674 stores in 43 states with more than 10,000 employees. The company’s revenues have gone up every year, it has never reported a loss, and its investors have consistently received good dividends.

For all of that steady growth, however, House of Fabrics’ stock slept through the great bull market of the 1980s. While the stocks in many other American companies routinely doubled or tripled during the five-year-long bull market, House of Fabrics stock was trading at about $14 before the Oct. 19 stock market crash, down from the $26 level it traded at in December, 1982.

Part of the problem was that during fiscal 1986 House of Fabrics’ income plummeted more than 50%, mostly the result of a costly diversification into a chain of crafts stores. The company ended up closing or selling most of the crafts stores, while taking a $4.1-million pre-tax loss in the fiscal year ended January, 1987.

But the real worry for executives of the Sherman Oaks company was that their basic business was starting to slow because the number of people sewing at home was shrinking. The American Home Sewing Assn. in New York said that with more women in the work force, they were too busy, or too rich, to bother sewing.

And men weren’t picking up the slack. “I have never sewed anything in my life,” said House of Fabrics’ CEO and president, Gary Larkins. “I wouldn’t know how to begin.”

But in the midst of all these problems, executives saw a way out. In 1984, the company had opened some super stores, 10,000 to 24,000 square feet, that were up to six times the size of their average store. The super stores did well from the start, and Larkins realized that if the overall sewing market was shrinking, his company had no choice but to try to grab a bigger share of the fabrics business by opening bigger stores.

“We really believe there is plenty of room for us to grow and get a bigger piece of the pie. Our game plan to do that is the super store,” said Larkins.

The company now appears to be on the mend. It is opening about 60 super stores a year while closing 70 to 80 of its smaller shopping-mall outlets. As a result, analysts said, House of Fabrics has 10% of the $3.5-billion home sewing market, up a full percentage point in just two years.

For the third quarter ended Oct. 31, House of Fabrics reported record quarterly earnings of $4 million, or 61 cents a share, compared to 2.6 million, or 40 cents a share, a year earlier. Revenue was up slightly to $87.3 million from $86.2 million a year earlier. Larkins anticipates another record quarterly profit for the fourth quarter.

For the fiscal year ended January 31, 1987, House of Fabrics earned $6.2 million, or 94 cents a share, on revenue of $316 million.

Management has done such a good fix-it job that analysts think House of Fabrics may become a takeover candidate. The Sofro family, which founded the company, control only about 10% of House of Fabrics’ stock.

‘Target for Acquirer’

“In a year and a half, they’re going to become a target for an acquirer,” said Stephen Petersen, an analyst with Fidelity Management & Trust Co., a mutual and pension fund concern in Boston.

So far, Wall Street has paid scant attention to House of Fabrics’ turnaround. On Monday, the stock closed at $15.625 per share. But Fidelity has been buying up stock in House of Fabrics and now owns 784,700 shares, or 12%.

“The stock relative to the stock market is a very inexpensive stock to us,” said Petersen. “Over two years, I think the stock could be $25, assuming the market is reasonable.”

Another buyer of the stock is Myron Kaplan, a former member of House of Fabrics’ board who now owns 543,525 shares, or 8.3%. He declined to be interviewed.

In part, the company was moved to open super stores because the rent it was paying in shopping malls, where many of the House of Fabrics outlets were located, kept soaring. “It was becoming prohibitive,” said Larkins.

Lower Rent

The super stores are doing so well, Larkins said, because the company ends up paying a lower rent per square foot because its larger stores are not in shopping malls. The larger stores also require less advertising to draw customers, and the company can trim the number of employees it needs to run one large store compared to two smaller ones.

For instance, in North Hollywood, the company closed two of its stores--one in Laurel Plaza--and opened a super store. In just five months, the super store is doing 20% more in sales than the other two stores combined, and its profit is twice that of those stores, Larkins said.

Super stores also carry twice the selection of a traditional store. A typical super store has departments carrying sewing machines, quilt supplies, crafts and home decorating supplies in addition to a broader array of fabrics.

Sticking to basics has paid off much better than the company’s 1985 diversification into crafts stores. It acquired a chain of stores called Crafts Showcase. But they flopped and House of Fabrics had to shut down, or sell, all of the stores. “It was a mistake,” said Larkins. “The market wasn’t large enough to support a stand-alone crafts store,” said Petersen.