It has been about a month since the last earnings report for Michaels (MIK - Free Report) . Shares have lost about 4.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Michaels due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Michaels Companies Q2 Earnings Beat, Sales Miss
Michaels Companies posted adjusted earnings of 15 cents per share in second-quarter fiscal 2018, beating the Zacks Consensus Estimate by a couple of cents but plunged 21.1% from the prior-year quarter due to lower net sales.
Net sales slipped 1.8% year over year to $1,053.3 million. The top line also missed the Zacks Consensus Estimate of $1,061. The year-over-year downside was mainly associated with the closure of 94 full-size Aaron Brothers stores in the first quarter, which negatively impacted the second quarter, besides dismal comps.
The sluggishness in the industry remained a key factor behind the downtrend. However, the fall in the company’s top line was partly offset by sales from the operation of 21 additional Michaels stores during the quarter under review and higher wholesale revenues.
Comps slid 0.4% (down 0.5% on a constant-currency basis). This follows an equivalent increase in the metric in the preceding quarter. In the year-ago period, comps inched up 0.6%.
The company’s quarterly gross profit deteriorated 7.2% year over year to $373.3 million while gross margin contracted 210 basis points (bps) to 35.4%. The contraction in gross margin was due to rise in distribution-related costs, higher promotional activity and occupancy cost deleverage. This was partly offset by benefits from the ongoing sourcing endeavors.
SG&A expenses including pre-opening costs saw 4.1% reduction to $301 million on lower performance-based compensation and a fall in expenses, attributable to the closing of Aaron Brothers stores. This was further counterbalanced by increased marketing expenses.
Consequently, adjusted operating income dropped 19.2% to $71.1 million in the reported quarter. Also, operating margin was 6.7%, down 150 bps from the year-ago quarter’s figure.
During the second quarter, the company inaugurated nine new Michaels stores alongside closing one and relocating seven Michaels outlets. As of Aug 4, 2018, Michaels Companies operated 1,251 Michaels stores and 36 Pat Catan’s stores.
In the fiscal third quarter, the company plans to open five, net of closures, and relocate five Michaels stores. For fiscal 2018, the company expects to open 19 new Michaels outlets (net of closures) and relocate 21 Michaels shops.
Michaels Companies had cash and cash equivalents of $123.2 million, long-term debt of $2,695.1 million and total stockholders’ deficit of $1,699.4 million as of Aug 4, 2018. Total debt at the quarter end was $2,835.3 million. As of Aug 4, total merchandise inventory rose 7.1% to $1,280.1 million.
Management incurred capital expenditures of $70 million in the fiscal second quarter, mainly related to investments in technology projects comprising funds to support the in-sourcing of e-commerce fulfillment and resources pumped into new and relocated outlets. For fiscal 2018, the company expects to incur capital expenditures of $160-$170 million.
Management expects comps for the third quarter to increase 1.5-3%. Adjusted operating income is estimated at $131-$138 million. Interest expense is likely to be about $38 million with an effective tax rate of 23%. Earnings are envisioned to be 42-45 cents per share. Notably, the company’s fiscal third-quarter outlook lagged analysts’ expectations.
For fiscal 2018, the company maintained its net sales forecast of $5,217-$5,293 million alongside comps of flat to up 1.5%. Adjusted operating income is projected to be $677-$700 million while interest expenses are expected at $144 million. Effective tax rate is anticipated to be nearly 23%. Further, earnings per share for the fiscal are envisioned to be $2.29-$2.42, up from its previous view of $2.19-$2.32.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -16.39% due to these changes.
At this time, Michaels has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Michaels has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.