The Michaels Companies Earnings: Looking Forward to the Holidays

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Arts and crafts retailer The Michaels Companies (NASDAQ: MIK) reported third-quarter results on Thursday morning. The company exceeded management's adjusted earnings target by 12% thanks to generous share buybacks and solid store traffic.

Michaels' third-quarter results: The raw numbers

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Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Net sales

$1.27 billion

$1.24 billion

2.4%

Net income

$83.8 million

$79.8 million

5%

GAAP earnings per share (diluted)

$0.50

$0.44

14%

What happened with Michaels this quarter?

  • Comparable store sales increased by 4.3% in constant currencies. A calendar quirk, resulting from Michaels ending every fiscal year and quarter on a Saturday, moved the Halloween season into the third quarter and shifted the Christmas shopping one week deeper into this reporting period. Backing out these calendar effects, comp sales rose 1.1%. For comparative purposes, comps fell 0.4% in the second quarter and increased by 1% in the year-ago period.
  • Adjusting the bottom-line earnings for a one-time tax benefit and an equally unusual inventory writedown, non-GAAP earnings rose 9% to $0.48 per share. Guidance for this quarter had pointed to roughly $0.44 per share for this adjusted metric.
  • The bottom-line surprise included a significant contribution from the share buyback program, which retired 6.5% of the total share count during the third quarter and should cancel another 4.5% of the current float in the fourth quarter.
  • More than 700 Michaels stores featured flexible merchandising areas, or FMA, by the end of this quarter. That's up from 420 stores a year earlier and closer to full coverage of the entire 1,256-location network. The FMA area gives Michaels a central spot where seasonal or otherwise timely items can be showcased. The store remodeling project continues, because FMA stores tend to outperform their less-flexible sister locations.

What management had to say

In a conference call with Wall Street analysts, Michaels CEO Chuck Rubin highlighted the changes his company is bringing into this year's holiday season.

"We know from our customer data that in Q4, the mix of customers generally overindexes to the casual customer as the holiday selling season picks up," Rubin said. "We continue to simplify our in-store, seasonal presentations to make it easier for customers to shop for the holiday. For example, we've consolidated all of our garland, tree skirts, stockings, and holiday pillows together so that the customer can see the breadth and depth of the assortment we offer."

The company is also adding new gift-wrapping stations to its stores and integrating its budding e-commerce operations into the in-store experience. About one-third of online sales end up being picked up at a local store, exposing the e-customer to the full physical store encounter and with a chance of triggering some impulse buys along the way.

Looking ahead

Here at the front edge of the holiday season, Michaels' management lifted their full-year earnings and revenue guidance targets by just a smidgen. Full-year sales should land near $5.27 billion, up from $5.26 billion three months ago. Adjusted earnings are now targeted at $2.37 per share, up from $2.36 per share in the previous guidance slate.

That works out to adjusted fourth-quarter earnings guidance of roughly $0.45 per diluted share on something like $1.79 billion in net sales.

Beyond all of that, Michaels will continue its store remodeling program in 2019 while expanding its in-house order fulfillment system for e-commerce sales. The company is also building more data analytics into its supply chain, inventory, and marketing programs. If those investments work out as expected, we should see Michaels widening its operating margins over time thanks to more targeted and deliberate operations at every step of the way from suppliers to customers.

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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.