Deutsche Bank Positive On Michaels, Offers 3 Key Takeaways From Q1 Report

Shares of Michaels Companies Inc MIK fell more than 2.5 percent on soft first-quarter results. But, Deutsche Bank is still bullish on the stock, saying that the trends should improve.

Analyst Mike Baker offered three key takeaways on the first quarter report.

1. 'What Caused 1Q Comps To Be Surprisingly Weak?'

Although an early Easter helped February and March comps, April sales were affected due to a pull forward of Michael's "Lowest Price of the Season" sales event.

"MIK did run some promotions in April, anticipating the impact of the pull forward, but the events did not provide the expected lift perhaps due to some general softness in retail traffic that month. This resulted in 125 bps comp miss versus the midpoint of guidance," Baker wrote in a note.

Related Link: Jim Cramer Says Michaels Stores Are "In The Wrong Place On Earth"

2. 'What Is Implied In 2H Comp Guidance, And 2 Reasons Why Trends Improve'

The weakness from April appears to have continued into May as evidenced by the relatively soft comp plan of 0.4–1.4 percent. Yet, the company kept its full year guidance of 2.2–2.7 percent on a reported basis.

Baker said the trends should improve as the company does better around seasonal calls to action, as evidenced by Easter 2016 and holiday 2015 — and third/fourth quarter has more of these events.

"Second, after seeing success from 70 store refreshes in January, including seasonal flex-areas at the store front, MIK will roll this out to another 270 stores in time to impact 2H16," the analyst said.

3. 'Six Reasons Why Trends Improve'

Baker highlighted six reasons why margins should improve:

• 1. "$0.01, or about 30 bps of investments in both 1Q and 2Q aimed at improving direct sourcing and better buying.
• 2. "Seeing the benefits of those initiatives by 4Q16;
• 3. "Lamrite's seasonality shifting from a 70 bps or $1.2 million drag in 1Q to a profit driver in 2H due to that businesses typical annual flow;
• 4. "Timing of inventory receipts which hurts 2Q by $0.03 or 90 bps, but should help 4Q;
• 5. "Lower advertising costs in 2Q and 3Q versus a year over year increase in 2Q;" and
• 6."Leverage on better comps."

Baker raised his 2016 EPS estimate to $1.97 from $1.96, but modestly lowered his revenue outlook to $5.329 billion from $5.345 billion.

Baker maintains his Buy rating and $30 price target on the stock' at time of writing, Michaels was down 1.61 percent at $27.35.