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Michaels (MIK) Q4 Earnings & Sales Beat, Merger in the Cards

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The Michaels Companies, Inc. posted fourth-quarter fiscal 2020 results, wherein the top and the bottom line surpassed the Zacks Consensus Estimate and improved year over year. Notably, comparable store sales (comps) improved significantly during the quarter under review.

On Mar 3, 2021, Michaels signed an agreement to be acquired and taken private by Apollo Global Management, Inc. for $3.3 billion (transaction valued at $5 billion). The buyout offer values Michaels’ shares at $22 per share, representing a 47% premium from the closing price on Feb 26, 2021, and a 78% premium to the 90-day volume-weighted average price. The merger, which is expected to be concluded by the first half of fiscal 2021, will support the retail and digital expansion plans of Michaels. As of Jan 30, 2020, the company operated 1,252 stores in the United States and Canada.

The shares, which are not covered in the tender offer, will also be acquired by Apollo in a second-step merger at the same price. In the second phase of the merger, the transaction of these shares will be funded by equity provided by Apollo-managed funds along with committed debt financing. Additionally, the deal includes a 25-day go-shop period for Michaels to seek out other offers. In case of a better proposal, the company has the right to terminate the deal.

Owing to the merger deal with Apollo, the company did not hold conference call for fourth-quarter fiscal 2020.

Shares of this Zacks Rank #3 (Hold) company have rallied 80.9% in the past three months compared with the industry’s growth of 8.3%.

Q4 Numbers

Michaels’ adjusted earnings of $1.69 per share improved 34.1% from $1.26 in the prior-year quarter and beat the Zacks Consensus Estimate of $1.57.

Net sales of this arts and crafts specialty retailer grew 11.3% year over year to $1,916.8 million and surpassed the Zacks Consensus Estimate of $1,882 million. The upside can be attributed to strong comps growth of 12.9% in the reported quarter against a 2.4% decline in the prior-year quarter. On a constant-currency basis, comps improved 12.7% year over year.

Strength in the core arts and crafts business has been contributing to quarterly growth. Moreover, robust demand in both stores and e-commerce has been a growth driver. Also, the company’s enhanced and expanded omni-channel capabilities like new delivery options, curbside pick-up; same day delivery; ship from store; buy online, pick-up in store, or BOPIS; in-app purchases and more have been aiding online sales growth.

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


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

The Michaels Companies, Inc. price-consensus-eps-surprise-chart | The Michaels Companies, Inc. Quote

Gross profit advanced 25.3% year over year to $810 million and gross margin expanded 480 basis points (bps) to 42.3%. SG&A expenses increased 20.6% to $447 million. As a percentage of sales, SG&A expenses rose 180 bps to 23.3%.

Adjusted operating income of $361 million surged 29.6% from $278.6 million in the prior-year quarter. This was mainly driven by improved gross profit, somewhat offset by a rise in SG&A expenses. Adjusted operating margin of 18.8% improved 260 bps year over year.

Financial Position

Michaels ended fiscal 2020 with cash and equivalents of $1,194.4 million, long-term debt of $2,481 million and total stockholders’ deficit of $1,197.2 million. Total merchandise inventory declined 8.2% year over year to $1,007 million as of Jan 30, 2021.

Further, the company generated operating cash flow of $1,222.4 million as of Jan 30, 2021.

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