Michaels Companies (MIK) Reports Q1 Loss, Misses on Sales

The Michaels Companies, Inc. MIK posted drab first-quarter fiscal 2020 results, wherein the bottom and top lines declined on a year-over-year basis. Results were negatively impacted by temporary store closures. Further, management refrained from issuing any guidance for fiscal 2020, citing unprecedented impacts of COVID-19.

However, the company has made significant transformations by enhancing digital and other omni-channel capabilities. Additionally, management is witnessing encouraging trends with the reopening of stores.  

Q1 Numbers

Michaels’ adjusted loss was 43 cents per share whereas it reported adjusted earnings of 31 cents in the prior-year quarter. Also, the figure missed the Zacks Consensus Estimate of 10 cents. This downside can be mainly attributed to lower sales and margins, somewhat offset by a fall in SG&A expenses.

Net sales of this arts and crafts specialty retailer declined 26.9% year over year to $800 million and fell short of the Zacks Consensus Estimate of $956 million. Sales declined year over year due to temporary store closures stemming from the COVID-19 pandemic. Further, comparable store sales (comps) fell 27.6%. Since stores reopened in May, the company has witnessed solid demand, resulting in comps growth of 11%.

On the flip side, e-commerce surged significantly to $118.8 million, driven by new delivery options, including curbside pick-up, same-day delivery, expanded shipment from store and BOPIS as along with in-app purchases. This helped in providing some cushion to sales.

Gross profit declined 46.9% year over year to $221.8 million and gross margin contracted significantly to 27.7% from 38.2% in the last-year quarter. Lower gross margin can be attributed to deleverage in occupancy and distribution costs stemming from the ongoing pandemic along with higher tariffs and negative channel mix.

SG&A expenses, including pre-opening costs, decreased 14% to $281.3 million. As a percentage of sales, SG&A expenses, including pre-opening costs, increased 590 bps to 35.2%.

Adjusted operating loss was $60.4 million against adjusted operating income of $101.4 million in the prior-year quarter. This might be due to lower gross profit, somewhat offset by a decline in SG&A expenses.

The Michaels Companies, Inc. Price, Consensus and EPS Surprise

The Michaels Companies, Inc. price-consensus-eps-surprise-chart | The Michaels Companies, Inc. Quote

Financial Position

Michaels had cash and equivalents of $926.8 million, long-term debt of $2,639.1 million and total stockholders’ deficit of $1,515.4 million as of May 2, 2020. Total merchandise inventory inched up 0.8% to $1,110.8 million at the end of the quarter under review.

In March, the company withdrew $600 million from its revolving credit facility. Post the first quarter, it repaid debt of $300 million from the credit facility. This leaves it with sufficient liquidity for the near future. Going ahead, it anticipates utilizing this cash position to fund capital expenditures, working capital and debt.

Store Update

As of May 2, 2020, less than 500 stores were reopened. However, curbside pickup and ship from store facilities are being used for fulfillment by certain closed stores.

Meanwhile, the company highlighted that 1,000 stores reopened as of Jun 4, 2020. These stores are following the local health guidelines and further envision to reopen 1,273 stores by the end of June.

Looking Ahead

On May 14, Michaels revealed plans of closing its Darice wholesale operations. This move, which is expected to be concluded by Nov 30, came after the completion of a strategic review. The company further noted that it will keep the sourcing-related office in China and incur a cost of $46-$52 million.

In addition to this, the company has completed successful testing of its loyalty program and now expects to launch it later in fiscal 2020. Apart from these, management foresees positive cash flow in the second half of fiscal 2020.

Price Performance

We note that shares of this Zacks Rank #3 (Hold) company have gained 34.9% in the past three months compared with the industry’s growth of 10%.

3 Stocks to Consider

Tractor Supply Company TSCO has an impressive long-term earnings growth rate of 12% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Office Depot ODP, also a Zacks Rank #2 stock, has an impressive long-term earnings growth rate of 6.8%.

Lowes Companies LOW, which presently carries a Zacks Rank #2, has an expected long-term earnings growth rate of 15.2%.

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