Market Overview

The Michaels Companies Announces Second Quarter 2018 Results and Raises Fiscal 2018 EPS Guidance

Share:
  • Comparable Store Sales Decreased 0.4%
  • Net income of $27.5 million, or $0.15 per diluted share
  • Full Year Diluted EPS Guidance raised by $0.10 to $2.29 to $2.42
  • 10.7 Million Shares of Common Stock Repurchased Through Accelerated
    Stock Repurchase Program

The Michaels Companies, Inc. (NASDAQ:MIK) today reported diluted
earnings per share for the second quarter of fiscal 2018 of $0.15, one
cent above the Company's previously provided guidance.

"We delivered second quarter results that were in-line with our
expectations despite continued softness in the core arts and crafts
industry. Our sales trend improved as the quarter progressed, reflecting
better merchandise in-stocks and enhanced omnichannel capabilities. In
addition, we converted 238 stores to our flexible merchandising area
format, launched Michaels Rewards in Canada, and tested a number of
different promotional vehicles to learn more about what motivates our
customer," said Chuck Rubin, Chairman and CEO. "Looking to the rest of
fiscal 2018, we have raised our full year EPS guidance to reflect the
net impact of higher than anticipated headwinds from
distribution-related costs, a lower expected effective tax rate, and the
impact of our accelerated share repurchase program. We are encouraged by
recent sales trends and believe the investments we made in the first
half of the year will help us deliver our revenue and earnings
expectations for the second half of fiscal 2018."

Second Quarter Highlights

Net sales were $1,053.3 million, compared to $1,072.6 million in the
second quarter of fiscal 2017. The decrease in net sales was primarily
due to the closure of all 94 full-size Aaron Brothers stores in the
first quarter of fiscal 2018 and a 0.4% (0.5% on a constant currency
basis) decline in comparable store sales. The sales decrease was
partially offset by sales from the operation of 21 additional Michaels
stores (net of closures) during the quarter and an increase in wholesale
revenue. During the quarter, the Company opened nine new Michaels
stores, closed one Michaels store and relocated seven Michaels stores.
At the end of the second quarter, the Company operated 1,251 Michaels
stores and 36 Pat Catan's stores.

Operating income was $74.3 million, compared to $88.0 million in the
second quarter of fiscal 2017. As expected, the decrease in operating
income was due to lower gross profit, partially offset by lower selling,
general and administrative expense, including store pre-opening costs
("SG&A"). The decrease in gross profit, as a percentage of sales, in the
quarter was due to higher distribution-related costs, increased
promotional activity and occupancy cost deleverage, partially offset by
benefits from the Company's ongoing sourcing initiatives. SG&A was lower
in the quarter primarily due to a reduction in performance-based
compensation and a decrease in expenses related to the Aaron Brothers
store closures during the first quarter of fiscal 2018, partially offset
by higher marketing expenses. In addition, the Company recognized a $3.2
million gain in the quarter primarily related to the settlement of lease
obligations associated with the closure of 94 full-size Aaron Brothers
stores and its related one-time restructuring charge in the first
quarter of fiscal 2018. Excluding the $3.2 million gain, adjusted
operating income for the second quarter of fiscal 2018 was $71.1 million.

Interest expense increased $6.1 million to $37.1 million, from $31.1
million in the second quarter of fiscal 2017 due to higher LIBOR rates
associated with the Company's variable rate Amended Term Loan Credit
Facility and the settlement payments associated with the Company's
interest rate swaps.

During the second quarter, the Company amended its $2.2 billion Amended
Term Loan Credit Facility to reduce the interest rate to LIBOR plus
2.50% from LIBOR plus 2.75%. As a result, the Company recognized a loss
on the early extinguishment of debt of approximately $1.8 million
related to this transaction in the quarter.

The effective tax rate was 24.0%, compared to 36.0% in the second
quarter of fiscal 2017. The lower effective tax rate is primarily due to
a reduction in the federal statutory tax rate in connection with the
enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Act").

Net income was $27.5 million, or $0.15 per diluted share, compared to
$35.6 million, or $0.19 per diluted share, in the second quarter of
fiscal 2017. Excluding the $2.4 million gain (net of taxes) related to
the settlement of lease obligations associated with the closure of 94
full-size Aaron Brothers stores in the first quarter of fiscal 2018 and
$1.4 million of losses (net of taxes) on early extinguishments of debt
and refinancing costs, adjusted net income for the second quarter of
fiscal 2018 was $26.4 million, or $0.15 per diluted share.

During the quarter, the Company paid $250 million and received an
initial delivery of approximately 10.7 million shares pursuant to its
previously announced accelerated share repurchase ("ASR") under its
share repurchase authorization program. The total number of shares the
Company will repurchase under its ASR agreement will be based upon the
volume-weighted average share price of the Company's common stock during
the term of the transaction. Final settlement of the transaction under
the ASR agreement, including receipt of any remaining shares, is
expected to occur in the third quarter of fiscal 2018. At the conclusion
of the ASR, the total remaining authorization for future repurchases is
expected to be approximately $100 million. The share repurchase program
does not have an expiration date, and the timing and number of
repurchase transactions under the program will depend on market
conditions, corporate considerations, debt agreements, and regulatory
requirements.

Third Quarter and Fiscal Year 2018 Outlook:

The Company's guidance for fiscal 2018 assumes Aaron Brothers stores
were closed as of the start of the fiscal year and excludes the
restructuring charge, provisional tax adjustments, and any one-time
costs associated with debt refinancing.

For fiscal 2018, a 52-week year, the Company now expects:

  • net sales will be between $5,217 million and $5,293 million;
  • comparable store sales will increase between 0% and 1.5%;
  • to open 19 new Michaels stores (net of closures) and relocate 21
    Michaels stores;
  • adjusted operating income will be in the range of $667 million to $700
    million, reflecting the impact of higher distribution-related costs;
  • net interest expense will be approximately $144 million;
  • the effective tax rate will be approximately 23%, reflecting
    additional clarification received on the Tax Act;
  • adjusted diluted earnings per common share will be between $2.29 and
    $2.42, based on diluted weighted average common shares of
    approximately 176 million; and
  • capital expenditures will be between $160 million and $170 million.

For the third quarter of fiscal 2018, the Company expects:

  • comparable store sales will increase between 1.5% and 3.0%;
  • to open five new Michaels stores (net of closures) and relocate five
    Michaels stores;
  • adjusted operating income will be in the range of $131 million and
    $138 million;
  • net interest expense will be approximately $38 million;
  • the effective tax rate will be approximately 23%, reflecting
    additional clarification received on the Tax Act; and
  • adjusted diluted earnings per common share will be between $0.42 and
    $0.45, based on diluted weighted average common shares of 171 million.

Conference Call Information

A conference call to discuss second quarter financial results is
scheduled for today, August 30, 2018, at 8:00 am Central Time. Investors
who would like to join the conference call are encouraged to
pre-register for the conference call using the following link: http://dpregister.com/10122588.
Callers who pre-register will be given a phone number and a unique PIN
to gain immediate access to the call and bypass the live operator.
Participants may pre-register at any time, including up to and after the
call start time.

Investors without internet access or who are unable to pre-register can
join the call by dialing (844) 340-4762 or (412) 717-9617.

The conference call will also be webcast at https://investors.michaels.com/news-events/events.
To listen to the live call, please go to the website at least 15 minutes
before the call is scheduled to begin to register and download any
necessary audio software. The webcast will be accessible for 30 days
after the call. Additionally, a telephone replay will be available until
September 13, 2018, by dialing (877) 344-7529 or (412) 317-0088, access
code 10122588.

Non-GAAP Information

This press release includes non-GAAP measures including operating income
excluding a one-time restructuring charge primarily related to the
closing of 94 full-size Aaron Brothers stores in the first quarter (net
of income from Aaron Brothers operations) ("Adjusted operating income");
net income excluding a one-time restructuring charge (net of income from
Aaron Brothers operations), net of related income taxes, losses on early
extinguishments of debt and refinancing costs, net of related income
taxes, and excluding provisional adjustments related to tax reform
("Adjusted net income"); and diluted earnings per share excluding a
one-time restructuring charge (net of income from Aaron Brothers
operations), net of related income taxes, losses on early
extinguishments of debt and refinancing costs, net of related income
taxes, and excluding provisional adjustments related to tax reform
("Adjusted diluted earnings per share"). The Company has reconciled
these non-GAAP financial measures with the most directly comparable GAAP
financial measures in a table accompanying this release. The Company
believes that these non-GAAP financial measures not only provide its
management with comparable financial data for internal financial
analysis but also provide meaningful supplemental information to
investors. Specifically, these non-GAAP financial measures allow
investors to better understand the performance of the Company's business
and facilitate a meaningful evaluation of its quarterly and fiscal 2018
diluted earnings per common share and actual results on a comparable
basis with its quarterly and fiscal 2017 results.

In evaluating these non-GAAP financial measures, investors should be
aware that in the future the Company may incur expenses or be involved
in transactions that are the same as or similar to some of the
adjustments in this presentation. The Company's presentation of non-GAAP
financial measures should not be construed to imply that its future
results will be unaffected by any such adjustments. The Company has
provided this information as a means to evaluate the results of its
ongoing operations. Other companies in the Company's industry may
calculate these items differently than it does. Each of these measures
is not a measure of performance under GAAP and should not be considered
as a substitute for the most directly comparable financial measures
prepared in accordance with GAAP. Non-GAAP financial measures have
limitations as analytical tools, and investors should not consider them
in isolation or as a substitute for analysis of the Company's results as
reported under GAAP.

Forward-Looking Statements

This news release includes forward-looking statements which reflect
management's current views and estimates regarding the Company's
industry, business strategy, goals, and expectations concerning its
market position, future operations, margins, profitability, capital
expenditures, share repurchases, liquidity and capital resources, and
other financial and operating information. The words "anticipate",
"assume", "believe", "continue", "could", "estimate", "expect",
"forecast", "future", "guidance", "imply", "intend", "may", "outlook",
"plan", "potential", "predict", "project", and similar terms and phrases
are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. The Company
cannot assure investors that future developments affecting the Company
will be those that it has anticipated. Actual results may differ
materially from these expectations due to risks relating to the effect
of economic uncertainty; substantial changes to fiscal and tax policies;
our reliance on foreign suppliers; regulatory changes; the seasonality
of our business; changes in customer demand; damage to the reputation of
the Michaels brand or our private and exclusive brands; unexpected or
unfavorable consumer responses to our promotional or merchandising
programs; our failure to adequately maintain security and prevent
unauthorized access to electronic and other confidential information;
increased competition including internet-based competition from other
retailers; and other risks and uncertainties including those identified
under the heading "Risk Factors" in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission ("SEC"), which is
available at www.sec.gov,
and other filings that the Company may make with the SEC in the future.
If one or more of these risks or uncertainties materialize, or if any of
the Company's assumptions prove incorrect, the Company's actual results
may vary in material respects from those projected in these
forward-looking statements.

Any forward-looking statement made by the Company in this news release
speaks only as of the date on which the Company makes it. Factors or
events that could cause the Company's actual results to differ may
emerge from time to time, and it is not possible for the Company to
predict all of them. The Company does not undertake and specifically
disclaims any obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future developments or otherwise, except as may be required by any
applicable securities laws.

About The Michaels Companies, Inc.:

The Michaels Companies, Inc. is North America's largest specialty
provider of arts, crafts, framing, floral, wall décor, and seasonal
merchandise for Makers and do-it-yourself home decorators. The Company
owns and operates more than 1,200 stores in 49 states and Canada under
the brands Michaels, Aaron Brothers and Pat Catan's. Additionally, the
Company serves customers through Michaels.com, consumercrafts.com and
aaronbrothers.com. The Michaels Companies, Inc., also owns Artistree, a
manufacturer of high quality custom and specialty framing merchandise,
and Darice, a premier wholesale distributor in the craft, gift and decor
industry. For a list of store locations or to shop online, visit www.michaels.com
or download the Michaels
app
.

 
 
The Michaels Companies, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
                 
13 Weeks Ended 26 Weeks Ended
August 4, July 29, August 4, July 29,
(in thousands, except per share data)

2018

2017

2018

2017

Net sales $ 1,053,267 $ 1,072,593 $ 2,208,778 $ 2,231,156
Cost of sales and occupancy expense   679,938     670,082     1,378,887     1,361,012  
Gross profit 373,329 402,511 829,891 870,144
Selling, general and administrative 300,981 313,867 629,598 641,263
Restructure charge (3,220 ) 44,278
Store pre-opening costs   1,295     662     2,799     1,640  
Operating income 74,273 87,982 153,216 227,241
Interest expense 37,101 31,051 71,695 61,488
Losses on early extinguishments of debt and refinancing costs 1,835 1,835
Other (income) expense, net   (832 )   1,353     (2,525 )   1,309  
Income before income taxes 36,169 55,578 82,211 164,444
Income taxes   8,681     20,016     27,838     56,674  
Net income $ 27,488   $ 35,562   $ 54,373   $ 107,770  
 
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other   807     13,944     (6,246 )   8,672  
Comprehensive income $ 28,295   $ 49,506   $ 48,127   $ 116,442  
 
Earnings per common share:
Basic $ 0.15 $ 0.19 $ 0.30 $ 0.57
Diluted $ 0.15 $ 0.19 $ 0.30 $ 0.57
Weighted-average common shares outstanding:
Basic 177,348 186,886 179,436 187,927
Diluted 178,215 187,931 180,426 189,171
 
 
The following table sets forth the percentage relationship to net
sales of each line item of our unaudited consolidated statements of
comprehensive income:
13 Weeks Ended 26 Weeks Ended
August 4, July 29, August 4, July 29,
2018 2017 2018 2017
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales and occupancy expense   64.6     62.5     62.4     61.0  
Gross profit 35.4 37.5 37.6 39.0
Selling, general and administrative 28.6 29.3 28.5 28.7
Restructure charge (0.3 ) 2.0
Store pre-opening costs   0.1     0.1     0.1     0.1  
Operating income 7.1 8.2 6.9 10.2
Interest expense 3.5 2.9 3.2 2.8
Losses on early extinguishments of debt and refinancing costs 0.2 0.1
Other (income) expense, net   (0.1 )   0.1     (0.1 )   0.1  
Income before income taxes 3.4 5.2 3.7 7.4
Income taxes   0.8     1.9     1.3     2.5  
Net income   2.6 %   3.3 %   2.5 %   4.8 %
 

 
The Michaels Companies, Inc.
Consolidated Balance Sheets
(Unaudited)
           
August 4, February 3, July 29,
(in thousands, except per share data) 2018 2018 2017
ASSETS
Current Assets:
Cash and equivalents $ 123,191 $ 425,896 $ 134,119
Merchandise inventories 1,280,095 1,123,288 1,195,495
Prepaid expenses and other 98,742 97,830 87,176
Accounts receivable, net 31,095 26,207 24,311
Income taxes receivable   16,523     3,761     20,085  
Total current assets   1,549,646     1,676,982     1,461,186  
Property and equipment, at cost 1,613,115 1,593,683 1,530,622
Less accumulated depreciation and amortization   (1,167,985 )   (1,173,663 )   (1,122,928 )
Property and equipment, net   445,130     420,020     407,694  
Goodwill 119,074 119,074 119,074
Other intangible assets, net 20,983 21,769 22,736
Deferred income taxes 31,532 34,538 37,137
Other assets   26,180     27,832     12,202  
Total assets $ 2,192,545   $ 2,300,215   $ 2,060,029  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 555,270 $ 483,002 $ 510,818
Accrued liabilities and other 351,987 370,457 391,784
Current portion of long-term debt 140,261 24,900 112,125
Income taxes payable   427     79,586     823  
Total current liabilities   1,047,945     957,945     1,015,550  
Long-term debt 2,695,087 2,701,764 2,712,475
Other liabilities   148,893     150,001     99,997  
Total liabilities   3,891,925     3,809,710     3,828,022  
 
Stockholders' Deficit:
Common Stock, $0.06775 par value, 350,000 shares authorized; 171,375
shares issued and outstanding at August 4, 2018; 181,919 shares
issued and outstanding at February 3, 2018; and 183,414 shares
issued and outstanding at July 29, 2017
11,504 12,206 12,330
Additional paid-in-capital 21,740 59,099
Treasury stock (11,361 )
Accumulated deficit (1,700,978 ) (1,539,781 ) (1,822,509 )
Accumulated other comprehensive loss   (9,906 )   (3,660 )   (5,552 )
Total stockholders' deficit   (1,699,380 )   (1,509,495 )   (1,767,993 )
Total liabilities and stockholders' deficit $ 2,192,545   $ 2,300,215   $ 2,060,029  
 

 
The Michaels Companies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
       
26 Weeks Ended
August 4, July 29,
(in thousands) 2018 2017
Cash flows from operating activities:
Net income $ 54,373 $ 107,770
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 59,054 57,423
Share-based compensation 12,334 10,557
Debt issuance costs amortization 2,522 2,549
Accretion of long-term debt, net (256 ) (252 )
Restructure charge 44,278
Deferred income taxes 770 (225 )
Losses on early extinguishments of debt and refinancing costs 1,835
Changes in assets and liabilities:
Merchandise inventories (177,586 ) (67,218 )
Prepaid expenses and other 2,217 (1 )
Accounts receivable (6,366 ) (1,096 )
Other assets (1,165 ) (700 )
Accounts payable 54,823 (11,841 )
Accrued interest 553 (7,691 )
Accrued liabilities and other (49,838 ) (2,811 )
Income taxes (87,341 ) (91,771 )
Other liabilities   3,231     1,272  
Net cash used in operating activities   (86,562 )   (4,035 )
 
Cash flows from investing activities:
Additions to property and equipment   (69,908 )   (43,120 )
Net cash used in investing activities   (69,908 )   (43,120 )
 
Cash flows from financing activities:
Common stock repurchased (252,508 ) (191,164 )
Payments on term loan credit facility (11,790 ) (12,450 )
Borrowings on asset-based revolving credit facility 133,600 139,100
Payments on asset-based revolving credit facility (15,600 ) (58,100 )
Payment of debt refinancing costs (1,069 )
Payment of dividends (317 ) (408 )
Proceeds from stock options exercised   1,449     5,483  
Net cash used in financing activities   (146,235 )   (117,539 )
 
Net change in cash and equivalents (302,705 ) (164,694 )
Cash and equivalents at beginning of period   425,896     298,813  
Cash and equivalents at end of period $ 123,191   $ 134,119  
 

 
The Michaels Companies, Inc.
Reconciliation of Adjusted EBITDA
(Unaudited)
                 
13 Weeks Ended 26 Weeks Ended
August 4, July 29, August 4, July 29,
(in thousands)

2018

2017

2018

2017

Net cash used in operating activities $ (119,065 ) $ (26,980 ) $ (86,562 ) $ (4,035 )
Depreciation and amortization (29,596 ) (28,872 ) (59,054 ) (57,423 )
Share-based compensation (5,365 ) (5,615 ) (12,334 ) (10,557 )
Debt issuance costs amortization (1,248 ) (1,275 ) (2,522 ) (2,549 )
Accretion of long-term debt, net 130 126 256 252
Restructure charge 3,220 (44,278 )
Deferred income taxes 1,810 484 (770 ) 225
Losses on early extinguishments of debt and refinancing costs (1,835 ) (1,835 )
Changes in assets and liabilities   179,437     97,694     261,472     181,857  
Net income 27,488 35,562 54,373 107,770
Interest expense 37,101 31,051 71,695 61,488
Income taxes 8,681 20,016 27,838 56,674
Depreciation and amortization 29,596 28,872 59,054 57,423
Interest income   (842 )   (110 )   (2,248 )   (254 )
EBITDA 102,024 115,391 210,712 283,101
Adjustments:
Losses on early extinguishments of debt and refinancing costs 1,835 1,835
Share-based compensation 5,365 5,615 12,334 10,557
Restructure charge (3,220 ) 44,278
Severance costs 243 902 577
Store pre-opening costs 1,295 662 2,799 1,640
Store remodel costs 3,239 855 3,754 977
Foreign currency transaction (gains) losses (231 ) 1,386 (801 ) 1,447
Store closing costs 2,587 284 3,649 2,013
Other(1)   555     634     1,281     1,499  
Adjusted EBITDA $ 113,449   $ 125,070   $ 280,743   $ 301,811  
 
(1)Other adjustments primarily relate to items such as
moving and relocation expenses, franchise taxes, sign on bonuses,
and certain legal expenses.
 

 
The Michaels Companies, Inc.
Summary of Operating Data
(Unaudited)
                 
The following table sets forth certain of our unaudited operating
data:
13 Weeks Ended 26 Weeks Ended
August 4, July 29, August 4, July 29,
2018 2017 2018 2017
Michaels stores:
Open at beginning of period 1,243 1,225 1,238 1,223
New stores 9 5 15 8
Relocated stores opened 7 1 16 8
Closed stores (1 ) (2 ) (1 )
Relocated stores closed   (7 )   (1 )   (16 )   (8 )
Michaels stores open at end of period   1,251     1,230     1,251     1,230  
 
Aaron Brothers stores:
Open at beginning of period 3 104 97 109
Closed stores   (3 )   (3 )   (97 )   (8 )
Aaron Brothers stores open at end of period       101         101  
 
Pat Catan's stores:
Open at beginning of period 36 35 36 35
Acquired stores
New stores                
Pat Catan's stores open at end of period   36     35     36     35  
 
Total store count at end of period   1,287     1,366     1,287     1,366  
 
 
Other Operating Data:
Average inventory per Michaels store (in thousands)1 $ 921 $ 864 $ 921 $ 864
Comparable store sales (0.4 )% 0.6 % 0.0 % (0.3 )%
Comparable store sales, at constant currency (0.5 )% 0.8 % (0.3 )% (0.2 )%
 

1 The calculation of average inventory per Michaels
store excludes Aaron Brothers and Pat Catan's stores.

 

 
 
The Michaels Companies, Inc.
Reconciliation of GAAP basis to Adjusted operating income,
Adjusted net income and Adjusted earnings per share
(Unaudited)
                 
13 Weeks Ended 26 Weeks Ended
August 4, July 29, August 4, July 29,
(In thousands, except per share)

2018

2017

2018

2017

Operating income $ 74,273 $ 87,982 $ 153,216 $ 227,241
Restructure charge and other (a)   (3,220 )     43,975    
Adjusted operating income $ 71,053   $ 87,982 $ 197,191   $ 227,241
 
Net income $ 27,488 $ 35,562 $ 54,373 $ 107,770
Restructure charge and other (a) (3,220 ) 43,975
Losses on early extinguishments of debt and refinancing costs (b) 1,835 1,835
Tax adjustment for above items (c) 332 (10,994 )
Tax reform – provisional adjustments of repatriation taxes (d)         8,107    
Adjusted net income $ 26,435   $ 35,562 $ 97,296   $ 107,770
 
Earnings per common share, diluted $ 0.15 $ 0.19 $ 0.30 $ 0.57
Restructure charge and other (a) (0.02 ) 0.24
Losses on early extinguishments of debt and refinancing costs (b) 0.01 0.01
Tax adjustment for above items (c) 0.00 (0.06 )
Tax reform – provisional adjustments of repatriation taxes (d)         0.04    
Adjusted earnings per common share, diluted $ 0.15 $ 0.19 $ 0.54 $ 0.57

(a)

 

Excludes the restructure charge primarily related to the closure
of 94 full-size Aaron Brothers stores and $0.3 million or
operating income in the first quarter of fiscal 2018 from the
operation of Aaron Brothers (prior to closing).

(b)

Eliminates the loss on early extinguishments of debt and
refinancing costs.

(c)

Adjusts for the tax impact of the restructure charge and loss on
early extinguishments of debt and refinancing costs.

(d)

Excludes provisional adjustments related to repatriation taxes for
accumulated earnings of foreign subsidiaries resulting from the
enactment of the Tax Cuts and Jobs Act of 2017.

 

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