Tie a string around your finger to remember to lure customers back to your store, A.C. Moore
Although CEO Rick Lepley says the arts-and-crafts retailer was laying "the foundation for improved profitability" by forgoing improving comps, it was only able to show better profits this quarter because it earned money on its cash in the bank. Without that, profits would have been flat, as revenue barely increased 2% in the quarter.
A.C. Moore was able to slightly decrease costs that allowed gross profits to increase by 110 basis points, but with selling, general, and administrative expenses 5% higher than last year (though representing a smaller increase as a percentage of sales), the retailer found consulting costs, stock options, and advertising eating into its operating profits. Since it also slowed down new store openings, it was able to cut those costs nearly in half. The quarter's performance had less to do with making A.C. Moore a store the crafty set wanted to go to and more with non-operational issues.
The hobby industry has been in a rough patch these days. Both Hancock Fabrics and The Rag Shop have declared bankruptcy, and Michaels Stores was taken private as a way to stay out of the glare of the public markets. Jo-Ann Stores
As one analyst noted in the recent Rag Shop bankruptcy, the arts-and-crafts store faced the fact that Wal-Mart offered 60% of Rag Shop's inventory at 30% lower prices. It's hard to compete in such an environment.
Will A.C. Moore end up going the way of Hancock Fabrics and Rag Shop? While bankruptcy doesn't seem to be a possibility, the company just might prove to be an attractive target for private equity. When Michaels was bought out, the $6 billion deal valued the retailer at around 1.5 times its enterprise value to revenue. A.C. Moore is currently valued at around 0.6 times its revenue, which mean it could be a cheap target for someone looking at a company trying to turn around.
Unlike Rag Shop, which was never able to get going, A.C. Moore has cleared out its inventory, is paying down its debt, and looks to be doing the things necessary to put a fresh foot forward. Still, it can't forgo getting customers back into its stores if it ever wants to be successful -- as either a public or private entity. It's something the arts-and-crafts retailer ought to remember.
For more on the arts and crafts companies, check out:
- Foolish Forecast: A.C. Moore Story Still Unraveling
- Jo-Ann Stores Redecorates
- A.C. Moore Takes Stock of Its Future
Fool contributor Rich Duprey owns shares of Wal-Mart, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.