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Why a Hold Strategy Is Apt for Michaels Companies (MIK)

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The Michaels Companies, Inc. appears good on the back of its impressive earnings trend, growth initiatives and solid first-quarter fiscal 2018 results. However, the company is witnessing higher expenses for a while now, which have been pressurising its margins.

Nevertheless, shares of the company have gained 10.1% in the past year, outperforming the industry’s 1.3% growth. Also, the stock has a Value Score of B with a long-term earnings growth rate of 7.7%, which is driving investor optimism.



Analysts’ bullishness on the stock is also linked to the company’s northbound earnings estimates revisions. The Zacks Consensus Estimate of $2.31 for fiscal 2018 and $2.48 for fiscal 2019 has moved up a couple of cents and a penny, respectively, in the last seven days. Management envisions earnings per share for fiscal 2018 in the $2.19-$2.32 band.

Let’s Find Out More

Michaels Companies remains committed to its store-expansion efforts for logging higher sales and boosting profitability. Notably, the company introduced six flagship stores, closed one and relocated nine in first-quarter fiscal 2018. Further, it intends to open up 19 and relocate 17 namesake stores in fiscal 2018. We believe that these store-growth initiatives along with solid marketing endeavors poise the company well for growth.

In addition, Michaels Companies’ ability to generate higher operating cash flow keeps management poised to execute its strategies such as enhancement of product and brand offerings, as well as building operational infrastructure. The company also remains committed toward enhancing shareholder returns via dividends and share buybacks.

In first-quarter fiscal 2018, the company repurchased shares worth $2.1 million and paid dividends of $0.3 million. As of May 5, 2018, the company had $350 million shares outstanding under its $500 million repurchase authorization. These strategic moves buoy confidence in the company’s future prospects and help it focus on maximizing shareholder value.

Michaels Companies also boasts an impressive earnings history, having delivered a bottom-line beat in three of the last four quarters, including the recently reported first-quarter fiscal 2018.

Hurdles

However, the company has disappointed investors on the top-line front as it lagged sales estimates in nine of the last 13 quarters. Though sales surpassed estimates in the first quarter, it declined year over year due to weak wholesale revenues, stemming from the time difference between new customer acquisition and the expected attrition of legacy customers.

Unfortunately, revenue decline from legacy customers is anticipated to continue, going ahead, hurting the company’s overall sales in the process. Further, consolidated net sales are projected in the range of $5,217-$5,293 million for fiscal 2018, down from $5,362 million in fiscal 2017.

Michaels Companies is also witnessing higher selling, general and administrative (SG&A) expenses for a while now, including pre-opening costs. This has been weighing upon the company’s margins and somewhat its overall profitability.

In the last reported quarter, SG&A expenses increased 30 basis points (bps) due to increased payroll expenses, costs related to strategic investments and the addition of 18 Michaels stores since the prior-year quarter. This led to a 110 bps contraction in operating margin from the year-ago period. In fiscal 2018, adjusted operating income is expected to be $677-$710 million, down from $735.4 million in fiscal 2017.

Wrapping Up

Nevertheless, management believes that it has an encouraging pipeline of new accounts and expects higher wholesale revenues in fiscal 2018 compared with fiscal 2017. Also, the company’s solid store-expansion endeavors to elevate sales and margins along with other initiatives are likely to drive growth.

Michaels Companies currently carries a Zacks Rank #3 (Hold).

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