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Michaels Companies (MIK) Tops Q1 Earnings, Falls on Soft View

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Shares of The Michaels Companies, Inc. declined as much as 14% yesterday. While the company reported earnings and sales beat in first-quarter fiscal 2018, the reason for the stock’s slump was its soft comparable store sales (comps) and a downbeat outlook for the second quarter of fiscal 2018. Further, its fiscal 2018 guidance also failed to impress investors.

A look at this Zacks Rank #4 (Sell) company’s price performance shows that it has underperformed the industry it belongs to. The stock declined 14.2% in the last three months, against the industry’s increase of 7.1%.



Q1 Numbers

Michaels Companies posted adjusted earnings of 39 cents per share, outpacing the Zacks Consensus Estimate and the year-ago quarter’s earnings of 38 cents. Including charges related to the restructuring of the Aaron Brothers division and provisional adjustments related to the tax reform, earnings per share were 15 cents.

The Michaels Companies, Inc. Price, Consensus and EPS Surprise

 

The Michaels Companies, Inc. Price, Consensus and EPS Surprise | The Michaels Companies, Inc. Quote

Net sales of this arts and crafts specialty retailer declined by marginal 0.3% year over year to $1,155.5 million. However, the top line surpassed the Zacks Consensus Estimate of $1,153.8 million. The year-over-year decline was mainly associated with the closure of all 94 full-size Aaron Brothers stores in the reported quarter. Additionally, results were hurt by an early Easter as well as persistently sluggish growth recorded by core arts and crafts industry.

Sales growth was also hampered by the fall in wholesale revenues, due to the time difference between new customer acquisition and the expected attrition of legacy customers. Though revenue declines from legacy customers is expected to continue, the company believes that it has an encouraging pipeline of new accounts and expects wholesale revenues in fiscal 2018 to be higher than fiscal 2017.

Comps improved 0.4% while it remained flat on a currency-neutral basis. The improvement was backed by higher average ticket, partly negated by fall in customer transactions. The upside also stemmed from 4% increase in e-commerce sales, which contributes only a small portion of overall sales. However, sales at the company’s physical stores dropped marginally.

The company’s quarterly gross profit declined 2.4% year over year to $456.6 million while gross margin contracted 90 basis points (bps) to 39.5%. The margin contraction is mainly attributed to higher distribution costs, occupancy cost deleverage and headwinds associated with the closure of 94 Aaron Brothers stores. This was partly offset by persistent growth in merchandise margins, driven by the company’s ongoing sourcing initiatives. This reflected the company’s seventh straight quarter of growth in merchandise margins.

Selling, general and administrative expenses, including pre-opening costs, increased 0.6% to $330 million. Further, it expanded 30 bps to 28.6% of sales, owing to increased payroll expenses, costs related to strategic investments and the addition of 18 Michaels stores since the prior-year quarter. This was partly mitigated by lower expenses related to the operation of 94 Aaron Brothers stores, which closed in the reported quarter.

Consequently, adjusted operating income dipped 9.5% to $126.1 million in the reported quarter. Also, operating margin was 10.9%, down 110 bps from the year-ago quarter.

Stores Update

During the fiscal first quarter, Michaels Companies inaugurated six Michaels stores alongside closing one and relocating nine Michaels locations. As of May 5, 2018, Michaels Companies operated 1,243 namesake (Michaels) stores across 49 states and Canada, three Aaron Brothers stores and 36 Pat Catan’s stores.

In the fiscal second quarter, the company plans to open six and relocate eight Michaels stores. For fiscal 2018, the company expects to inaugurate 19 and relocate 17 Michaels stores.

Financial Position

Michaels Companies had cash and equivalents of $422.5 million, long-term debt of $2,696.4 million and total stockholders’ deficit of $1,483.9 million as of May 5, 2018.

The company ended the fiscal first quarter with more than $1 billion in liquidity, including $422.5 million in cash and $674 million available under its revolver credit facility. Total debt at the quarter end was $2.7 billion. As of May 5, total merchandise inventory rose 1.7% to $1.12 billion.

Management incurred capital expenditures of $28 million in the fiscal first quarter, mainly related to investments in technology projects, including investments to support the in-sourcing of e-commerce fulfillment, and investments in new and relocated stores. For fiscal 2018, the company expects to spend $160-$170 million for capital expenditure.

Guidance

Following the fiscal first-quarter results, Michaels Companies reiterated its view for fiscal 2018 and initiated guidance for the fiscal second quarter. It expects comps for the second quarter to be nearly flat year over year. Adjusted operating income is estimated to be $65-$70 million. Interest expense is likely to be about $37 million, with effective tax rate of 24%. Earnings are envisioned to be 12-14 cents per share.

Notably, the company’s fiscal second-quarter outlook lagged analysts’ expectations. The guidance is below the current Zacks Consensus Estimate of 19 cents per share.

For fiscal 2018, the company projects consolidated net sales of $5,217-$5,293 million alongside comps of flat to up 1.5%. Adjusted operating income is projected to be $677-$710 million while interest expenses are expected to be $144 million. Effective tax rate is anticipated to be nearly 24%. Further, earnings per share for the fiscal are envisioned to be $2.19-$2.32.

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