How The Michaels Companies, Inc. Turned 1% Sales Growth Into a 19% Earnings Boost

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Arts and crafts store-chain The Michaels Companies (NASDAQ: MIK) reported third-quarter results early Thursday morning. The company beat some of its own guidance targets and fell short of others, but the bottom line came in well ahead of expectations.

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Here's a closer look at Michaels' third quarter.

Michaels' third-quarter results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Net sales

$1.24 billion

$1.23 billion

0.8%

Net income

$80 million

$76 million

4.3%

GAAP earnings per share (diluted)

$0.44

$0.37

19%

What happened with Michaels this quarter?

  • Comparable-store sales increased by 1% compared to the third quarter of 2016. This figure included roughly $10 million of lost sales due to hurricanes Irma and Harvey, and fell below management's guidance for comps of approximately 1.7%.
  • Soft sales notwithstanding, earnings landed at the top end of management's guidance range. A richer product mix helped some, but the company controlled its own destiny on this metric with the help of share buybacks.
  • Michaels delivered 19% higher earnings per share based on a modest 4% jump in bottom-line income, all thanks to a generous share-buyback program. The company has spent a total of $499 million on share repurchases over the last four quarters, including $49 million in the third quarter alone. That's enough to retire 23.3 million shares, or 23% of the year-ago period's diluted share count.

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Michaels' management issued the following financial targets for the end of 2017:

  • Fourth-quarter comparable-store sales should rise by roughly 2% year over year. Earnings should land near $1.17 per diluted share.
  • The full-year earnings target was moved up from $2.13 to $2.15 per diluted share, reflecting the third-quarter earnings surprise.
  • Full-year sales are now seen growing by 3.1%, down from 3.3% in the second-quarter update.

What management had to say

"We are seeing nice momentum in our business, excluding the disruption from the hurricanes," said Michaels CEO Chuck Rubin in a prepared statement. "As we turn to the fourth quarter, we believe our holiday assortment is bigger and better than ever, and our teams are ready to serve customers, both in stores and online. We are pleased with the start to the quarter, although we recognize the heart of the season still lies ahead."

Looking ahead

Rubin often reminds investors that his company is less vulnerable to the onslaught of online retailers than most of its peers in the traditional retail space. Michaels' customers tend to enjoy having a closer look at their crafting materials. That hands-on experience is available in Michaels stores, and it's not easy to duplicate it in an online store.

That being said, Michaels is trying its hand at expanding into the online space where that makes sense. The company recently launched a brand new site where customers can order a custom picture frame, either filled with an uploaded digital image, or ready to accept your mixed-media masterpiece at home.

Rubin calls his online operations "a very small part of our overall business," but hopes to grow into this opportunity over time.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends The Michaels Companies. The Motley Fool has a disclosure policy.