(FORTUNE Magazine) – It's been 31 years since the first Michaels (MIK, $30) converted a Ben Franklin five-and-dime into a humble arts-and-crafts store. Today the Irving, Texas, company is a national chain of 842 hobby-supply stores, 164 Aaron Brothers frame shops, eight ReCollections scrapbooking joints, and more. All company-owned, they ring up $3.2 billion a year in sales. Beaders and knitters aren't the only Michaels fans; so are investors. The stock is up 40% this year, giving Michaels a market cap of over $4 billion.

Is it too late to get in on the fun? Michaels's September sales figures seem to suggest the quilting bee might be ending: Same-store sales were down 4% from September last year. But Wall Street says that was just a bump; the consensus of 11 analysts who follow Michaels is that earnings will rise 17% in 2005--putting it well ahead of most specialty retailers and on a par with mighty Wal-Mart. (Michaels blamed its weak September mainly on hurricanes, which sapped sales in the Southeast.) Says Ozarslan Tangun of Southwest Securities: "On a quarter-by-quarter basis, Michaels has actually been exceeding expectations."

Tangun and others say there's still lots of room for growth, and even for happy surprises. Under CEO Michael Rouleau, a veteran of Target, Office Max, and Lowe's, Michaels is bringing category-killer efficiency to the vast, fragmented realm of arts and crafts. Michaels recently switched on an inventory-management system that has streamlined purchasing and cut by 80% the labor needed to replenish shelves; Brian Postol of A.G. Edwards predicts that systems know-how will increase Michaels's cash flow by as much as $200 million annually over the next few years.

Look for Michaels to add nearly a thousand stores between now and 2009. Ralph Jean of Wachovia contends the stock offers a cushion against economic pressures that affect retailers: "Arts and crafts are the least dependent on changes in interest rates and energy costs." And Michaels's giant selection of wares has so far helped it fend off the biggest economic pressure of all, Wal-Mart. -- Christine Y. Chen