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Factors Likely to Decide Michaels' (MIK) Fate in Q1 Earnings

Zacks Equity Research

The Michaels Companies, Inc. MIK is slated to report first-quarter fiscal 2019 results on Jun 6, before the opening bell.

Notably, the company delivered a positive earnings surprise in each of the trailing four quarters, the average being 7%.

How Are Estimates Faring?

The Zacks Consensus Estimate for first-quarter earnings is pegged at 31 cents, indicating a 21% decline from the figure reported in the year-ago quarter. Notably, the consensus mark remained stable over the past 30 days. For quarterly sales, the consensus estimate stands at $1.1 billion, implying a 4.4% fall from the prior-year quarter reported number.

The Michaels Companies, Inc. Price and EPS Surprise

The Michaels Companies, Inc. Price and EPS Surprise

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

Factors at Play

Michaels has been witnessing strained margins for the past few quarters due to higher expenses, which remains a concern in the to-be-reported quarter. In fourth-quarter fiscal 2018, the company delivered a fourth straight quarter of gross margin decline and fifth consecutive quarter of operating margin contraction. Markedly, rise in distribution-related costs as well as higher occupancy and product costs are weighing on gross margin. Also, an unfavorable sales mix due to soft sales of low-margin categories such as technology and storage remain deterrents. Lower gross margin coupled with higher SG&A expenses is negatively impacting operating margin.

These apart, management issued a soft earnings view for the quarter under review, when it reported fourth-quarter fiscal 2018 results. For the fiscal first quarter, adjusted earnings per share are envisioned to be 28-33 cents, down from 39 cents earned in the year-ago quarter. Furthermore, comps are projected to decline low-single-digits. Adjusted operating income is estimated between $96 million and $106 million.

Nevertheless, focus on integrating e-commerce and in-store operations to enhance the omni-channel experience appears encouraging. Evidently, the company has been witnessing robust e-commerce sales backed by an enhanced ability to search, expanded assortments and in-store product availability. Higher traffic and conversion rates are added positives. The company also continues to gain from omni-channel capabilities such as “Buy Online Pick-up In Store” (BOPIS).

Additionally, the company has been remodeling stores to feature flexible merchandising area format (or FMA), where seasonal and other merchandise are showcased providing better access to customers. Moreover, it is putting together additional data analytics into its supply chain, inventory and marketing programs. These factors are likely to prove conducive to Michaels’ first-quarter results.

What the Zacks Model Say

Our proven model does not conclusively show that Michaels is likely to beat earnings estimates in first-quarter fiscal 2019. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Michaels’ Zacks Rank #3 increases the predictive power of earnings beat, its Earnings ESP of -6.45% makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

lululemon athletica inc. LULU has an Earnings ESP of +1.41% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Costco Wholesale Corporation COST has an Earnings ESP of +2.19% and a Zacks Rank #3.

Dollar General DG has an Earnings ESP of +2.16% and a Zacks Rank #3.

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