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Michaels (MIK) Stock Gains 17% on Solid Omni-Channel Efforts

Zacks Equity Research

The Michaels Companies, Inc. MIK looks well poised for growth, courtesy of its concentrated efforts to enhance omni-channel experience and in-store operations. Moreover, the company remains focused on three areas — improving current sales trends, executing against the 2019 priorities to build momentum in the second half and refreshing long-term growth strategy.

As a result, shares of this leading arts and crafts specialty retailer have gained 17% in the past three months against the industry’s 14.9% decline. A VGM Score of B coupled with an expected earnings growth rate of 4.5% further demonstrates this Zacks Rank #2 (Buy) stock’s potential.

Let’s delve deep.

Factors Driving the Stock

In order to enhance omni-channel experience and boost the top line, Michaels is focused on integrating its e-commerce and in-store operations. Notably, its e-commerce platform has been a significant contributor to the company’s sales growth. The company is steadily gaining from capabilities like “Buy Online Pick Up in Store” (BOPIS), which is a cost-effective way of fulfilling online orders as it eliminates shipping costs. In second-quarter fiscal 2019, BOPIS contributed nearly 44% to online sales and was about two-thirds of online orders.

In addition, Michaels completed a major step toward the evolution of its e-commerce business by exiting third-party fulfillment providers to manage all online transactions by itself. Earlier, Michaels had officially launched its e-commerce website in Canada, wherein shoppers can order and avail around 22,000 items such as art supplies, home decor and seasonal merchandise.

On the store front, Michaels remains committed to expansion and remodeling efforts for bolstering margins and profitability. As part of its 2019 priorities, the company remains focused on expanding assortments in key growth categories and de-emphasizing on slower moving categories. Management also doubled the space for assortments of tools and technology, with recognized brands, namely, Cricut, Caesar and Oracle. These endeavors are likely to help it boost leadership in the DIY (do-it-yourself) category.

Recently, the company has also announced a collaboration under which it rolled out United Parcel Service, Inc. UPS Access Point locations into its more than 1,100 outlets. This is likely to make shipping or receiving UPS packages easy for customers, driving footfall at Michaels’ stores.

Further, the company remains on track to expand its assortments in craft storage, jewelry and art categories. Meanwhile, it expects to downsize in categories like bakeware, ready-made frames and more traditional paper crafting supplies. Management expects these changes in assortments to drive sales in the second half of fiscal 2019.

Michaels’ Quarterly Performance

Michaels has an impressive surprise history, which continued in second-quarter fiscal 2019. This marked the company’s fifth earnings beat in the trailing six quarters, with a positive sales surprise in three of the last four quarters.

Notably, the company’s comparable-store sales (comps) returned to positive in the fiscal second quarter, benefiting from strategic efforts and rise in average ticket, partly offset by a decline in customer transactions.

After five straight quarters of gross margin decline and six consecutive quarters of operating margin contraction, the company witnessed margin improvement in the fiscal second quarter. The upside was driven by pricing and sourcing efforts coupled with occupancy expense leverage despite adverse impacts of tariffs on goods sourced from China, and a rise in promotional activity and change in sales mix.

For fiscal 2019, adjusted earnings per share are now envisioned to be $2.31-$2.42, up from $2.29-$2.41 anticipated earlier.

2 Other Key Picks

Regis Corporation RGS has an expected long-term earnings growth rate of 7.5% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports, Inc. HIBB has an impressive long-term earnings growth rate of 10.9% and a Zacks Rank of 2.

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