Rag Shops, Inc. Business Information, Profile, and History

History of Rag Shops, Inc.

Rag Shops, Inc. operates specialty retail stores that sell competitively priced craft and fabric merchandise to consumers who create decorative accessories and sew. Each store offers such craft items as silk flowers, wicker, picture frames, wood products, stitchery, yarn, wearable art, and art and craft supplies. Fabric items include apparel and home decorative fabrics, trimmings, patterns, and sewing notions. Rag Shops stores--known individually under the name "Rag Shop"&mdashe located in shopping centers; most are in New Jersey or Florida.

Rag Shops Through 1991

The company's origins go back to 1952, when Stanley Berenzweig founded a distribution business called Mobile Fabrics in his Paterson, New Jersey garage. In 1963 he opened his first Rag Shop retail store. A second fabric store had opened by 1980. There were nine in 1983, when Rag Shops added craft items to its product line, and 20 by the end of 1986. By this time crafts and related items had proven so successful that they accounted for about 45 percent of net sales.

Rag Shops' net sales grew from $19 million in fiscal 1987 (the year ended August 27, 1987) to $57.8 million in fiscal 1991, the year the company went public. Annual net income grew from $284,000 to $2.3 million over that period. The company collected $8.8 million in 1991 by the public sale of one-third of its common stock at $6.25 a share. At the end of the fiscal year there were 44 Rag Shops, of which 21 were in New Jersey, 13 in Florida, five in Pennsylvania, four in New York, and one in Maryland. The company's expansion strategy was to grow by expanding within areas from which it already was attracting customers and into contiguous areas, thereby capitalizing on preexisting advertising and name recognition.

Each Rag Shop store was offering about 15,000 fabric and crafts products in 1991. Custom picture framing also was offered in 33 of the stores. The company was selling a wide variety of seasonal merchandise, with special emphasis on the Easter, Halloween, Christmas, and back-to-school seasons. Through their purchases, customers could make many finished products for personal use, gifts, home beautification, and seasonal decoration. Fabrics, for example, could be made into career, leisure, children's, bridal, and special occasion fashions, or draperies, upholstery, and quilts for home use. The company's craft items could be used to create needlepoint and stitchery, personalized hand-painted apparel, floral arrangements, and dolls.

Rag Shops' marketing and merchandising strategy emphasized the sale of multiple products for use by the customers to create a single project. To assist customers in making their own selections and to encourage their purchase of several products, the company's stores displayed finished models incorporating a variety of merchandise in close proximity to where the components were sold. Each of Rag Shops' stores offered at least three craft or sewing classes every week. During each class, participants completed a project using materials purchased from the store at which the class was offered.

Rag Shops had a preferred-customer mailing list of about 540,000 persons to whom it sent direct-mail pieces at least 12 times a year, with a monthly calendar of promotions emphasizing special sale items, seasonal products, and other currently popular merchandise. Fashion shows held periodically at many of the company's stores also were an effective method of attracting customers and generating the purchase of fabrics, patterns, notions, and related merchandise necessary for the customer to create the featured apparel. These shows were later replaced by instructional demonstrations of merchandise held at the sites of charitable organizations, conventions, and schools.

Rag Shops was reported to be placing significant emphasis on home fabrics at this time because the recession was causing people to stay home more and redecorate. The company was planning to spend nearly $2.5 million during the year to promote this category through such means as direct-mail pieces, flyers, and twice-a-year storefront displays dedicated solely to decorative fabrics. Some stores were moving their home fabric departments to the front, and certain locations added recessed lighting and new carpets in fashion colors. The shop-at-home service available at some Rag Shops was to be expanded.

The average Rag Shop store was 7,500 square feet at this time, although one store was as large as 18,000 square feet. The company's 51,000-square-foot leased distribution center in Paterson was later expanded to 85,000 square feet. Corporate headquarters were located in leased space in Hawthorne, New Jersey.

Mixed Results: 1992--97

The number of Rag Shop outlets reached 54 at the end of fiscal 1992. Net sales increased to $73.6 million, and net income reached a record $3 million. A retail performance index by Management Horizons, an industry consultant, ranked the company seventh, with a 31 percent annual revenue growth and a 60 percent average annual profit growth. Rag Shops had been ranked one of the nation's top 200 small companies by Forbes.

Rag Shops President Donald G. Hunt told Loretta Roach of Discount Merchandiser in November 1993, "Our real growth has taken place in the craft/fun type fabrics. We're pulling back in apparel type fabrics that require the home sewer to sit at the sewing machine, buy a pattern and spend time, which has become a precious commodity now, with so many double wage-earner families. We've moved to home decorator fabrics, crafts, and fun-type fabrics.... We now do a complete decorator fabric business, from draperies to quilting."

Rag Shops had 61 stores at the end of fiscal 1993. The standard store size of 8,500 square feet was slowly being updated to 10,000 or 12,000 square feet, with wide aisles, shopping carts, and displays that invited browsing and creative ideas. New Jersey and Florida remained the focus of store siting. Hunt explained, "There are economies associated with being able to operate stores in clusters. It cuts down on your advertising costs around the markets. It gives you name dominance, and name recognition in these markets and allows you to saturate TV with special promotions."

The home craft category now represented 65 percent of Rag Shops' business. A prototype layout called for new fixturing that would allow the stores to expand their crafts holdings without using more space. Crafts workshops were being held throughout the day, and on Saturdays the stores offered a free workshop for children. Store displays, situated in close proximity to the merchandise used, were showcasing completed projects. Wearable art was one growing category. This included jewelry-making items, stitchery products, fabric painting, yarn, appliques, and other accessories.

Although net sales increased to $84.2 million in fiscal 1993, net income fell to $2 million in what proved to be the beginning of an extended decline in profitability for Rag Shops. New stores accounted for all of the company's sales growth, with sales per square foot actually decreasing from $174 to $166. Accordingly, after the number of Rag Shop outlets reached 66 in early 1994, company management began focusing its efforts on improving the strength of existing stores and increasing sales per square foot of retail space.

The number of Rag Shop outlets peaked at 69 in fiscal 1995, including one in Rhode Island and one in Connecticut. Net sales reached $89.5 million in fiscal 1994 but declined to $86.1 million in fiscal 1995 and $83.8 million in fiscal 1996. Net income declined to $767,000, $542,000, and $520,000, respectively. Company executives took ten percent salary cuts in late 1996 as they sought ways to improve sales. At Rag Shops' annual meeting in January 1997, however, the company reported that sales were increasing for the first time in more than three years, owing in large part to a change in emphasis on its product line, improved technology, and a new marketing strategy.

Rag Shops was opening prototypes of what Michael Aaronson, who became president in 1995, called "bigger, lighter, brighter" stores, with up to 15,000 square feet of selling space, including a 12,000-square-foot outlet in Edgewater, New Jersey, and a 15,000-square-foot unit in Vero Beach, Florida. The additional space was allowing the stores to carry a wider selection of merchandise. More fabrics--such as drapes and slip covers--were to be carried for home decorating than for clothing. Bar-code scanners, installed to monitor sales and inventory accurately, were now in place in 23 stores and were expected to be in all units by midyear. This was expected to free employees from time-consuming inventory control and allow some suppliers to automatically replenish the company's merchandise.

Rag Shops had been mailing circulars to about a million customers 14 times a year. In September 1996, however, it converted from direct-mail marketing to newspaper advertising. The company's new marketing plan called for the chain to place inserts into Sunday newspapers 24 times a year and rely on in-paper advertising the other 28 Sundays each year, thereby reaching three million readers every Sunday. Net sales for Rag Shops in fiscal 1997 climbed to $86.5 million, but net income dropped to $207,000 because of increased expenses attributed to automation and marketing as well as increased payroll costs. Company executives expressed confidence, however, that the enterprise was moving in the right direction.

Rag Shops in 1998

For fiscal 1998 Rag Shops reported net income of $942,000--the first annual increase since 1992--on record sales of $90.6 million. The company paid off its long-term debt of $554,000 during 1998 and tested an automated store-ordering system to help executives do a better job of targeting merchandise. The installation of this system, completed in all stores by March 1999, also would enable individual stores to adapt their stock to local demographics and sales patterns. Speaking to shareholders at the annual company meeting in January 1999, Aaronson said that Rag Shops hoped to grow at a rate of six to eight stores per year for the next three years. At the end of fiscal 1998, there were 66: 33 in New Jersey, 19 in Florida, seven in Pennsylvania, six in New York, and one in Connecticut.

Rag Shops' construction of larger new stores had many practical advantages, Senior Vice-President Evan Berenzweig--son of the chain's founder&mdashøld Mike Duff of Discount Store News in April 1999. "Most of our customers are women, and a lot of them are mothers," he explained. "They have strollers and shopping carts they want to use, and we have wider aisles to accommodate them. We want to give them an opportunity to get in and out of the store fast." He added, "If you want to identify one macrotrend, it's [being] fast. We want to have product available and fast checkout and fast crafts. Of course, we have craft customers who spend a tremendous amount of time on their projects, but if we want to appeal to more people we have to have crafts that people can do fast."

As seen from the entrance, the new stores were divided evenly between fabrics and crafts. In the past, fabrics had been displayed in the front and crafts in the rear, which was at variance with the chain's sales breakdown, now two-thirds craft items and only one-third fabrics. "We discovered," Berenzweig said, "that, almost comprehensively, our fabric customer is a craft customer, but that's not necessarily true the other way."

Crafts and fabrics were being divided by a promotional aisle that included seasonal and value items, and--in the larger stores--bigger items such as rattan furniture. The front section of both the crafts and fabrics sides also featured seasonal goods. The crafts side also included a growing selection of arts supplies and children's crafts as well as more established crafts segments. On the other side apparel fabrics were given priority, with home-oriented material in the rear and along the walls. Vignettes above fabric displays showed potential uses for the fabrics and included items from the crafts side of the store. By combining items from its various departments, Rag Shops was advertising the breadth of its product line.

A total of 59 of Rag Shops' 66 stores were offering custom framing at the end of fiscal 1998. In the larger stores, framing was being done on the premises instead of at an offsite shop. The chain also was turning out both pre-made and custom-arranged bouquets from its straw flower collections, with selections adapted to local characteristics. Each store had a craft teaching room used for paid instruction, since the company had found that free programs did not attract the quality of teacher needed. This room also was being used for children's parties at which the children were encouraged to make a present for themselves.

Stanley Berenzweig, still chief executive officer of Rag Shops, and his wife, Doris, owned some 43 percent of the company's stock. A share of common stock traded at between $2.12 and $3.75 in fiscal 1998 and was trading at about $2 a share in the summer of 1999. Book value was $5.10 a share and the company had no long-term debt.

Principal Subsidiaries: Mobile Fabrics, Inc.; The Rag Shop, Inc.; RSL, Inc.