The Michaels Companies announced 2Q financial results ended July 30, 2016

IRVING, Texas, 2016-Aug-26 — /EPR Retail News/ — The Michaels Companies, Inc. (NASDAQ:MIK) today (Aug. 25, 2016) announced financial results for the second quarter ended July 30, 2016.

“We are pleased that our team delivered second quarter results within our expectations, despite a retail environment which continues to be choppy. As anticipated, the quarter was uniquely challenged by the impact of investments we are making to support our Vision 2020 strategy, including the integration of Lamrite West and initiatives to reduce long-term product acquisition costs, as well as the unfavorable timing of distribution expenses,” said Chuck Rubin, Chairman and Chief Executive Officer. “As we move into the second half of the year and into fiscal 2017, we expect to see the benefits of our strategic investments on sales and profitability.”

Second Quarter Highlights

  • Net sales increased 7.7%, or 8.1% on a constant currency basis, to $1,060.4 million , from $984.3 million in the second quarter of fiscal 2015.  The increase was primarily a result of the acquisition of Lamrite West in February 2016 and sales from 17 additional stores (net of closures) during the quarter.  Comparable store sales increased 0.7%, or 1.0% on a constant currency basis, driven by an increase in customer transactions.
  • Gross profit increased 4.7% to $390.7 million, from $373.3 million in the second quarter of fiscal 2015.  As a percentage of net sales, gross profit was 36.8% compared to 37.9% in the second quarter of fiscal 2015. The decrease, as a percentage of net sales, was due to 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 timing of distribution expenses; a higher mix of sales from merchandise sold on promotion; and the timing of profit recognition for the product Michaels buys through Lamrite West.  The decrease was partially offset by improved sourcing and pricing efficiencies and $1.4 million of net non-recurring, inventory-related purchase accounting adjustments related to the acquisition of Lamrite West.
  • Selling, general and administrative expense, including store pre-opening costs, (“SG&A”) increased 9.7% to $303.6 million, from $276.7 million in the second quarter of fiscal 2015. As a percent of net sales, SG&A was 28.6%, compared to 28.1% in the second quarter of fiscal 2015. The increase in SG&A was primarily due to $17.4 millionassociated with the acquisition of Lamrite West, including: $1.9 million of integration expenses; expenses associated with operating 17 additional stores (net of closures); an unplanned credit card assessment of $2.9 million; and higher professional fees.  The increase was partially offset by lower in-store signage expense.
  • Operating income was $87.1 million, compared to $96.6 million in the second quarter of fiscal 2015.  As a percent of net sales, operating income was 8.2% compared to 9.8% in the second quarter of fiscal 2015.
  • Interest expense decreased $2.4 million to $32.0 million, from $34.3 million in the second quarter of fiscal 2015 due to a voluntary principal payment of $150.0 million on the Restated Term Loan Credit Facility in the fourth quarter of fiscal 2015 and interest savings from the refinancing of the Restated Revolving Credit Facility.  The Company recorded a loss on the early extinguishment of debt of $0.4 million during the second quarter of fiscal 2016 related to the refinancing of the Restated Revolving Credit Facility in May 2016. The Company recorded a loss on the early extinguishment of debt of $6.1 million during the second quarter of fiscal 2015 related to the redemption of the PIK Notes in May 2015.
  • The effective tax rate was 35.5% for the second quarter of fiscal 2016, compared to 36.6% for the second quarter of fiscal 2015.
  • Net income was $35.6 million, compared to $35.7 million in the second quarter of fiscal 2015. Diluted earnings per common share was $0.17, compared to $0.17 in the second quarter of fiscal 2015.
  • During the second quarter of fiscal 2016, the Company opened five new Michaels stores and two new Pat Catan’s stores and closed three Aaron Brothers stores, compared with nine new Michaels store openings in the second quarter of 2015. At the end of the second quarter, the Company operated 1,209 Michaels stores, 112 Aaron Brothers stores, and 35 Pat Catan’s stores.
  • The Company ended the second quarter of fiscal 2016 with $114.8 million in cash, $2.8 billion in debt and $597.1 million in availability under its asset-based revolving credit facility.
  • Inventory at the end of the second quarter increased $71.7 million, or 6.7%, to $1,145.4 million, compared to $1,073.7 million in the second quarter of fiscal 2015.  The increase in inventory was due to $96.2 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, decreased 3.9% to $846,000, compared to $880,000 at the end of the second quarter of fiscal 2015.  This decrease in inventory per store was primarily a result of higher inventory in fiscal 2015 resulting from the early receipt of seasonal merchandise in an effort to mitigate the impact of West Coast port issues in early 2015.
  • During the quarter, the Company purchased 2.4 million shares, or $67.6 million, under its share repurchase authorization. The total remaining authorization for future repurchases is approximately $73.1 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 2016 Outlook:

Commenting on expectations for the rest of fiscal 2016, Mr. Rubin said, “Although sales growth in the first half of fiscal 2016 was more challenging than we anticipated, we believe that we continue to gain market share. We are excited about our plans to engage customers and drive traffic into our stores in the second half. However, we believe it is prudent to be conservative with our comparable store sales expectations for the rest of fiscal 2016 to reflect a continuation of the current retail environment. Our team continues to manage the business well against this backdrop, and we remain confident that the investments we are making, including our sourcing initiatives and our tax planning efforts related to the acquisition of Lamrite West, will help drive double-digit earnings growth for the year.”

For fiscal 2016, the Company expects:

  • Comparable store sales to increase 1.0% to 1.5%;
  • Total net sales growth, including revenues from Lamrite West, of 6.8% to 7.8%;
  • Approximately 1.3% sales growth from 23 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 $750 million to $770 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 $129 million;
  • The effective tax rate to be approximately 35.4%;
  • Adjusted diluted earnings per common share to be between $1.92 and $1.98, based on diluted weighted average common shares of approximately 207 million; and
  • Capital expenditures of between $125 million and $135 million.

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

  • Comparable store sales growth of 0.5% to 1.5%;
  • Approximately 13 net new store openings;
  • Adjusted operating income of $160 million to $165 million;
  • Interest expense to be approximately $32 million;
  • The effective tax rate to be approximately 31.4%; and
  • Adjusted diluted earnings per common share of $0.42 to $0.44, based on diluted weighted average common shares of 206 million.

The outlook for fiscal 2016 includes approximately $0.01 of favorable earnings per share impact related to 2.4 million shares repurchased in the second quarter of fiscal 2016.

Conference Call Information

A conference call to discuss second quarter financial results is scheduled for today, August 25, 2016, at 8:00 am Central Time.  Analysts and 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/10091269. Callers who pre-register will be given a conference call passcode 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 (866) 777-2509 or (412)-317-5413.

The conference call will also be webcast at http://investors.michaels.com/. 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 untilSeptember 8, 2016, by dialing (877) 344-7529 or (412) 317-0088, access code 10091269.

Non-GAAP Information

This press release includes non-GAAP measures including Adjusted EBITDA, operating income excluding integration benefits and costs and non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West (“Adjusted operating income”), net income excluding integration benefits and costs and non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West (“Adjusted net income”), and earnings per share excluding integration benefits and costs and non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West (“Adjusted 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 2016 diluted earnings per common share and actual results on a comparable basis with its quarterly and fiscal 2015 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, risks associated with our substantial outstanding indebtedness of $2.8 billion, changes in customer demand, risks relating to 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, risks relating to our reliance on foreign suppliers, risks relating to how well we manage our business, risks related to our ability to open new stores and increase comparable store sales growth, damage to the reputation of the Michaels brand or our private and exclusive brands, risks associated with executing or integrating an acquisition, a business combination or major business initiative, and other risks and uncertainties including those identified under the heading “Risk Factors” in the Company’s 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 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 the hobbyist and do-it-yourself home decorator.  As of July 30, 2016, the Company owned and operated 1,356 stores in 49 states and Canada under the brands Michaels, Aaron Brothers, and Pat Catan’s.  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.  The Michaels Companies, Inc. produces a number of exclusive private brands including Recollections®, Studio Decor™, Bead Landing®, Creatology®, Ashland®, Celebrate It®, Art Minds®, Artist’s Loft®, Craft Smart®, Loops & Threads®, Make Market®, Foamies®, LockerLookz®, and Sticky Sticks®. Learn more about Michaels at www.michaels.com.

Investor Contact:
Kiley F. Rawlins, CFA
972.409.7404
Kiley.Rawlins@michaels.com

ICR, Inc.
Farah Soi/Anne Rakunas
203.682.8200
Farah.Soi@icrinc.com/Anne.Rakunas@icrinc.com 

Financial Media Contact:
ICR, Inc.
Michael Fox/ Jessica Liddell
203.682.8200/ 203.682.8208
Michaels@icrinc.com

Source: Michaels Companies, Inc./GLOBE NEWSWIRE

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