Struggling to Measure Up : Retailing: Ailing House of Fabrics is hoping to turn itself around by shifting its focus from sewing to crafts and home decorating. A prototype store, reopened in Simi Valley after the quake, reports a climb in sales.
These are trying times for House of Fabrics Inc.
The once thriving enterprise, based in Sherman Oaks, started on a downward course in 1992 when the company’s earnings collapsed under the weight of the recession. Rumors of possible bankruptcy continue to surround it, leaving the financial and retailing communities wondering if the fabric retailer can turn itself around.
House of Fabrics is pinning its hopes on a new retailing concept to help solve its problems. At a handful of prototype stores, it is putting expanded emphasis on crafts and home decorating. The initial response has been positive.
At the same time, the firm is having to deal with the financial community’s skepticism. Bob Simonson, a financial analyst with Kemper Securities in Chicago, and one of the few remaining analysts to follow House of Fabrics’ stock, said the skepticism began to surface about a year ago.
“Confidence is such an important issue in remaining an ongoing concern. I just don’t know if they’re going to make it,” Simonson said.
House of Fabrics lost $29.5 million on sales of $546 million in the year ended Jan. 31. Last month, it reported an $11.6-million loss for its fiscal second quarter ended July 31 and a 15% decline in revenue from a year earlier, to $110 million. Its stock, which traded at $41 a share in 1991, adjusted for a 2-for-1 split that year, closed Monday at $2.375 a share.
The company’s predicament is so dire that it said it has asked landlords for a two-month moratorium on rents to the end of lease terms.
House of Fabrics’ troubles have prompted some drastic moves. To cut costs, the company last month announced it would close 200 of its 624 stores by Jan. 31. Earlier this month, four months after the company’s banks warned it of a possible default, it earned a reprieve when the banks agreed to waive existing and certain future defaults until Nov. 11, giving the company more time to pursue financial restructuring.
One hopeful sign was that in June, company executives reportedly bought just over 21,000 shares of House of Fabrics stock at average prices of $3.64 a share. Insider buying is generally viewed as a vote of confidence in a company.
On Monday, the company said it had entered into an agreement with a private investment partnership that would raise much-needed capital. Under the agreement, subject to a number of closing conditions, Levine Leichtman Capital Partners would purchase $20 million in subordinated notes, and receive warrants enabling it to possibly buy up to 35% of House of Fabrics’ common stock at $1 per share.
House of Fabrics is also working with the Finley Group, a turnaround consulting firm based in Charlotte, N.C., and is writing a new business plan to present to its banking group.
House of Fabrics President Gary L. Larkins said the company would not say which stores make up the 200 to be closed. The company is generally targeting mall stores and some of less profitable “superstores,” primarily in the Midwest and Northeast, where House of Fabrics has strong competition. It is also liquidating inventory to lower its bank debt, which stood at $129.9 million as of Aug. 1.
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House of Fabrics’ vendors are apparently remaining steadfast. Bill Gardner, editor of the industry publication, Craftrends, listened in on a conference call between Larkins and suppliers shortly after the company announced its plans to close stores.
Gardner said the vendors, without prompting, expressed support for the company. Most said they would continue shipping to the retailer, even though some hadn’t been paid for as long as five months. “House of Fabrics has been honest and upfront with vendors and they appreciate it,” said Gardner. “Because of the people involved, they’re sticking with them.”
The turmoil at House of Fabrics stems from social change, shifts in the apparel business, and the recession. With the increase in working women, fewer people sew their own clothes, especially with the abundance of low-priced, ready-to-wear clothing that has saturated the market in recent years. The sour economy, particularly in California where House of Fabrics has most of its outlets, plus the Jan. 17 earthquake, put further pressure on the company.
While House of Fabrics is the weakest of the major players in the estimated $4 billion-a-year fabric retailing industry, key competitors Fabri-Centers of America of Hudson, Ohio, and Hancock Fabrics of Tupelo, Miss., have also seen their profits slip because of changing consumer habits. The industry is also dealing with a massive hangover from over-expansion in the 1980s. Today, there are too many stores vying for the business of too few home sewing customers.
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If it gets its financial house in order, House of Fabrics is hoping that its new crafts and home decorating emphasis will be its salvation. Last year, the company hired Doyle W. Parker, a former Wal-Mart craft buyer, to head its craft buying. It launched four prototype stores--dubbed “Creative Centers”--at former fabric superstores in Valencia, Simi Valley, Torrance and Temecula. The company will convert four more of its stores--which carry a trimmed-down line of fabrics--in the next 60 days, Larkins said. If all goes well, it hopes to have another 20 such outlets in the near future.
House of Fabrics has sold crafts at its outlets since the early 1980s, but it believes this merchandise can make up a greater portion of total sales because of the public’s rising interest in crafts and home decorating. In the fiscal year ended Jan. 31, crafts represented about 15% of House of Fabrics’ sales, but Larkins believes that share can rise to between 20% and 25%.
The House of Fabrics prototype store in Simi Valley is a 24,000-square-foot showroom featuring a huge selection of craft items, such as baskets, artificial flowers, pillows, needle craft, dolls and figurines, plus fabric for home sewing and decorating. Before the earthquake, the location was a House of Fabrics superstore. It was damaged by the Jan. 17 temblor and reopened five months later as one of the new concept stores.
The Simi Valley store manager, Christie McAdams, said sales at that prototype store have been climbing since then--up 62% in June, 50% in July and 21% in August. “We’re getting more and more crafts customers,” she said.
The Hobby Industry Assn. in Elmwood Park, N.J. estimates total crafts industry retail sales in 1993 at $9.6 billion. For the past four years, despite the recession, the industry has registered healthy annual increases.
But the question remains if House of Fabrics can solve its financial problems in time to introduce its crafts concept systemwide.
“The future of the company is currently in the hands of the bank and the vendors,” concluded Craftrends publisher Michael Hartnett.
