Michaels Companies Inc (MIK) Reported 3Q Results; Shares Fall 7%


mik

Michaels Companies Inc (NASDAQ:MIK) announced financial results for the third quarter ended October 29, 2016.

“In a tough environment, I am encouraged we continued to increase adjusted net income, gain market share, and invest to support our long-term strategy. We are disappointed our plans did not result in expected comp and earnings growth, and we have taken steps to position the fourth quarter for better performance,” said Chuck Rubin, Chairman and Chief Executive Officer. “We are the leader in the channel, and we have a strong financial model with consistent cash flows. Although the industry may be facing some temporary headwinds, we intend to leverage our leadership position to continue to expand our market share while continuing to return cash to shareholders.”

Third Quarter Highlights

  • Net sales increased 5.0% to $1.227 billion, from $1.168 billion in the third quarter of fiscal 2015. The increase was primarily a result of the acquisition of Lamrite West in February 2016 and sales from 19 additional stores (net of closures). Comparable store sales decreased 2.0% driven by a decrease in customer transactions, which was partially offset by an increase in average ticket.
  • Gross profit increased 0.2% to $466.6 million, from $465.6 million in the third quarter of fiscal 2015. As a percentage of net sales, gross profit was 38.0% compared to 39.8% in the third quarter of fiscal 2015. The decrease, as a percentage of net sales, was due to a higher mix of sales from merchandise sold on promotion, the timing of distribution-related costs, and the acquisition of Lamrite West, including the impact of Lamrite West’s wholesale business, which has a lower gross margin rate than the Michaels business. The decrease, as a percentage of sales, was partially offset by improved sourcing and pricing efficiencies.
  • Selling, general and administrative expense, including store pre-opening costs, (“SG&A”) increased 3.4% to $320.3 million, or 26.1% of sales, from $309.7 million, or 26.5% of sales, in the third quarter of fiscal 2015. The increase in SG&A was primarily due to $17.3 million associated with the acquisition of Lamrite West, including $1.6 million of integration expenses; expenses associated with the operation of 19 additional stores (net of closures); and higher professional fees. The increase was partially offset by a decrease in incentive-based compensation and lower marketing expense.
  • Operating income was $146.3 million, compared to $155.9 million in the third quarter of fiscal 2015. As a percent of net sales, operating income was 11.9% compared to 13.3% in the third quarter of fiscal 2015. Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted operating income was $148.6 million, or 12.1% of net sales.
  • Interest expense decreased $2.3 million to $31.5 million, from $33.8 million in the third quarter of fiscal 2015 due to a voluntary principal payment of $150.0 million on the term loan credit facility in the fourth quarter of fiscal 2015 and interest rate savings from the refinancing of the revolving credit facility. The Company recorded a loss on the early extinguishment of debt of $6.9 million during the third quarter of fiscal 2016 related to the refinancing of the term loan credit facility in September 2016.
  • The effective tax rate was 29.0% for the third quarter of fiscal 2016, compared to 37.0% for the third quarter of fiscal 2015. The lower effective tax rate is primarily due to benefits realized from our direct sourcing initiatives, certain federal tax credits and a decrease in state taxes.
  • Net income was $76.5 million, compared to $76.8 million in the third quarter of fiscal 2015. As a percent of net sales, net income was 6.2% compared to 6.6% in the third quarter of fiscal 2015. Excluding net non-recurring, inventory-related purchase accounting adjustments, integration expenses associated with the acquisition of Lamrite West, and losses on early extinguishments of debt and refinancing costs, adjusted net income for the third quarter of fiscal 2016 was $82.1 million, or 6.7% of net sales.
  • Diluted earnings per common share was $0.37, flat with the third quarter of fiscal 2015. Excluding net non-recurring, inventory-related purchase accounting adjustments, integration expenses associated with the acquisition of Lamrite West, and losses on early extinguishments of debt and refinancing costs, adjusted diluted earnings per common share for the third quarter was $0.40.
  • During the third quarter of fiscal 2016, the Company opened 14 new Michaels stores, compared with 10 new Michaels store openings in the third quarter of 2015. At the end of the third quarter, the Company operated 1,221 Michaels stores, 112 Aaron Brothers stores, and 35 Pat Catan’s stores.
  • The Company ended the third quarter of fiscal 2016 with $150.0 million in cash and cash equivalents, $2.8 billion in debt and $792.7 million in availability under its asset-based revolving credit facility.
  • Inventory at the end of the third quarter increased $117.0 million, or 9.2%, to $1.394 billion, compared to $1.277 billion at the end of the third quarter of fiscal 2015. The increase in inventory was due to $95.4 million in additional inventory from the acquisition of Lamrite West. Average Michaels inventory on a per store basis, inclusive of distribution centers, in transit and inventory for the Company’s e-commerce site, was flat compared to average inventory per store at the end of the third quarter of fiscal 2015.
  • During the quarter, the Company purchased 1.2 million shares, or $29.5 million, under its share repurchase authorization, previously announced in March 2016.

Share Repurchase Authorization

In December 2016, the Board of Directors authorized the Company to purchase, from time to time, as market conditions warrant, $300 million of the Company’s common stock, which is in addition to its prior repurchase authorization. As of December 6, 2016, the total authorization for future repurchases was approximately $343.5 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.

Fourth Quarter and Fiscal Year 2016 Outlook:

For the fourth quarter of fiscal 2016, the Company expects:

  • Comparable store sales growth to be flat to down 1.5%;
  • Adjusted operating income of $335 million to $348 million;
  • Interest expense to be approximately $31 million;
  • The effective tax rate to be approximately 36%; and
  • Adjusted diluted earnings per common share of $0.94 to $0.98, based on diluted weighted average common shares of 204 million.

For fiscal 2016, the Company expects:

  • Comparable store sales to be approximately flat;
  • Total net sales growth, including revenues from Lamrite West, of 5.8% to 6.2%;
  • Approximately 1.3% sales growth from 22 net new store openings, including 3 new Pat Catan’s stores;
  • Lamrite West to generate $225 million to $250 million in revenues;
  • Adjusted operating income to be in the range of $724 million to $737 million, excluding approximately $14 million to $15 million of integration costs and net non-recurring, inventory-related purchase accounting entries;
  • Annual interest expense to be approximately $127 million;
  • The effective tax rate to be approximately 35%;
  • Adjusted diluted earnings per common share to be between $1.86 and $1.90, based on diluted weighted average common shares of approximately 207 million; and
  • Capital expenditures of between $115 million and $125 million. (Original Source – please add link)

Shares of The Michaels Companies are currently trading at $22.56, down $1.75 or -7.20%. MIK has a 1-year high of $31.37 and a 1-year low of $19.46. The stock’s 50-day moving average is $23.55 and its 200-day moving average is $26.03.

On the ratings front, MIK stock has been the subject of a number of recent research reports. In a report issued on November 4, Merrill Lynch analyst Denise Chai downgraded MIK to Hold. Separately, on September 6, Credit Suisse’s Seth Sigman reiterated a Buy rating on the stock and has a price target of $29.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Denise Chai and Seth Sigman have a yearly average return of 3.6% and 1.7% respectively. Chai has a success rate of 57% and is ranked #1074 out of 4256 analysts, while Sigman has a success rate of 58% and is ranked #1611.

Michaels Cos., Inc. is an arts and crafts specialty retailer, which engages in the provision of materials, project ideas, and education for creative activities.