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Michaels (MIK) Down 16% on Q3 Earnings Miss & Lower FY19 View

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The Michaels Companies, Inc. (MIK - Free Report) reported dismal third-quarter fiscal 2019 results, wherein both the top and bottom line missed the Zacks Consensus Estimate. Earnings and sales also declined on a year-over-year basis.

Consequently, management trimmed sales and earnings view for fiscal 2019. Net sales are now projected to be $5.06-$5.08 billion for fiscal 2019, down from the prior estimate of $5.16-$5.19 billion and $5.27 billion generated in fiscal 2018. Comps are now anticipated to decline nearly 2% compared with the earlier projection of flat comps.

Further, the company now estimates adjusted operating income to be $565-$575, down from the previous projection of $625-$645 million. Interest expense is expected to be about $152 million in the current fiscal year, with effective tax rate of 23-24%.

Adjusted earnings per share are now envisioned to be $2.07-$2.12, down from $2.31-$2.42 guided earlier. Following the soft quarterly results and bleak outlook, shares of this Texas-based company declined 15.7% on Dec 5.

However, we note that this Zacks Rank #3 (Hold) company is making efforts to get back on the growth track. The company has been implementing initiatives that support its 'Maker' strategy, which is expected to boost its business.

Q3 Numbers

Michaels’ adjusted earnings of 40 cents per share lagged the Zacks Consensus Estimate of 49 cents and declined 16.7% from the prior-year quarter. This downside can be mainly attributed to lower sales and margins, somewhat offset by fall in SG&A expenses.

Net sales of this arts and crafts specialty retailer dipped 4.1% year over year to $1,222.7 million and fell short of the Zacks Consensus Estimate of $1,256 million. Sales declined year over year owing to impacts of the Pat Catan’s store closures in fiscal 2018 coupled with a 2.2% fall in comparable store sales (comps) and lower wholesale revenues. The decline was partly compensated by incremental sales from the addition of 18 net flagship stores since the end of third-quarter fiscal 2018.

Comps fell due to lower customer transactions, partly mitigated with a rise in average ticket. However, the company delivered strong e-commerce sales again in the reported quarter fueled by higher traffic and conversion rates.

Gross profit slipped 7.8% year over year to $441.6 million and gross margin contracted 150 basis points (bps) to 36.1%. Lower gross margin can be attributed to decline in merchandise margin along with occupancy and distribution expense deleverage, which were partly offset by a decline in inventory reserves.

SG&A expenses, including pre-opening costs, decreased 5.1% to $324.2 million. The decline was mainly due to lower payroll-related costs that include performance-based compensation and expenses related to the Pat Catan’s stores closure. As a percentage of sales, SG&A expenses, including pre-opening costs, decreased 30 bps to 26.5%.

Adjusted operating income fell 16.9% to $117.4 million due to lower gross profit, somewhat offset by decline in SG&A expense.

Store Update

During the fiscal third quarter, the company opened 13 flagship stores, 11 of these were former Pat Catan’s outlets converted to the Michaels brand. Simultaneously, it shuttered one Michaels outlet and relocated five flagship stores during the same period. As of Nov 2, 2019, it operated 1,274 Michaels stores.

For fiscal 2019, the company intends to open 16 net flagship outlets that include nearly 12 rebranded Pat Catan’s stores. Also, it expects to relocate 13 Michaels stores.

Financial Position

Michaels had cash and equivalents of $118.4 million, long-term debt of $2,649.8 million and total stockholders’ deficit of $1,631.8 million as of Nov 2, 2019. Total merchandise inventory fell 1.2% to $1,423.4 million at the end of the fiscal third quarter. However, average inventory per Michaels store inclusive of distribution centers, inventory in-transit and inventory for its e-commerce site grew 2.9%.

Moreover, the company incurred capital expenditure of $32 million in third-quarter fiscal 2019 mainly due to investments in technology projects, including e-commerce and store-growth initiatives. In the first nine months of the fiscal year, it spent $90 million in capital expenditure. For fiscal 2019, Michaels expects to incur capital expenditure of about $125 million.

In the fiscal third quarter, the company bought back 8.6 million shares worth nearly $80 million, under its share repurchase authorization. Following this, Michaels had an outstanding repurchase authorization of roughly $294 million.


Apart from lowering the fiscal 2019 view, the company outlined its guidance for the fourth quarter. For the fiscal fourth quarter, comps are projected to decline 2-3%. This reflects the existing business trends, a shorter holiday selling season in the same quarter and a potential adverse impact from liquidation of A.C. Moore retail stores.

Adjusted operating income is estimated to be $271-$281 million. Moreover, net interest expense is estimated to be roughly $38 million. The effective tax rate is likely to be between 23% and 24%. Further, adjusted earnings are envisioned to be $1.21-$1.27 per share.

Key Picks in the Same Space

DICK'S Sporting Goods, Inc. (DKS - Free Report) delivered average positive earnings surprise of 11.5% in the trailing four quarters. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports, Inc. (HIBB - Free Report) , also a Zacks Rank #1 stock, has an impressive long-term earnings growth rate of 12.2%.

Office Depot, Inc. (ODP - Free Report) , which presently carries a Zacks Rank #2 (Buy), has an expected long-term earnings growth rate of 11.1%.

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