The Michaels Companies Inc. (MIK) is a retail chain that specializes in arts and crafts. The company offers a variety of arts and crafts products for scrapbooking, floral, framing, home décor, seasonal offerings, and children's hobbies. Michaels also operates 11 exclusive private brands: Recollections, Studio Decor, Bead Landing, Creatology, Ashland, Celebrate It, Art Minds, Artist's Loft, Craft Smart, Loops & Threads, and Imagin8.
Q1 Earnings & Guidance Disappoints
Last month, shares of MIK fell over 16% when the company reported first quarter results and forward looking guidance that left investors wanting.
Earnings of 31 cents did meet the Zacks Consensus Estimate, but fell 21% year-over-year. Revenues of $1.09 billion came in just below our consensus estimate and declined 6% from the prior-year period. Comparable store sales fell 2.9% primarily due to a decrease in customer transactions.
Despite Q2 earnings guidance falling in-line with analyst projections, Michaels slashed its full-year bottom line outlook from roughly $2.40 per share to $2.35 per share. The company still expects revenues of $5.21 billion for the year.
“While our first quarter results were within our range of expectations for the quarter, we are not satisfied and are taking steps to improve our performance,” said Mark Cosby, Interim CEO.
On the call with analysts, Cosby commented that fixing Michaels’ current issues will “take time,” saying “The erosion of our value perception didn't happen overnight, and we know it will take time to win back the confidence of our customers. But we are confident that the steps we are taking to stabilize and improve our value perception will contribute to better performance in Q2 and the second half of 2019.”
Estimates Keep Falling
Analysts have since turned bearish on Michaels, with eight cutting estimates in the last 60 days for the current fiscal year. Earnings are expected to remain flat for the year, and the Zacks Consensus Estimate has dropped 14 cents during that same time period from $2.49 to $2.35 per share.
This sentiment has stretched into 2021. Though earnings growth could bounce back into positive territory, our consensus estimate has dropped 15 cents in the past two months.
MIK is now a Zacks Rank #5 (Strong Sell).
Shares of the retailer have fallen over 30% since January compared to the S&P 500’s gain of about 20%.
Looking ahead, Michaels will need to focus on improving customer support and bringing back the lost value that Cosby talked about on the conference call. Additionally, moving away from heavy promotion and discount marketing will also be key for the retailer.
If Michaels can figure out a way to improve its fundamentals going forward, it could potentially prove to be a real value for those bargain stock hunters. Shares are currently trading at only 3.7X forward earnings estimates.
Investors who are interested in adding a retail peer to their portfolio should take a look at Hibbett Sports (HIBB) or Tractor Supply Co. (TSCO). The two companies hold a Zacks Rank #1 (Strong Buy) and #2 (Buy) and expect earnings growth of 16.4% and 10.7% for their current fiscal years respectively.
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