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Michaels (MIK) Down 37% in 6 Months: Is a Turnaround Likely?

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The Michaels Companies, Inc. (MIK - Free Report) is navigating through rough waters due to strained margins stemming from elevated costs. Moreover, the company faces intense competition and remains highly exposed to seasonal risks.

Driven by these headwinds, shares of this Irving, TX-based company declined 37% in the past six months, underperforming the industry’s growth of 1.8%.

Let’s take a look at what’s ailing the company’s performance.

Reasons Behind Michaels’ Dismal Run

Michaels is grappling with strained margins for a while now. The company continued to witness soft margins trend in fourth-quarter fiscal 2018, delivering fourth straight quarter of gross margin decline and fifth consecutive quarter of operating margin contraction. In the fiscal fourth quarter, gross margin contracted 100 basis points (bps) due to a rise in distribution-related costs as well as higher occupancy and product costs. Also, an unfavorable sales mix due to soft sales of low-margin categories, such as technology and storage, hurt gross margin. Gains from the ongoing sourcing endeavors and lower promotional activity partly offset gross margin contraction.

Further, adjusted operating income dropped nearly 6%, mainly due to the impact of an additional week last year. Adjusted operating margin fell 10 bps to 18.6%. Decline in operating margin was somewhat cushioned by a 90 bps fall in SG&A expenses, as a percentage of sales. Moreover, the company expects adjusted operating income for fiscal 2019 in the range of $640-$665 million, down from $671.7 million in fiscal 2018. Adjusted earnings per share for fiscal 2019 are envisioned to be $2.34-$2.46, depending on weighted average shares of about 158 million.

For the fiscal first quarter, adjusted earnings per share are envisioned to be 28-33 cents, down from 39 cents earned in the year-ago quarter. Furthermore, comps are projected to decline low-single-digits in first-quarter fiscal 2019. Moreover, net sales for fiscal 2019 are estimated in the band of $5.19-$5.24 billion, down from $5.27 billion realized in fiscal 2018.

Can Efforts Aid Revival?

Michaels is focused on integrating e-commerce and in-store operations to enhance the omni-channel experience. Notably, the company nearly doubled its online sales compared with the prior-year quarter, driven by enhanced ability to search, expanded assortments and in-store product availability that led to higher traffic and conversion rates. Further, it continues to gain from omni-channel capabilities like “Buy Online Pick-up In Store” (BOPIS).

The company is focused on expanding its in-house order fulfillment system for e-commerce sales. Michaels is developing the latest order management system besides retrofitting the Alliance distribution center that was opened in the fiscal third quarter. Notably, it remains on track to be out of the third-party fulfillment center by the end of first-quarter fiscal 2019.

Apart from these, the company is remodeling stores to feature flexible merchandising areas (or FMA), where seasonal and other merchandise are showcased providing better access to customers. It is also putting together additional data analytics into its supply chain, inventory and marketing programs, which should help expand operating margins.

We believe the aforementioned factors to provide cushion to this Zacks Rank #3 (Hold) stock and help it win back investors’ confidence.

Stocks to Consider

Regis Corporation (RGS - Free Report) outperformed the Zacks Consensus Estimate by a wide margin in the trailing four quarters. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tractor Supply Company (TSCO - Free Report) has a long-term earnings growth rate of 11.4% and a Zacks Rank #2 (Buy).

The TJX Companies, Inc. (TJX - Free Report) has a long-term earnings growth rate of 10.9% and a Zacks Rank #2.

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