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Michaels Set to Close Pat Catan's Stores, Updates Q4 View

Shares of The Michaels Companies, Inc. MIK declined 9.8% on Jan 30 following the company’s decision to shut down all its 36 Pat Catan’s stores in fourth-quarter fiscal 2018. This move comes after Pat Catan’s retail unit repeatedly failed to overcome the persisting challenges in the industry.

Nonetheless, the company plans to rebrand and reopen 12 of these stores under its namesake brand in fiscal 2019. It will also continue to operate a support center as well as a distribution center in Strongsville, OH to support the wholesale business.

Chuck Rubin, chairman and CEO, The Michaels Companies said: “We believe these changes will provide more value for customers and shareholders by enabling us to leverage a more consistent merchandise assortment and eliminate duplicative retail operating expenses.”

The company acquired Pat Catan stores in 2016 to firm up its position in the arts and crafts industry. However, the business was unable to deliver the desired results. Management expects to incur restructuring charges of approximately $44-$48 million related to store closures. Also, the company expects to generate one-time after-tax cash benefit of roughly $20-$25 million in fiscal 2019.

Meanwhile, Michaels Companies also provided holiday sales numbers and updated its fourth-quarter guidance. The company witnessed comparable store sales slip of 0.2% for the nine-week period ending Jan 5, 2019. On a calendar shifted basis, comparable store sales inched up 2.3%.

Although this Zacks Rank #2 (Buy) company remains content with its performance during the festive season, sales trend in January appears to be inconsistent due to rapidly changing consumer preferences. This compelled management to envision fourth-quarter comps to be at the lower end of its prior view of down 0.5% to up 0.5%. The forecast includes an unfavorable impact of 160-180 basis points on account of calendar shift.

Also, adjusted earnings per share for the quarter to be reported are projected at the lower end of the previously provided guided range of $1.42-$1.47. The bottom-line outlook doesn’t include the above-mentioned restructuring costs related to Pat Catan’s store closures.

Evidently, the company’s bleak fourth-quarter outlook has hurt investor’s sentiments. Notably, the stock has dipped 1.9% in the past month versus the industry’s growth of 12.8%.

Other Stocks to Consider

Bed Bath & Beyond BBBY has a long-term earnings growth rate of 1% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DICKS Sporting Goods DKS has a long-term earnings growth rate of 6.2% and a Zacks Rank of 2.

Five Below FIVE has a long-term earnings growth rate of 30.3% and is a Zacks #2 Ranked player.

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