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Michaels Stock Rises 36% in 3 Months: What's Behind the Rally?

Zacks Equity Research

The Michaels Companies, Inc. MIK stock has gained 36.3% in the past three months, thanks to its sturdy omni-channel expansion efforts. Moreover, management is confident about initiatives undertaken to improve current sales trends and is progressing well on its fiscal 2019 priorities to build momentum in the second half. An upbeat earnings view for the current fiscal year is further boosting investors’ sentiment.

We note that the Zacks Rank #3 (Hold) stock has outperformed the industry’s 6.1% decline in the said time frame. Further, an expected long-term earnings growth rate of 7% coupled with a VGM Score of A speaks well of the company’s growth potential.

 



Delving Deeper

Speaking of the omni-channel endeavors, Michaels remains focused on integrating its e-commerce and in-store operations to boost the top line and customer experience. The company is steadily gaining from capabilities like “Buy Online Pick Up in Store” (BOPIS), which are cost-effective ways of fulfilling online orders as these eliminate shipping costs.

It has also completed a major step in the evolution of its e-commerce business by exiting third-party fulfillment providers for online orders. All orders from Michaels.com are now fulfilled by Michaels’ stores or its distribution center. These laudable efforts are likely to continue fueling e-commerce sales and position it well for growth.

Further, sales from the e-commerce business remained sturdy in second-quarter fiscal 2019, backed by higher traffic and conversion rate. In the same quarter, BOPIS contributed nearly 44% to online sales and was about two-thirds of online orders.

Apart from store-expansion and remodeling efforts, the company remains focused on expanding assortments in key growth-driving areas in addition to de-emphasizing on slower-moving categories. As part of its first category expansion in all stores, Michaels doubled the space for assortments of tools and technology with recognized brands such as Cricut, Caesar and Oracle. These efforts are likely to help it strengthen leadership in the DIY (do-it-yourself) category.

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, which display little customer interest. It expects the aforesaid changes in assortments to boost sales in the second half of fiscal 2019.

Key Highlights

Michaels boasts an impressive surprise history, which continued in second-quarter fiscal 2019. In the same quarter, the company delivered the fifth earnings beat in the trailing six quarters, with a positive sales surprise in three of the last four quarters.

Remarkably, Michaels’ comparable store sales (comps) returned to positive in second-quarter fiscal 2019, benefiting from strategic efforts and rise in average ticket, partly offset by a decline in customer transactions. In addition, its margins reverted to growth in the same quarter.

After five straight quarters of gross margin decline and six consecutive quarters of operating margin contraction, the company witnessed margin expansion 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 rise in promotional activity and change in sales mix.

In fiscal 2019, gross margin is likely to gain from ongoing sourcing initiatives and improved promotion management. Also, higher cost savings realized in the previous quarter will likely aid margins. As a result, adjusted earnings per share for fiscal 2019 are now envisioned to be $2.31-$2.42, up from $2.29-$2.41 mentioned earlier.

Three Key Picks

Boot Barn Holdings, Inc BOOT has an impressive long-term earnings growth rate of 15%. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KAR Auction Services, Inc KAR has an expected long-term earnings growth rate of 14.5% and a Zacks Rank #2 (Buy) at present.

Regis Corporation RGS, which presently carries a Zacks Rank #2, has an expected long-term earnings growth rate of 7.5%.

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