Higher Prices, New Stores Aid Profits for House of Fabrics

Profits at House of Fabrics rebounded slightly in the third quarter thanks to improved results at new stores and because the company abandoned a price-cutting policy it put into place earlier this year.

The Sherman Oaks operator of retail fabric stores said its fiscal third-quarter net income rose 3%, to $4.30 million from $4.18 million a year ago. Sales for the period were up 3%, to $92.5 million from $90.2 million.

But a major investment firm, The Value Line Investment Survey, chastised House of Fabrics for shifting strategies this year, which it said has caused House of Fabrics’ earnings to decline in the first half of the year.

As part of a nearly 5-year-old plan to improve profit margins, House of Fabrics this year has opened 28 so-called “super stores” while closing 44 smaller stores. The bigger stores are as much as three times the size of its traditional mall stores, and the idea is that more goods in one store will attract more traffic and produce more profits.

But when House of Fabrics cut prices earlier this year Value Line complained that “ . . . House of Fabrics changed course: A promotional strategy was implemented to increase volume in an attempt to better leverage expanding overhead costs. But things did not work out as expected. Extensive markdowns caused substantial gross margin erosion.”

Indeed, even with the latest quarterly upturn, for the nine months that ended Oct. 31, House of Fabrics’ net income declined 17% to $5.5 million, from $6.6 million last year. The company’s nine-month sales increased 7%, to $253 million from $237 million a year earlier.

House of Fabrics chief executive Gary L. Larkins said new super stores don’t generate higher profits when they open.

Larkins said the underlying trend was encouraging: Results at the bigger stores have improved quarter to quarter as they attract more customers and run more efficiently.