The news is pretty grim at Jo-Ann Stores (NYSE:JAS). A banner fiscal 2005 encouraged the fabric and crafts retailer to invest in a lot of new "superstores," which have absolutely clobbered the firm in just-completed fiscal 2006.

The increased costs associated with those stores are part one of the problem. Part two is that the sewing market is in one of its periodic swoons, and as Jo-Ann has branched further into crafts, it's found itself competing with the likes of Michaels Stores (NYSE:MIK), Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and AC Moore (NASDAQ:ACMR), instead of just Hancock Fabrics (NYSE:HKF).

These two pressures combined to squash nearly 2% out of gross margins. Overall, sales didn't look too crummy, but their 3.9% increase for the year, on a 0.8% comps decline, was not enough to keep the ill effects of negative leverage from plunging the firm into trouble. The net loss for the year was $1.01 per share, though $1.19 of that came from a goodwill impairment. Might as well take the big bath now, when no one expects much good news, I guess; the bad news here has been piling up for months.

The firm has cut back its expansion, will be aggressively working down inventory, and has warned that, as a result, margins will remain under pressure for the first half of the coming year. Jo-Ann has been seeking a new CEO for weeks now; longtime chairman and CEO Alan Rosskamm recently said that he will step aside nearly completely, retaining only a board position. He scuttled a plan to remain as chair because he figured his absence would help attract better CEO candidates, giving any newcomer greater freedom.

Little details like that have me interested in this stock as a value play. Don't get me wrong: Jo-Ann is stinking it up big time, with no certain fix in sight. But on the other hand, new distribution centers should reduce costs if done right, and the company is currently valued at slightly more than 25% of revenues. That's getting toward "going out of business" cheap, and I have a hard time believing that's Jo-Ann's fate. I see nothing here that can't be fixed.

Value investors with the capacity to handle a bit of risk would do well to take a hard look at these shares. If Jo-Ann can turn things around and work toward the couple of bucks a share it earned in 2003, 2004, and 2005, the share price will doubtlessly make an equally healthy comeback.

For further Foolishness, see Jo-Ann's Q4 and FY 2006 by the numbers.

Turnaround possibilities like Jo-Ann Stores are always on the "hmmm" list at Motley Fool Inside Value . Take a look at companies that have already made the cut with a free guest pass.

Seth Jayson often sets foot in his local Jo-Ann store. At the time of publication, he had positions in no company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.