A.C. Moore crafting a turnaround

On its face, yesterday's news that A.C. Moore Arts & Crafts Inc. would close a batch of stores may have seemed like just another retail retrenchment during what some call a recessionary downturn.

But to analysts closely watching the $560 million chain of craft stores based in Berlin, N.J., the announcement was a sign that better days are ahead for the company that sells beads, scrapbooks, frames and glue guns to consumers up and down the East Coast in what some say is a recession-proof retail sector: hobbies.

The store closings are part of an overhaul strategy of executives assembled by president and chief executive officer Rick Lepley, who swept in 18 months ago when profits were negative and Jack Parker retired as chief executive of the company he founded in 1985.

The company's stock has lost two-thirds of its value over the last 12 months, even though the nation's $31.8 billion craft and hobby market is a realm where hobbyists tend to continue spending even during recessions.

Analysts said they were heartened to learn that Lepley's team was closing up to 10 of its 139 stores and moving to expand its massive distribution and warehouse hub in South Jersey. Lepley's folks also have shed loads of unsold inventory and begun improving how shelves are stocked, putting those decisions in the brains of computers rather than the hands of humans.

"A lot of what A.C. Moore has done over the past year is similar to what Michael's did about five or six years ago," retail analyst Holly Guthrie of Philadelphia's Janney Montgomery Scott L.L.C. said, referring to the $3.8 billion hobby-market leader.

It took the Michael's chain about three years to overhaul its massive craft-store business. A.C. Moore, which was founded as a single store in Moorestown and went public in 1997, appears to be a late bloomer.

"Give new management credit," Guthrie said. "We're probably about two years into the turnaround."

Analyst William A. Armstrong, with C.L. King & Associates in New York, said the new management team had been aggressively tackling inherited problems.

"The stores, and especially the supply-chain infrastructure, had really been neglected by the prior management team for a long time," Armstrong said. "Sales per store went from something like $6 million in 2002 to $4.5 million last year."

The company plans to close between seven and 10 unprofitable stores this year and open fewer new ones than originally planned - as few as eight instead of as many as 14.

Earlier this year, Lepley and his executives launched the beginning of a massive computerized inventory-systems overhaul that will help stores track merchandise and restock the hottest sellers quickly rather than leaving shelves bare because of human error.

"Our company is very much behind the curve in retail in employing state-of-the-art systems," Lepley said in an interview yesterday.

All of this is intended to boost profitability for a company that has managed to grow rather steadily, while watching profits diminish.

The company's net sales were $434 million in 2003 and rose to $590 million by the end of 2006. During that period of growth, however, annual net income dropped from $16 million profit in 2003 to a loss of $406,000 in 2006.

It was during that year that Lepley was brought on board. Lepley, 57, had been a high-ranking retail executive at Office Depot Inc. before joining A.C. Moore as chief executive in June 2006.

He eventually brought on chief financial officer Marc Katz, 43, formerly of Foot Locker Inc.; executive vice president of operations Joseph A. Jeffries, 42, formerly of Office Depot; senior vice president of merchandising and marketing Craig R. Davis, 55, formerly of Cracker Barrel Old Country Store Inc.; and general counsel Amy Rhoades, 36, formerly of the Blank Rome L.L.P. law firm.

There was no immediate relief. Net sales dropped to $559.7 million last year, and comparable store sales were down 10 percent - a sign that sales in stores open at least a year were way down. Net income, though, increased to $3.8 million.

Analysts said it takes time to reinvent unwieldy inventory systems. But Lepley and his new team seem positioned to make up ground.

"I think they'll get it done," Armstrong said.

Lepley said the new inventory system would be built out by next year, so that when merchandise sells, a computer will order more.

"I think that A.C. Moore stores historically have been run like independent stores as opposed to like a chain," Lepley said. "And that's a good thing from the standpoint of driving sales."

He added: "It's not always the best thing from the viewpoint of controlling costs."