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HAWTHORNE, NJ-Fresh from its September buyout of Rag Shops Inc., Sun Capital Partners put two of its turnaround chiefs in charge of repositioning this brand from the ground up. Tom Souza moves from his post as CEO of Sun Capital’s Mirage Stores to take the same title at the locally based crafts chain. And Susan Boklas, most recently CFO of Anchor Blue apparel stores, another Sun Capital company, joins Sousa as Rag Shops’ new CFO.

Acknowledging that Rag Shops has been “pretty stagnant” for a decade, Souza calls it a “sleeping giant. The craft and home project areas are just exploding in popularity, and we are well positioned to take advantage of these trends,” he says. The first step is a new ad campaign by New York-based RowenWarren Inc., focused initially on redesigned newspaper inserts.

That is far from the last step. Souza calls the plans for rejuvenating the brand “sweeping.” The stores will maintain their focus on value pricing, but will gain a new brand and corporate identity design, improved store layout and customer service, an updated merchandise mix, and enhanced marketing, customer outreach and in-store promotions, according to Souza.

There are currently 70 Rag Shops stores in five states: New Jersey, New York, Pennsylvania, Connecticut and Florida. Souza promises more, although he declined to reveal the numbers, locations or the timing of new store openings, except to say he plans “to aggressively expand Rag Shops market presence through opening new stores in strategic locations.”

He would not say where or when, but told GSR, “We’re concentrating on turning the boat before we expand, but we have a new store prototype in development. Right now there are 70 stores and 70 prototypes. When we finalize the prototype, we’ll be ready to begin expansion.”

Souza also declined to tell the size of the prototype. Current stores range from about 10,000 sf to 20,000 sf, however.

While Rag Shops, founded in 1963, has languished, later entries have flourished. Its NJ-based neighbor, A.C. Moore Arts & Crafts, started with a single store in 1985 and now has 93 in the Eastern US. Its third-quarter sales rose 9.2% this year, and sales for the first nine months of the year rose 12.7%. This fall it suffered a roof-collapse at a distribution center, which caused delayed shipments and out-of-stocks that curtailed some promotions, but it continues to anticipate gains in the current quarter and full year.

Irving, TX-based Michaels, which claims to be the “world’s largest” in this field, operates 849 Michaels stores in 48 states, 164 Aaron Brown units, eight Recollections stores and three Star Wholesale units. It opened more than two dozen units in third-quarter and reported a record income-increase of 11% and a nine-month increase of 18%. November sales for Michaels, however, proved “disappointing.” Same-store sales decreased 3%, traffic dropped 2%, and the average ticket was flat, the company reported.

Jo-Ann Fabrics & Crafts, based in Hudson, OH, is another big contender in this market. It echoed the word “disappointing” in its third-quarter report. Net sales were up just 0.2%, and same-store sales dropped 0.9%. The culprit was reduced customer traffic. At the start of the year, there were 892 Jo-Ann units in 47 states. Of those, 806 were traditional, 14,400-sf units, and 86 were 45,000-sf superstore units. It has turned to a new 35,000-sf superstore format, which it is rolling out rapidly, often while closing traditional units.

Hobby Lobby, which started with a 300-sf store in Oklahoma City in 1972, now has 341 units in 27 states and projects sales of just over $1.4 billion this year. It added approximately 30 new stores this year and plans nine more in January alone.

“Rag Shops has been an under-performer forever, while its competitors are doing beautifully,” says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm based in New York. “It’s in a sector that’s growing like crazy and one that should continue to grow as people spend more time at home. The only questions are: Will the new management make the necessary investment and correct marketing decisions? Is it too late? Companies like A.C. Moore have exploded in this field? Can they all continue to grow, and how big?” Davidowitz asks.

The craft and hobby market is currently “in excess of $30 billion,” says Don Meyer, director of marketing for the Craft & Hobby Association. CHA conducts studies of the market every two years, and Meyer indicates that, according to previous CHA studies, the market grew approximately 11% between 2000 and 2001 and 12% between 2001 and 2002.

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