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Michaels Up 18% in 3 Months on Solid EPS View & Q2 Results

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The Michaels Companies, Inc. (MIK - Free Report) stock has gained 18.2% in the past three months, thanks to its impressive second-quarter fiscal 2019 results and upbeat earnings view for the fiscal year. Also, the company’s strained margins trend reversed in the reported quarter.

Moreover, its efforts to enhance omni-channel experience and other strategic initiatives are commendable. We note that this Zacks Rank #3 (Hold) stock has outperformed the industry’s 20.8% decline in the past three months.

Let’s Delve Deep

Michaels has an impressive surprise history, which continued in second-quarter fiscal 2019. This marked the company’s fifth earnings beat in the trailing six quarters, with a positive sales surprise in three of the last four quarters. The bottom line also improved year over year in the fiscal second quarter, backed by efficient expense management and higher margins. Although sales fell year over year due to the impacts of the Pat Catan’s store closures in fiscal 2018, the metric gained from comparable store sales (comps) growth and sales from the operation of 11 net additional flagship stores in the quarter.

Notably, the company returned to positive comps in the quarter under review, benefiting from strategic efforts and rise in average ticket, partly offset by a decline in customer transactions. Moreover, Michaels delivered strong e-commerce sales fueled by higher traffic and conversion rates. After five straight quarters of gross margin decline and six consecutive quarters of operating margin contraction, the company witnessed margin improvement. The upside was driven by pricing and sourcing efforts coupled with occupancy expense leverage despite adverse impacts of tariffs on goods sourced from China, and rise in promotional activity and change in sales mix.

In fiscal 2019, gross margin is likely to gain from ongoing sourcing initiatives and improved promotions management. Further, the company expects SG&A expense to leverage due to the absence of restructuring charges and investment spending of $16 million incurred last fiscal. Also, higher cost savings realized in the previous quarter will aid margins. As a result, adjusted earnings per share for fiscal 2019 are now envisioned to be $2.31-$2.42, up from $2.29-$2.41 anticipated earlier.

Analysts are also optimistic about the company’s prospects. The Zacks Consensus Estimate of 49 cents for the third quarter and $2.37 for fiscal 2019 moved north 6.5% and 1.3%, respectively, over the past seven days. Further, a VGM Score of A coupled with an expected earnings growth rate of 5.6% clearly demonstrates the stock’s potential.

Strategic Endeavors

In order to enhance omni-channel experience and boost the top line, Michaels focuses on integrating the e-commerce and in-store operations. The company is steadily gaining from capabilities like “Buy Online Pick Up in Store” (BOPIS), which is a cost-effective way of fulfilling online orders as it eliminates shipping costs. In the fiscal second quarter, BOPIS contributed nearly 44% to online sales and was about two-thirds of online orders.
Moreover, the company exited third-party fulfillment providers for online orders. As a result, all orders from Michaels.com are now fulfilled by its stores or own distribution centers.

Apart from store-expansion and remodeling efforts, the company remains focused on expanding assortments in key growth-driving areas besides de-emphasizing on slower-moving categories. As part of its first category expansion in all stores, Michaels doubled the space for assortments of tools and technology with recognized brands such as Cricut, Caesar and Oracle. Further, the company remains on track to expand assortments in craft storage, jewelry and art categories. Meanwhile, it expects to downsize categories like bakeware, ready-made frames and more traditional paper crafting supplies.

However, the company is not immune to tariff-related woes as it is likely to witness an uncertain tariff environment. Moreover, management expects to incur applicable direct import product costs of $400-$500 million, when the List 4 China tariffs are fully implemented. Also, it projects lower sales in the back half of the fiscal year, and the metric is likely to come in the range of $5.16-$5.19 billion.

Nevertheless, Michaels is confident that the strategic initiatives will aid in improving overall performance. Encouragingly, the company remains keen on improving current sales trends and executing against the 2019 priorities to build momentum in the second half.

3 Key Picks in the Same Space

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Regis Corporation (RGS - Free Report) has an expected long-term earnings growth rate of 7.5% and a Zacks Rank #1 at present.

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