We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our retail stores (operating as Jo-Ann Fabric and Craft stores and Jo-Ann stores) and website (www.Joann.com) feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial floral, home accents, finished seasonal and home décor merchandise.

 

During the second quarter of fiscal 2008, we made a change in the way we reference our store formats. We now classify our stores as large-format and small-format, as opposed to the previous classification of superstore and traditional stores. As we continue to remodel our stores, the distinction between superstores and traditional stores would become less clear. The dividing line between the large-format and small-format classification is approximately 24,000 to 25,000 square feet of retail space. The most important distinction is whether or not stores in that range have been recently built or remodeled and contain a broad assortment of craft categories.

 

As of February 2, 2008, we operated 774 stores in 47 states (578 small-format stores and 196 large-format stores). Our small-format stores offer a complete selection of fabric and a convenience assortment of crafts, artificial floral, finished seasonal and home décor merchandise. They average approximately 14,700 square feet and generated net sales per store of approximately $1.5 million in fiscal 2008. We did not open any small-format stores in fiscal 2008. Our large-format stores offer an expanded and more comprehensive product assortment than our small-format stores. Our large-format stores also offer custom framing and educational programs that our small-format stores do not. They average approximately 38,000 square feet and generated net sales per store of approximately $4.9 million in fiscal 2008. We opened six large-format stores in fiscal 2008.

 

We provide a one-stop shopping experience for craft and sewing projects under one roof, with employees who are encouraged to assist customers in creating and completing creative projects. Many of our store level employees are sewing and/or crafting enthusiasts, which we believe enables them to provide exceptional customer service. We believe our focus on service contributes to a high proportion of repeat business from our customers. A significant portion of our advertising budget is allocated to our direct mail and weekly newspaper insert advertising programs.

 

We believe that our large-format stores are uniquely designed to offer a destination location for our customers. We offer approximately 79,000 stock-keeping units (“SKUs”) across two broad product categories: sewing and non-sewing components. We manage our vast product selection with SAP Retail. Through the core SAP application and integration with peripheral processing systems, we continue to drive operational and execution improvements, through enhanced forecasting and replenishment capabilities, and streamlined operations.

 

We believe stability in our sales and our industry is partially a function of recession-resistant characteristics. For example, according to a 2007 research study conducted by the Craft & Hobby Association, approximately 57 percent of all U.S. households participated in crafts and hobbies. While expenditures for such projects are generally discretionary in nature, our average sales ticket during fiscal 2008 was $23 in our large-format stores and $18 in our small-format stores. Industry sales, according to the Craft & Hobby Association’s 2007 research

study, were approximately $32 billion. Our market is highly fragmented and is served by multi-store fabric retailers, arts and crafts retailers, mass merchandisers, small local specialty retailers, mail order and Internet vendors and a variety of other retailers.

 

Recent Developments and Business Update

 

Fiscal 2008 was a year of transition as we began the implementation of our long-term strategic growth plan to position ourselves for profitable and sustainable growth over the long term. The long-term strategic growth plan addresses three major objectives:

 

 

The above objectives were supported by dozens of initiatives and were enabled by the development of our people, enhancement of our information systems, enhanced efficiencies in our supply chain, and improved controls over inventory and selling, general and administrative expenses (“SG&A”).

 

By executing this strategy, we delivered solid results for fiscal year 2008 and positioned ourselves to deliver balanced and consistent financial improvements over the long term.

 

During fiscal year 2008:

 

 

In addition to implementing our new strategic growth plan, during the fourth quarter of fiscal 2008, we completed the acquisition of the 62 percent of IdeaForest.com, Inc. (“IdeaForest”) that we previously did not own. IdeaForest was the operator of the Joann.com website.

 

During fiscal 2009 we plan to continue to execute our strategic plan and take advantage of competitive withdrawals from the fabric industry. The current economic environment has added a degree of uncertainty, but we expect to be insulated from a downturn to a certain extent due to the strong demographics of our shoppers and the steady performance of the sewing and craft industry in previous recessions.

 

As we continue to improve overall business results and achieve more consistent performance from new stores, we plan to accelerate new store openings and store remodels in future years.

 

Some key priorities we will pursue in fiscal year 2009 include:

 

 

Product Selection

 

The following table shows our net sales by principal product line as a percentage of total net sales:

 

 

Sewing

 

We offer a broad and comprehensive assortment of fabrics and sewing accessories in both our small-format and large-format stores. These fabrics are merchandised by end use and are sourced from throughout the world to offer our customers a combination of unique design, fashion forward trends, and value. Our stores are organized in the following categories for the convenience of the sewer:

 

 

Non-sewing

 

We offer a broad assortment of non-sewing merchandise for the creative enthusiast. Our large-format stores offer the complete array of categories while our small-format stores, due to their smaller size, carry edited down versions of the best items. We offer the following non-sewing selections in our large-format stores:

 

 

 

In addition to the basic categories described above, our stores regularly feature seasonal products, which fit with our core merchandising strategy. Our seasonal offerings span all product lines and include finished decorations, gifts and accessories that focus on holidays including Easter, Halloween and Christmas, as well as seasonal categories such as patio/garden. Seasonal product is brought in under the “Holiday Inspirations” private label.

 

During the Christmas selling season, a significant portion of floor and shelf space is devoted to seasonal crafts, decorating and gift-making merchandise. Due to the project-oriented nature of these items, our peak selling season starts earlier than that of other retailers and generally runs from September through December. In fiscal 2008, approximately 57 percent of our net sales occurred in the third and fourth quarters, and approximately 31 percent occurred in the fourth quarter alone.

 

During fiscal 2008, non-sewing and sewing net sales represented 60 percent and 40 percent of total net sales for our large-format stores, respectively. Non-sewing and sewing net sales represented 40 percent and 60 percent of total net sales for our small-format stores for the same period, respectively.

 

Marketing

 

Our marketing efforts are key to the ongoing success and growth of our stores. Our primary focus is on acquiring and retaining customers through an integrated direct and mass marketing program.

 

We use our proprietary customer database to provide ongoing communication to our best customers through a robust direct mail and email program. This allows us to efficiently and effectively reach our target market on a regular basis throughout the year. To drive customer acquisition, we supplement our direct mail advertising with weekly newspaper insert advertising, primarily in large-format store markets. Our direct mail and newspaper inserts showcase our sales events, feature numerous products offered at competitive prices, and showcase people interacting with product providing inspiration.

 

As we market the Jo-Ann Stores concept, we also focus on developing long-term relationships with our customers. These efforts include providing knowledge and inspiration through in-store classes, demonstrations and project sheets.

 

Our grand opening program plays an integral role in the successful opening of each new store. We utilize our existing customer base to build awareness and excitement in each market around the opening of each new store. This is paired with newspaper inserts, in-store promotions and public relations efforts during the grand opening weekend to drive customer traffic. We continue to drive customer awareness and traffic after the grand opening through ongoing advertising efforts in the market.

 

We also reach our customers through our Joann.com Internet business. During the fourth quarter of fiscal 2008 we completed the purchase of the 62 percent of IdeaForest.com, Inc. that we previously did not own for $23.6 million, including a note payable of approximately $9 million. In conjunction with the acquisition, we launched a site redesign of Joann.com. The improved website is more visually compelling, easier to navigate, includes features such as a community area to share ideas, as well as a place to review and rate products. This transaction provides us with the opportunity to integrate the online shopping experience with our stores ultimately improving the overall customer experience.

Purchasing

 

We have numerous domestic and international sources of supply available for each category of product that we sell. During fiscal 2008, approximately two-thirds of our purchases were sourced domestically and one-third was sourced internationally. Our domestic suppliers source internationally some of the products they sell to us. Although we have very few long-term purchase commitments with any of our suppliers, we strive to maintain continuity with them. All purchases are centralized through our store support center, allowing store team leaders and store team members to focus on customer sales and service and enabling us to negotiate volume discounts, control product mix and ensure quality. Currently, our top supplier represents approximately three percent of our annual purchase volume and the top ten suppliers represent approximately 23 percent of our total annual purchase volume. We currently utilize approximately 575 merchandise suppliers, with the top 128 representing more than 80 percent of our purchasing volume.

 

Logistics

 

We operate three distribution centers in Hudson, Ohio, Visalia, California and Opelika, Alabama, all of which ship merchandise to our stores on a weekly basis. Based on purchase dollars, approximately 81 percent of the products in our stores are shipped through our distribution center network, with the remaining 19 percent of our purchases shipped directly from our suppliers to our stores. Approximately 50 percent of our store base is supplied from the Hudson distribution center, 30 percent from our Visalia distribution center and 20 percent from our Opelika distribution center.

 

We transport product from our distribution centers to our stores utilizing contract carriers. Merchandise is shipped directly from our distribution centers to our stores using dedicated core carriers for approximately 95 percent of our store base. For the remainder of our chain, we transport product to the stores using less than truckload carriers or through three regional “hubs” where product is cross-docked for local delivery. We do not own either the regional hubs or the local delivery vehicles.

 

Store Operations

 

Site Selection.  We believe that our store locations are integral to our success. New sites are selected through a coordinated effort of our real estate, finance and operations management teams. In evaluating the desirability of a potential store site, we consider both market demographics and site-specific criteria. Market criteria that we consider important include, but are not limited to, our existing store sales performance in that immediate market, distance to other Jo-Ann store locations, as well as total population, number of households, median household income, percentage of home ownership versus rental and historical and projected population growth over a ten-year period. Site-specific criteria that we consider important include, but are not limited to, rental terms, the store location, position and visibility within the shopping center, size of the shopping center, co-tenants, proximity to highway access, traffic patterns, availability of convenient parking and ease of entry from the major roadways framing the location.

 

Costs of Opening Stores.  Standard operating procedures are employed to efficiently open new stores and integrate them into our information management and distribution systems. We have developed a standardized floor plan, inventory layout and marketing program for each store that we open. We typically open stores during the period from February through October to maximize sales and to minimize disruption to store operations during our fourth-quarter peak selling season.

 

Store Management.  Small-format stores generally have five full-time team members and 10 to 12 part-time team members, while large-format stores typically have approximately nine full-time team members and 35 to 45 part-time team members. Store team leaders are compensated with a base salary plus a bonus, which is tied to quarterly store sales and annual store controllable profit.

 

Small-format store team leaders are typically promoted from a group of top performing assistant managers, some of whom started as our customers. This continuity serves to solidify long-standing relationships between our stores and our customers. When a small-format store is closed due to the opening of a large-format store, we generally retain its team members to staff the new large-format store. Large-format store team leader

positions primarily have been staffed with individuals from outside the Company who have previous experience in managing “big-box” retail concepts. We have a training program that is designed to develop and prepare more large-format store managers from within our organization. Each store is under the supervision of a district team leader who reports to a regional vice president.

 

The following table shows our stores by type and state on February 2, 2008:

 

 

The following table reflects the number of stores opened, expanded or relocated and closed during each of the past five fiscal years (square footage in thousands):

 

Total Stores

 

 

Our new store opening costs depend on the building type, store size and general cost levels in the geographical area. During fiscal 2008, we opened six large-format stores with an average size of approximately 33,000 square feet. Our average net investment in a large-format store is approximately $1.5 million, which

includes leasehold improvements, furniture, fixtures and equipment, inventory (net of payable support) and pre-opening expenses. No small-format stores were opened in fiscal 2008.

 

During fiscal 2009, we expect to open approximately 13 to 15 new stores and close approximately 25 stores. We also plan to remodel approximately 25 to 30 stores.

 

Information Technology

 

Our point-of-sale register transactions are polled nightly and our point-of-sale system interfaces with both our financial and merchandising systems. We utilize point-of-sale registers and scanning devices to record the sale of product at a SKU level at our stores. We also utilize handheld radio frequency devices for a variety of store tasks including price look-up, perpetual inventory exception counting, merchandise receiving, vendor returns and fabric sales processing. We have broadband communication and store controllers in our stores, resulting in an enhanced customer checkout experience and a better platform to further automate internal store communications. We believe this will enable us to provide higher levels of customer and associate satisfaction, while providing a platform that we can build on and leverage over the coming years.

 

Information obtained from item-level scanning through our point-of-sale system enables us to identify important trends, increase in-stock levels of more popular SKUs, eliminate less profitable SKUs, analyze product margins and generate data for the purpose of evaluating our advertising and promotions. We also believe that our point-of-sale system allows us to provide better customer service by increasing the speed and accuracy of register checkout, enabling us to more rapidly restock merchandise and efficiently reprice sale items.

 

We operate on SAP Retail. SAP Retail includes all of our core financial, merchandise and retail systems and links business processes on a single software platform. During fiscal 2008, we completed an upgrade to the current version of SAP Retail software. The software for the upgrades was purchased in the fourth quarter of fiscal 2007. The cost of the upgrade is included in property equipment and leasehold improvements on our consolidated balance sheets. In addition to the upgrades to our existing SAP Retail systems, we purchased additional SAP modules in the fourth quarter of fiscal 2007, which will be implemented over the next 6 to 9 months of fiscal 2009. The cost of the modules is included in construction in progress on our consolidated balance sheets.

 

Status of Product or Line of Business

 

During fiscal 2008, there was no public announcement nor is there a public announcement anticipated about either a new product line or line of business involving the investment of a material portion of our assets.

 

Trademarks

 

We do business under trademarks for “Jo-Ann^®,” “Joann.com^TM,” “Jo-Ann ETC^®,” “Jo-Ann Fabrics^®,” “Jo-Ann Fabric and Craft Stores^®,” “Jo-Ann Fabrics & Crafts^®,” “Jo-Ann Fabrics and Crafts^®” and we also own numerous trademarks relating to our private label products. We believe that our trademarks provide significant value to our business.

 

Seasonal Business

 

Our business exhibits seasonality that is typical for most retail companies, with much stronger sales in the second half of the year than in the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. In fiscal 2008, approximately 57 percent of our net sales occurred in the third and fourth quarters, and approximately 31 percent occurred in the fourth quarter alone.

Customer Base

 

We are engaged in the retail sale of merchandise to the general public and, accordingly, no part of our business is dependent upon a single customer or a few customers. During fiscal 2008, no single store accounted for more than one percent of total net sales.

 

Backlog of Orders

 

We sell merchandise to the general public on a cash and carry basis and, accordingly, we have no significant backlog of orders.

 

Competitive Conditions

 

We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our stores compete with other specialty fabric and craft retailers and selected mass merchants, including Wal-Mart, that dedicate a portion of their selling space to a limited selection of fabrics and craft supply items. In addition, alternative methods of selling fabrics and crafts, such as over the Internet, could result in additional competitors in the future and increased price competition since our customers could more readily comparison shop. We compete on the basis of product assortment, price, convenience and customer service. We believe that the combination of our product assortment under one roof, quality sales events and knowledgeable and customer focused team members provides us with a competitive advantage.

 

There are three companies that we primarily compete with nationally in the fabric and craft specialty retail industry, one in the fabric segment (Hancock Fabrics, Inc.) one in the craft segment (Michaels Stores, Inc.) and one in the craft segment that also carries fabrics (Hobby Lobby). There is also a regional operator, A.C. Moore Arts & Crafts, Inc., which competes in the craft segment. The balance of our competition is comprised of smaller regional and local operators. We believe that we have several advantages over most of our smaller competitors, including:

 

 

Research and Development

 

During the three fiscal years ended February 2, 2008, we have not incurred any material expense for research activities relating to the development of new products or services or the improvement of existing products or services.

 

Environmental Disclosure

 

We are not engaged in manufacturing. Accordingly, we do not believe that compliance with federal, state and local provisions regulating the discharge of material into the environment or otherwise relating to the protection of the environment will have a material adverse effect upon our capital expenditures, income or competitive position.

 

Employees

 

As of February 2, 2008, we had approximately 21,707 full and part-time employees, of whom 20,125 worked in our stores, 433 were employed in our Hudson distribution center, 228 were employed in our Visalia distribution center, 188 were employed in our Opelika distribution center and 733 were employed at our store support center in Hudson. The number of part-time employees is substantially higher during our peak selling season. We believe our employee turnover is below average for retailers, primarily because our stores often are

staffed with sewing and crafting enthusiasts. In addition, we provide an attractive work environment, employee discounts, flexible hours and competitive compensation packages within the local labor markets. Our ability to offer flexible scheduling is important in attracting and retaining these employees, since approximately 75 percent of our employees work part-time.

 

The United Steelworkers of America, Upholstery and Allied Industries Division currently represents employees who work in our Hudson, Ohio distribution center. Our current contract expires on May 5, 2011. We believe that our relationship with our employees and the union are good.

 

Foreign Operations and Export Sales

 

In fiscal 2008, we purchased approximately one-third of our products directly from manufacturers located in foreign countries. These foreign suppliers are located primarily in China and other Asian countries. In addition, many of our domestic suppliers purchase a portion of their products from foreign suppliers. Because a large percentage of our products are manufactured or sourced abroad, we are required to order these products further in advance than would be the case if the products were manufactured domestically. We do not have material long-term contracts with any manufacturers.

 

Other Available Information

 

We make available, free of charge, on our website at www.Joann.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as we file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). We have posted on our website the charters of our Audit, Compensation and Corporate Governance Committees; our Corporate Governance Guidelines, Code of Business Conduct and Ethics (which also serves as the Code of Ethics for the Chief Executive Officer and Financial Officers), and any amendments or waivers thereto. These documents are also available in print, free of charge, to any person requesting a copy from our Investor Relations department at our principal executive offices.

 

As required by Section 303A.12 of the Listed Company Manual of the New York Stock Exchange (the “NYSE”), our chief executive officer submitted to the NYSE his annual certification on July 6, 2007 stating that he was not aware of any violation by our Company of the corporate governance listing standards of the NYSE. In addition, we have filed, as exhibits to this annual report on Form 10-K for the year-ended February 2, 2008, the certifications of our principal executive officer and principal financial officer required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

 

Our business and financial performance is subject to various risks and uncertainties. There are many factors that affect our business and financial performance, some of which are beyond our control. In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially adversely affect our business, prospects, financial condition, and results of operations. Other factors not presently known to us, or that we presently believe are not material, could also affect our business and financial performance.

 

Economic Risks

 

Changes in economic conditions could have a material adverse effect on our business, revenue and profitability

 

In general, our sales represent discretionary spending by our customers. Discretionary spending is affected by many factors, including, among other things, general business conditions, interest rates, the availability of consumer credit, taxation, weather and consumer confidence in future economic conditions. Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower (for example, as a result of higher energy prices) or during periods of actual or perceived unfavorable

economic conditions. If this occurs, our revenues and profitability will decline. In addition, our sales could be adversely affected by a downturn in the economic conditions in the markets in which we operate. A prolonged economic downturn could have a material adverse effect on our business, financial condition and results of operations.

 

If customer interest in fabric and craft products declines, our revenues may decline

 

The success of our business depends on our customers purchasing our fabric and craft products. Our products are not necessities and compete with numerous other leisure activities and other forms of entertainment. If our customers’ interest in fabric and craft products declines, that decline would result in the reduction of our revenues and have a negative impact on our business and prospects. Our inability or the inability of our vendors to develop and introduce new products that interest our customers also could adversely affect our operating results. In addition, changes in demographic and societal trends could have a material adverse effect on our business and prospects.

 

Changes in interest rates could adversely impact profitability

 

We are subject to market risk from exposure to changes in interest rates, which affect our financing, investing and cash management activities. Changes in interest rates could have a negative impact on our profitability.

 

External Business Risks

 

Competition could negatively impact our operations

 

Competition is intense in the retail fabric and craft industry. We must remain competitive in the areas of quality, price, selection, customer service and convenience. The location and atmosphere of retail stores are additional competitive factors in the retail business.

 

Our primary competition is comprised of specialty fabric retailers and specialty craft retailers such as Michaels Stores, Inc., a national chain that operates craft and framing stores, Hobby Lobby, a regional chain that operates craft stores, Hancock Fabrics, Inc., a national chain that operates fabric stores, and A.C. Moore Arts & Crafts, Inc., a regional chain that operates craft stores in the eastern United States. We also compete with mass merchants, including Wal-Mart, that dedicate a portion of their selling space to a limited selection of fabrics, craft supplies and seasonal and holiday merchandise. Some of our competitors have stores nationwide, several operate regional chains and numerous others are local merchants. Some of our competitors, particularly the mass merchants, are larger and have greater financial resources than we do. Our sales are also impacted by store liquidations of our competitors. In addition, alternative methods of selling fabrics and crafts, such as over the Internet, could result in additional competitors in the future and increased price competition since our customers could more readily comparison shop. Moreover, we ultimately compete against alternative sources of entertainment and leisure activities of our customers that are unrelated to the fabric and crafts industry. This competition could result in the reduction of our prices and a loss of market share.

 

Our suppliers may encounter business issues and not meet our needs

 

Many of our suppliers are small companies that produce a limited number of items. Given their limited resources and lack of financial flexibility, many of these firms are susceptible to cash flow issues, production difficulties, quality control issues and problems in delivering agreed-upon quantities on schedule. We cannot assure that we would be able, if necessary, to return products to these suppliers and obtain refunds of our purchase price or obtain reimbursement or indemnification from them if their products prove defective. In addition, many of these suppliers require extensive advance notice of our requirements in order to supply products in the quantities we desire. This long lead time requires us to place orders far in advance of the time when certain products will be offered for sale, exposing us to shifts in demand. Our suppliers may be unable to withstand a downturn in economic conditions. In addition, based on public information, Wal-Mart plans to eliminate fabric sales in its new and remodeled stores and Hancock Fabrics is currently in a Chapter 11 bankruptcy proceeding, both of which could negatively affect our fabric suppliers. Significant failures on the part of our key suppliers could have a material adverse effect on our operating results.

Our dependence on foreign suppliers subjects us to possible delays in receipt of merchandise and to the risks involved in foreign operations

 

In fiscal 2008