Fabric Stores Seek New Patterns for Survival : Retail: House of Fabrics and its rivals used to be thought of as recession- resistant, but that theory has since unraveled.

Wild swings in the stock market usually bring to mind biotechnology, computers, real estate companies or other speculative shares. But home sewing?

Few stocks in the last two years have had the roller-coaster ride of House of Fabrics Inc., which is in a close race with Fabri-Centers of America Inc. to be the nation’s largest retailer of fabrics, sewing notions and craft materials. House of Fabrics, based in Sherman Oaks, runs 695 stores, a quarter of them in California.

House of Fabrics’ stock, after soaring to $41 a share in 1991 (adjusted for a 2-for-1 split that year) on the strength of the company’s swelling earnings, then dropped like a stone during 1992 as earnings collapsed. The stock closed at $11.375 on Monday, down 25 cents on the New York Stock Exchange.

The company’s profit got hammered as the recession, particularly in California, took hold. Ironically, House of Fabrics was always thought to be recession-resistant--the idea was that home sewing would become more popular as a way to save cash. But the current downturn and an abundance of low-priced, ready-to-wear clothing has disproved that theory.

“We’ve known for several years now it’s not as resistant as in the old days,” said Gary L. Larkins, the company’s 50-year-old president and chief executive.

So House of Fabrics has been forced to slash prices to move its bloated inventories out the door. That helped send its fiscal 1993 (ended Jan. 31) profit plunging to $5.2 million from $19.7 million the year before--this despite a 13% sales gain, to $557.5 million.

One investor that apparently saw the slump coming was FMR Corp., parent of the giant Fidelity group of mutual funds. A 17% equity holder in House of Fabrics in late 1990, FMR began bailing out, and a year later had cut its stake by half. FMR, which now owns less than 7%, declined to comment.

The other main factors in House of Fabrics’ sliding profit are the company’s ongoing conversion of its stores and its digestion of Fabricland Inc., an 84-store chain in the Pacific Northwest that House of Fabrics bought for $55 million in stock in mid-1991.

In the conversion, House of Fabrics is opening “super-stores” of 10,000 to 12,000 square feet while closing its conventional 4,500-square-foot mall stores. The move is increasing its sales per store--to $802,160 in 1992 from $517,600 four years ago--but it also requires a lot of up-front costs for additional inventory, grand-opening advertising and extra workers.

Those new stores accounted for House of Fabrics’ overall sales gain in 1992, because its “same-store sales”--those of stores open at least one year--fell 1% from the prior year.

Larkins, bowing to the recession, is slowing the conversions this year to limit costs. About 25 to 30 new super-stores are scheduled to open, down from 84 in 1992. That would mean about 90% of House of Fabrics’ outlets will be the bigger stores. (About 60 of its mall stores will be closed this year, about the same as in 1992.)

Still, Larkins sounds unruffled. “We had a difficult year, but we still made $5 million,” he said, shrugging. “It’s not like we lost money.”

He also said the recession and the pressures on House of Fabrics’ earnings aren’t likely to dissipate soon. “It’s going to be tough sledding in 1993; we don’t kid ourselves about that,” he said.

Jennifer Groves, an analyst at the brokerage firm Black & Co. in Portland, Ore., said she “would not expect to see the company turn around until the second half of the year.” But as for the erosion of House of Fabrics’ profit, “we’ve probably seen the worst of it,” she said.

Nonetheless, Groves said House of Fabrics and its rivals must better understand what products their customers want. Fabric now accounts for about 48% of House of Fabrics’ sales, followed by notions and accessories at 31% and crafts at 14%.

“The whole industry has been archaically managed,” Groves said, with many chains merely giving customers a huge selection. Selection is important, she said, but “now, with so many competitors, you really have to be focused, know your customer and be a merchant.”

For now, Larkins said, “we’re going to continue to cut prices, as long as this recession is going. There’s a clear signal from the consumer that they’re buying when things are on sale, and they’re not buying when things are not on sale.”

House of Fabrics isn’t the only one struggling. Its two major publicly held rivals, Fabri-Centers of America (700 stores) and Hancock Fabrics Inc. (482) also have seen their earnings and stock prices fall sharply during the last 18 months.

Larry Kirk, Hancock’s chief financial officer, said that with the exception of severe price cuts on closed-out goods, his company strives to consistently keep prices at low levels, as opposed to House of Fabrics’ periodic use of half-off sales for goods that normally carry “high markups.”

House of Fabrics isn’t “selling anything unless it’s on sale, which indicates to us there’s a lack of confidence from the customer in their initial pricing,” Kirk said. Translation: Some customers stay away from House of Fabrics until the next sale.

How that pricing difference plays out in Southern California could become clearer in the months to come, because Hancock is planning to add fabric stores in the region. It now has a handful in cities such as Lancaster, Riverside and Rancho Cucamonga that operate under the name Hancock Fabric Warehouse.

The strategy could also take on added importance soon because there’s agreement in the industry that, in places such as Southern California, there is a glut of fabric stores and a shakeout is inevitable.

“There’s too many stores trying to share a demand in home sewing products that’s not going up nearly as fast as the number of stores,” said Hancock’s Kirk, adding that the industry’s conversion to giant stores only exacerbates the problem. “We’re fighting over the same bone.”