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Bear Of The Day: Michaels (MIK)

Daniel Laboe

The ‘retail apocalypse’ is hitting the fan amid this global pandemic, and bankruptcies are on the horizon as antiquated, overleveraged retailers see how long they can survive with limited foot traffic. Michaels (MIK) is one of the unfortunate victims of the brick-and-mortar retail decline. Analysts have been increasingly pessimistic about the business’s ability to turn a profit in 2020 and have pushed this stock into a Zacks Rank #5 (Strong Sell).

The ‘retail apocalypse’ has been brewing ever since Amazon (AMZN) launched its first online bookstore in 1995. The e-commerce space gave consumers the ease & convenience they didn’t even know they were looking for. Amazon has been the trailblazer of online shopping with 25 years of remarkable innovation.

With consumers able to satisfy their shopping needs right from their smartphone or computer, the requirement to physically go into a store is plummeting. Michaels has been unable to adapt to the digitalizing age, and its attempts to grow out an omnichannel solution appear to be too little too late. Only 5% of its fiscal 2019 sales came from its e-commerce platform, and 45% of that was instore pickups.

MIK has lost 93% of its value in the past 5 years as the company appears to overextend itself. The business has been making poor investment decisions with its continued investment in new store openings. Management seems to be paying very little attention to the shifting consumer. The firm had a declining topline & bottom-line the past two years, and analysts are expecting this to continue through 2020.

The Michaels Companies, Inc. Price, Consensus and EPS Surprise

The Michaels Companies, Inc. Price, Consensus and EPS Surprise

The Michaels Companies, Inc. price-consensus-eps-surprise-chart | The Michaels Companies, Inc. Quote

Michaels’ is excessively overleveraged with debt-to-capital exceeding 150%. Its balance sheet is currently illustrating a negative shareholders equity of ($1.45) billion, which means the firm has more liabilities than assets. This is an enormous red flag, especially for a firm with declining profitability.

MIK’s credit rating is deep in junk bond territory and continues to sink deeper as its risk of default surges. People are looking to Amazon.com for their arts and crafts need to alleviate their boredom, not Michaels.com. Only 5% of Michaels’ customers think to go to their online site, and only about half of them are having them delivered directly to their homes, primarily due to the high shipping costs.

To put the icing on the cake, the company has been changing its leadership more often than most people change their sheets, with 3 CEO’s in the last 2 months of 2019, illustrating how dysfunctional the Michaels’ board of directors is.

Take Away

The longer Michaels’ stores are closed, the closer to bankruptcy this company becomes. I would recommend that you stay away from these infected shares.

With a negative book value in equity and decline top & bottom-lines, I see no value in these shares at any price. Management is clearly not making the right investment decisions, and I would not trust any of my money in this antiquated business.

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