Frayed Around the Edges : House of Fabrics: Earnings and stock prices are way down for sewing-notions retailer. And the slump shows no signs of ending.

Wild swings in the stock market usually bring to mind biotechnology, computers, real estate companies or other speculative shares. But home sewing?

Few stocks in the past two years have had the roller-coaster ride of House of Fabrics Inc., which is in a close race with Fabri-Centers of America Inc. to be the nation’s largest retailer of fabrics, sewing notions and craft materials. House of Fabrics, based in Sherman Oaks, runs 695 stores, a quarter of them in California.

House of Fabrics’ stock, after soaring to $41 a share in 1991 (adjusted for a 2-for-1 split that year) on the strength of the company’s swelling earnings, then dropped like a stone during 1992 as the company’s earnings collapsed. The stock closed Monday at $10.50 a share in New York Stock Exchange composite trading.

The company’s profits got hammered as the recession, particularly in California, took hold. Ironically, House of Fabrics was always thought to be recession resistant--the idea was that women would sew more of their clothes to save cash. But the current downturn and an abundance of low-priced, ready-to-wear clothing has disproved that theorem.

“We’ve known, for several years now, it’s not as resistant as in the old days,” said Gary Larkins, the company’s 50-year-old president and chief executive.

So House of Fabrics has been forced to slash prices to move its bloated inventories out the door. That helped send its fiscal 1993 (ended Jan. 31) profit plunging to $5.2 million from $19.7 million the prior year. This despite a 13% sales gain, to $557.5 million.

One investor that apparently saw the slump coming was FMR Corp., parent of the giant Fidelity group of mutual funds. A 17% equity holder in House of Fabrics in late 1990, FMR began bailing out and had cut its stake in half a year later. FMR, which now owns less than 7%, declined comment.

The other main factors in House of Fabrics’ sliding profits are the company’s ongoing conversion of its stores and its digestion of Fabricland Inc., an 84-store chain in the Pacific Northwest that House of Fabrics bought for $55 million in stock in mid-1991.

In the conversion, House of Fabrics is opening “superstores” of 10,000 to 12,000 square feet while closing its conventional 4,500-square-foot mall stores. The move is increasing its sales per store--to $802,160 in 1992 from $517,600 four years ago--but it also requires lots of up-front costs for additional inventory, grand-opening advertising and extra workers.

Those new stores accounted for House of Fabrics’ overall sales gain in 1992, because its “same-store sales”--those of stores open at least one year--fell 1% from the prior year.

Larkins, bowing to the recession, is slowing the conversions this year to limit costs. About 25 to 30 new superstores are scheduled to open, down from 84 in 1992. That would mean about 90% of House of Fabrics outlets will be the bigger stores.

About 60 of its mall stores will simultaneously be closed this year, about the same as in 1992. But as the store conversions happen, the company’s number of employees will grow--House of Fabrics now employs 17,000 people.

Otherwise, Larkins sounds unruffled. “We had a difficult year, but we still made $5 million,” he shrugged. “It’s not like we lost money.”

He also said the recession and the pressures on House of Fabrics’ earnings aren’t likely to dissipate soon. “It’s going to be tough sledding in 1993, we don’t kid ourselves about that,” he said.

Jennifer Groves, an analyst at the brokerage firm Black & Co. in Portland, Ore., said she “would not expect to see the company turn around until the second half of the year.” But as for the erosion of House of Fabrics’ profit, “we’ve probably seen the worst of it,” she said.

Nonetheless, Groves said House of Fabrics and its rivals must better understand what products their customers want. That means the companies will have to adjust their product mixes, although she’s not sure in which direction. Fabric now accounts for about 48% of House of Fabric’s sales, followed by notions and accessories at 31% and crafts at 14%.

“The whole industry has been archaically managed,” she said, with many chains merely giving customers a huge selection. Selection is important, she said, but added: “Now, with so many competitors, you really have to be focused, know your customer and be a merchant.”

For now, Larkins said, “we’re going to continue to cut prices, as long as this recession is going. There’s a clear signal from the consumer that they’re buying when things are on sale, and they’re not buying when things are not on sale.”

House of Fabrics isn’t the only one struggling. Its two major publicly held rivals, Fabri-Centers of America (700 stores) and Hancock Fabrics Inc. (482) also have seen their earnings and stock prices fall sharply during the past 18 months. Hancock, a 32-state chain based in Tupelo, Miss., suffered a 4.9% drop in same-store sales last year.

Larry Kirk, Hancock’s chief financial officer, said that with the exception of severe price cuts on closed-out goods, his company strives to consistently keep prices at low levels as opposed to House of Fabrics’ periodic use of 50%-off sales for goods that normally carry “high markups.”

House of Fabrics isn’t “selling anything unless it’s on sale, which indicates to us there’s a lack of confidence from the customer in their initial pricing,” Kirk said. Translation: Some customers stay away from House of Fabrics until the next sale.

Larkins said the price-cutting “hurts your earnings, certainly, but it’s the right answer. We would prefer to cut prices if necessary and move product and retain our customers than have them go elsewhere to shop.”

How that pricing difference plays out in Southern California could become clearer in the months to come, because Hancock is planning to add fabric stores in the region. Currently, it has a handful in cities such as Lancaster, Riverside and Rancho Cucamonga that operate under the name Hancock Fabric Warehouse.

The strategy could also soon take on added importance because there’s agreement in the industry that, in places such as Southern California, there are more fabric stores than needed and that a shakeout is inevitable.

“There’s too many stores trying to share a demand in home-sewing products that’s not going up nearly as fast as the number of stores,” said Hancock’s Kirk, adding that the industry’s conversion to giant-size stores only exacerbates the problem. “We’re fighting over the same bone.”

Meantime, the chains are still grappling with the recession. Besides the problems in California, Larkins said that the northeastern states are also soft and that there are indications that the Pacific Northwest “is starting to slow down.” (In the Northwest, House of Fabrics retained the Fabricland name.)

But Larkins has no regrets about buying Fabricland.

“It was and still is a very sound chain,” he said. “There will be a day when it will throw off significant profits for us.”