Fabric ‘Superstores’ Sew Up Profits : Strategy: The chain completes its purchase of Fabricland and continues to reap earnings from its phase-out of mall outlets.
House of Fabrics, the conversion of its stores from mall outlets to larger fabric “superstores” in full swing, said its fiscal second-quarter earnings more than doubled from a year earlier on a 12% increase in sales.
The surge in profit--to $1.55 million from $703,000 a year earlier--reflects the fabric retailer’s ongoing phase-out of smaller shopping-center stores and the opening of more superstores, primarily in strip malls near regional shopping centers.
That conversion, under way for six years, was accelerated during the latest quarter by the company’s acquisition of Fabricland Inc., a Portland, Ore.-based operator of 83 warehouse-sized superstores in the Pacific Northwest. But the merger was not completed in time to significantly affect the company’s latest results, Gary L. Larkins, House of Fabrics’ president and chief executive, said in an interview.
“You’re talking about a company that has been putting out record earnings for the past year and a half,” Larkins said. “That’s because we are doing things right. The acquisition is kind of frosting on the cake.”
House of Fabrics, based in Sherman Oaks, said its second-quarter sales rose to $98.1 million from $87.4 million a year earlier. For the six months ended July 31, its profit jumped 72%, to a record $4.92 million from $2.86 million, and its six-month sales grew 15% to $199.3 million from $173.8 million.
“I had been expecting a good quarter but it was better than I anticipated,” said Marcia Aaron, an analyst with Montgomery Securities in San Francisco.
Investors also have taken notice. House of Fabrics’ stock price has doubled so far this year--closing Friday at $30.25 a share in New York Stock Exchange composite trading--after adjustment for a 2-for-1 split in April. (Financial markets were closed Monday in observance of Labor Day.)
Larkins said he expects the current fiscal year to be House of Fabrics’ best, in part because of cost savings related to the Fabricland deal.
He said 165 former Fabricland employees will be laid off by the end of September as House of Fabrics shuts down Fabricland’s corporate headquarters and processing plant in Portland. (A regional office in Portland will be set up under the direction of Tony Bosboom, Fabricland’s president, to service the company’s Northwestern stores).
The employees whose jobs will be cut are primarily assigned to the company’s accounting, data-processing and warehousing departments--operations that Larkins said would be duplicated by those of House of Fabrics. House of Fabrics plans to retain 2,200 other former Fabricland employees, he said.
The cuts also will help offset the greater-than-planned costs of acquiring Fabricland, Larkins said. In January, House of Fabrics launched a $13.50-per-share unsolicited cash tender offer for the company, valued overall at about $43.2 million, which was rejected by Fabricland as inadequate. A subsequent stock swap that resulted in the completed merger July 16 was valued at more than $58 million.
“When you acquire another company, particularly when you have to pay more than you like to pay, you have to look at closing the duplication items,” Larkins said.
The merger brings to 428 the number of superstores owned by House of Fabrics, compared to 305 a year ago, Larkins said. Earlier, during the first half of its current fiscal year, the company opened 15 of the 40 superstores it plans to open before the Jan. 31 end of the fiscal year, Larkins said.
At the same time, it closed 37 mall locations out of a total of 60 closings planned this fiscal year.
What’s the appeal of the big stores? The superstores average 10,000 to 12,000 square feet each, compared to about 4,500 square feet for mall stores, and they offer a greater variety of products that produce higher sales, Larkins said.
Analyst Aaron said the superstores also attract a more serious type of customer than do the mall stores.
“I think it offers the customer a better assortment of products, which means getting a customer who is a serious sewer as opposed to someone who wants to replace a button or do a hem,” she said. “You’re getting a customer that will spend more money in your store, so profits can be four or five times what they can get in a mall store.”
And with more space available, House of Fabrics stores can offer items for arts and crafts, upholstery and drapery in addition to their staple inventory of clothing fabric, Larkins said. About 50% of the company’s sales today come from clothing fabrics, compared to 80% in the mid-1970s, he added.
Besides offering greater selection, the superstores are also less costly to operate compared to mall stores because the rents tend to be lower and because there are few “common areas,” such as walkways, which mall stores must pay fees to maintain, Larkins said.
The cost of being in malls “continues to go up,” he said.
