The Michaels Companies (MIK 18.07, -3.85, -17.58%) is trading sharply lower today after
reporting Q1 (Apr) results last night and providing disappointing guidance for
Q2 (Jul). Michaels is the largest arts and crafts specialty retailer in North
America. It sells arts, crafts, framing, floral, wall décor, and seasonal
merchandise for Makers and do-it-yourself home decorators.
The company operates nearly 1,300 stores in 49 states and Canada under the brands Michaels (1,243), Aaron Brothers (3), and Pat Catan's (36). It also makes online sales via Michaels.com, consumercrafts.com, and aaronbrothers.com. MIK also owns Artistree, a manufacturer of framing merchandise, and Darice, a wholesale distributor in the craft, gift, and decor industry.
Each Michael store carries approximately 45,000 products, including arts, crafts, scrapbooking, floral, framing, home decor, seasonal offerings, and children's hobbies. Its product category breakdown is as follows: General Crafts (49% of FY17 revenue), Home Decor and Seasonal (23%), Framing (16%),and Papercrafting (12%). MIK believes it offers the most complete arts and crafts experience and that it's the preferred destination in the industry. Of note, MIK's private branded products, which represent about half of revenue, are only available at Michaels and allow the company to further differentiate its merchandise while enhancing product margins.
In an industry with few well-known national brands, MIK's private brands are recognized as a leader in many categories. MIK's private brands totaled approximately 58% of company sales in FY17 and include, among others, Recollections, Studio Decor, Bead Landing, Creatology, Ashland, Celebrate It, and ArtMinds. In terms of its history, Michaels was taken private by Blackstone Group and Bain Capital in 2006, however, it returned to the public markets in late June 2014 in an IPO. As a quick note, MIK recently completed a strategic review of its Aaron Brothers segment, a retail chain primarily focused on custom framing, ready-made frames, wall art, and art supplies. MIK decided to close 94 full-size Aaron Brothers stores and reposition Aaron Brothers as a "store-within-a-store," providing custom framing services in all Michaels stores.
Turning to the Q1 (Apr) results, non-GAAP EPS rose 3% year/year to $0.39, which was above prior guidance of $0.36-0.38. Revenue was roughly flat year/year (down 0.3%) to $1.16 bln, which also was slightly above prior guidance of $1.139-1.150 bln. The decrease in sales was primarily due to the closure of all 94 full-size Aaron Brothers stores in Q1 (Apr).
While the AprQ results were pretty good, the Q2 (Jul) guidance was disappointing. MIK expects Q2 EPS of $0.12-0.14, which is a good bit below market expectations. Same store comps are always an important metric for retailers. On that front, MIK posted AprQ comps of +0.4%, in-line with prior guidance of +0.0-1.0%. For Q2 (Jul), MIK expects comps to be flat.
In sum, this was a tough quarter for Michaels. While the AprQ results were decent, the EPS guidance for JulQ is spooking investors. The stock has been pretty volatile over the past year or so. It went from around $18 in mid-November to nearly $28 in late January before heading back down again to the high teens this spring. The stock had been moving higher again in June, up about 15% heading into this report. However, today's action is wiping out those gains.
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