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Michaels (MIK) Gains on Strategic Initiatives, Hit by Tariff

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The Michaels Companies, Inc. (MIK - Free Report) is gaining on the back of strategic initiatives. Notably, the company is on track with solid e-commerce efforts like Buy Online Pick Up In Store (BOPUS), the core ’maker’ strategy and store optimization initiatives.

Recently, the stock got a boost from the appointment of former Walmart (WMT - Free Report) executive as its CEO. Investors are optimistic about the new appointment. Moreover, the company’s plans to improve marketing productivity are likely to reduce expenses in the fiscal fourth quarter. In the past one month, shares of this Zacks Rank #3 (Hold) company have increased 19.1% outperforming the industry’s growth of 0.1%.

We note that shares of this Irving, TX-based company have decreased around 17% in the past three months against the industry’s growth of 4.2%. The dismal run was attributed to its lower-than-expected results in the third quarter of fiscal 2019 due to soft margins and store closures along with soft comps and lower wholesale revenues. Also, tariff-related headwinds hurt merchandise margin in the same quarter. Management cut sales and earnings view for fiscal 2019.


 

For fiscal 2019, net sales of $5.06-$5.08 billion is projected, down from $5.16-$5.19 billion mentioned earlier. Notably, it generated net sales of $5.27 billion in fiscal 2018. Comparable store sales (comps) are now anticipated to decline 2% compared with earlier mentioned flat comps. Further, the company now estimates adjusted operating income of $565-$575 million, down from previously stated $625-$645 million. Adjusted earnings per share are now envisioned to be $2.07-$2.12, down from $2.31-$2.42 mentioned earlier.


Initiatives Bode Well

Michaels has embarked on a customer-centric, core 'Maker' strategy, which aims at building the business better and leveraging digital and data. The company is shifting to store selling culture, crafting a customer-centric assortment, optimizing pricing and promotions, and maximizing marketing productivity to build a better business. It launched a store-selling initiative in August to shift from a task-based store culture to serving customers and selling.

Further, the company is progressing well to maximize marketing productivity through the recently completed media-mix model, wherein it will shift to higher productivity media options such as digital and addressable TV, without increasing the spending. This will lower marketing spending in the fiscal fourth quarter and beyond.

Michaels also implemented a pricing and promotion strategy in the third quarter. This will likely help in optimizing discounts and improving customers’ perception of the value offered through discounts, coupons and other promotional activities. Early results from the initiative have been promising, with higher productivity promotions. The company expects this capability to drive growth in 2020.

Also, the company remains committed to store-expansion and remodeling efforts to elevate margins and boost profitability. This will lead to higher comps, thus generating greater sales and capturing market share. It has been focused on expanding its store base and introducing technological advancements to enhance services for its patrons. The company also remains focused on expanding assortments in key growth-driving categories while de-emphasizing on slower moving categories. Its recent shift in assortment to the maker categories — including technology, craft storage and fine art — performed well in the fiscal third quarter.

Apart from these, Michaels is focused on integrating its e-commerce and in-store operations to enhance the omni-channel experience. Notably, the e-commerce platform has been a contributor to sales since its launch in 2014. In third-quarter fiscal 2019, sales from the e-commerce business remained sturdy, backed by higher traffic and conversion rate. Moreover, it continues to gain from omni-channel capabilities like BOPUS, which is a cost-effective way of fulfilling online orders as it eliminates shipping costs. In the fiscal third quarter, BOPUS contributed nearly 45% to online sales and was about 65% of online orders.

The company recently launched e-commerce operations in Canada, following which e-commerce sales in the region grew significantly. Most of its sales came from BOPUS. Management expects e-commerce sales in Canada to act as a major growth driver in fourth-quarter fiscal 2019 and fiscal 2020. Moreover, the company is also putting together additional data analytics into its supply chain, inventory, and marketing programs, which should help expand operating margins over time. These apart, efforts such as optimizing digital spending, enhancing web capabilities and customizing website as per consumer preferences bode well.

We expect the company’s growth initiatives to help steer through adverse tariff environment. This should contribute meaningfully to its growth in the long term.

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