Fri. Jan 24th, 2020

The Michaels Companies, Inc. (NASDAQ: MIK)

36 min read

The Michaels Companies, Inc. (NASDAQ: MIK) released today its diluted earnings for each share for the 3rd-quarter of fiscal 2k19 of $0.190, or $0.400 for each adjusted diluted share which excludes charges totalling $31.40M (net of taxes) consisting primarily of non-cash goodwill and other impairment charges associated with the Darice wholesale business. This compares to diluted earnings for each share for the 3rd-quarter of fiscal 2k18 of $0.500, or $0.480 for each adjusted diluted share.

3rd-Quarter Highlights

Net sales were $1,222.00M in the 3rd-quarter of fiscal 2k19 compared to $1,274.10M in the 3rd-quarter of fiscal 2k18. The decline in net sales was primarily due to a 2.20 percent decline in comparable store sales, the closure of our Pat Catan’s stores throughout the 4th-quarter of 2k18, and a decline in wholesale revenue. The decline was partially offset from sales related to 18 additional Michaels stores (net of closures) since the end of the 3rd-quarter of fiscal 2k18. Throughout the 3rd-quarter, the Company opened 13 new Michaels stores, 11 of which were former Pat Catan’s stores converted to the Michaels brand, closed one Michaels store, and relocated five Michaels stores. At the end of the 3rd-quarter of fiscal 2k19, the Company operated 1,274 Michaels stores.

Gross profit was 36.10 percent of net sales in the 3rd-quarter of fiscal 2k19 compared to 37.60 percent in the 3rd-quarter of fiscal 2k18. The 150.0 basis point decline was primarily due to a decline in merchandise margin and the deleveraging of occupancy and distribution related costs, partially offset by a decline in inventory reserves. The decline in merchandise margin reflects the impacts of higher promotional activity, higher tariffs on inventory we purchase from China, and a change in sales mix, partially offset by benefits from our ongoing pricing and sourcing initiatives.

Selling, general and administrative cost including store pre-opening costs (“SG&A”) was $324.20M in the 3rd-quarter of fiscal 2k19 compared to $341.80M in the 3rd-quarter of fiscal 2k18. The decline was primarily due to payroll related costs including performance-based compensation, and costs associated with the closure of the Pat Catan’s stores.

Restructure and impairment charges in the 3rd-quarter totalled $41.40M and consist primarily of non-cash goodwill and other impairment charges associated with the Darice wholesale business.

Operating income was $76.00M compared to $137.20M in the 3rd-quarter of fiscal 2k18. Excluding restructure and impairment charges, adjusted operating income for the 3rd-quarter of fiscal 2k19 was $117.40M. This compares to adjusted operating income in the 3rd-quarter of fiscal 2k18 of $141.30M, excluding an inventory write-down of $4.10M related to a third-party product which did not meet the Company’s quality standards.

Interest cost inclined $1.00M to $38.80M in the 3rd-quarter of fiscal 2k19, from $37.80M in the 3rd-quarter of fiscal 2k18, due primarily to higher interest on our new 2027 Senior Notes, partially offset by a decline related to reduced borrowing on the Company’s Amended Revolving Credit Facility. On August 30, 2k19, the Amended Revolving Credit Facility was amended to extend the maturity to August 2024.

The effective tax rate was 22.50 percent in the 3rd-quarter of fiscal 2k19, compared to 15.80 percent in the 3rd-quarter of fiscal 2k18. The effective tax rate was higher primarily due to tax benefits recognized in the 3rd-quarter of fiscal 2k18 associated with the enactment of the Tax Cuts and Jobs Act of 2k17 (“Tax Act”).

Net income was $28.70M in the 3rd-quarter of fiscal 2k19, compared to $83.80M in the 3rd-quarter of fiscal 2k18. Excluding restructure and impairment charges, losses on early extinguishments of debt and refinancing costs and related tax adjustments, adjusted net income for the 3rd-quarter of fiscal 2k19 was $60.10M, compared to adjusted net income for the 3rd-quarter of fiscal 2k18 of $79.80M, which excludes the inventory write down of $3.10M (net of taxes) described above and the adjustments related to the Tax Act.

Total merchandise inventory at the end of the 3rd-quarter of fiscal 2k19 declined 1.20 percent to $1,423.40M compared to $1,440.90M at the end of the 3rd-quarter of fiscal 2k18 primarily related to closing the Pat Catan’s stores. Average Michaels inventory on a for each store basis, inclusive of distribution centers, inventory in-transit and inventory for the Company’s e-commerce site, inclined 2.90 percent to $1,069,000.00 reflecting the impact of tariffs, and compares to $1,039,000.00 at the end of the 3rd-quarter of fiscal 2k18.

For the 4th-quarter of fiscal 2k19, the Company expects:

  • comparable store sales to be down 2.00 percent-3.00 percent reflecting current business trends, a shorter holiday selling season in the 4th-quarter, and a potential negative impact from the liquidation of A.C. Moore retail locations;
  • adjusted operating income to be between $271.00M and $281.00M;
  • net interest cost to be approximately $38.00M;
  • the effective tax rate to be between 23.00 percent and 24.00 percent; and
  • adjusted diluted earnings for each common share to be between $1.210 and $1.270, based on diluted weighted average common shares of 147.00M.

For fiscal 2k19, the Company now expects:

  • net sales to be between $5.060B and $5.080B;
  • comparable store sales to be down approximately 2.0 percent;
  • to open net 16.0 new Michaels stores, inclusive of 12.0 Pat Catan’s stores the Company plans to rebrand and reopen, and relocate 13 Michaels stores;
  • adjusted operating income to be in the range of $565.00M to $575.00M;
  • interest cost to be approximately $152.00M;
  • the effective tax rate to be between 23.00 percent and 24.00 percent;
  • adjusted diluted earnings for each share to be between $2.070 and $2.120, based on diluted weighted average shares of approximately 153.00M; and
  • capital expenditures to be approximately $125.00M.

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