U.S. Markets open in 5 hrs 1 min

Michaels Stores Battled Heavy Holiday Headwinds

Anders Bylund, The Motley Fool

Arts and crafts retailer Michaels Stores (NASDAQ: MIK) reported fourth-quarter results early Tuesday morning. Year-over-year comparisons were muted by an extra week in the year-ago period, but the company still delivered positive earnings growth. Here's a closer look at Michaels' fourth quarter.

Michaels' fourth-quarter results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change (Decline)

Revenue

$1.79 billion

$1.89 billion

(5.3%)

Net Income

$181 million

$203 million

(11%)

GAAP earnings per share (diluted)

$1.15

$1.11

3.6%

Data source: The Michaels Stores.

What happened with Michaels this quarter?

  • The holiday season worked out almost exactly as planned. Michaels' full-year guidance from the third-quarter report pointed to adjusted earnings near $2.37 per diluted share on roughly $5.27 billion in top-line sales. Revenue landed exactly on target, while adjusted earnings stopped a single penny short of the bottom-line goal.
  • Unadjusted year-over-year comparisons were complicated by a calendar effect. Michaels' fiscal year doesn't start on a hand-picked date but on the Saturday closest to Jan. 31 of each year. Due to this movable reporting model, there's a 53rd week inserted into some fiscal years and a 14th week into the corresponding fourth quarter. That happened in 2017, adding $79 million to that period's sales and $0.09 to its diluted EPS. Backing out only this effect, Michaels' sales fell 1.6% in the fourth quarter while calendar-adjusted GAAP earnings increased by 13%.
  • The company bought back a relatively modest $26 million of its shares in the fourth quarter, adding up to $457 million for the full year. All told, Michaels lowered its diluted share count by 13% in 2018.
  • Comparable-store sales fell 0.4% in the fourth quarter but rose 0.8% for 2018 as a whole.
  • The company opened 20 net new stores under the flagship Michaels banner in 2018, including two in the fourth quarter. Meanwhile, all 36 Pat Catan stores were shuttered in the fourth quarter and 94 Aaron Brothers locations were closed down in the first quarter of 2018. Michaels' store network stands at 1,258 locations today, all operating and marketed under the Michaels brand.
  • Chairman Chuck Rubin gave up his CEO title three weeks ago, handing the day-to-day reins to interim CEO Mark Cosby. Rubin will also step down from his role as chairman on April 1. Michaels' board of directors is searching for permanent replacements for both of these top-level jobs. Cosby comes with two decades of C-suite experience from retail giants including CVS Health and Office Depot, though Michaels is his first swing at a CEO title.
Two smiling young shoppers making their way through the holiday strip-mall crowds.

Image source: Getty Images.

What management had to say

Cosby's primary focus during his stint as CEO is to deliver on Michaels' annual revenue and profit targets while helping the company develop its long-term growth strategy.

"With 1,258 stores, Michaels is the largest player in a very fragmented $36 billion industry," Cosby said in the fourth-quarter earnings call. "Michaels has an underpenetrated digital business with very attractive e-commerce growth potential and an opportunity to further leverage michaels.com to drive sales growth in a seamless omnichannel way."

That digital focus includes a heavier dose of online advertising and less of the old-school newspaper inserts and mailing circulars. Michaels will also improve its online shopping experience and delivery operations in an attempt to drive both revenue and margins higher in the e-commerce space. For example, the company is launching a ship-from-store online shopping program in Canada this summer.

Looking ahead

Michaels' management expects sales of roughly $5.2 billion in fiscal year 2019. Comps should rise, but by less than 1%, resulting in adjusted full-year earnings in the neighborhood of $2.39 per diluted share. The company plans to open 24 new stores this year, including 12 converted Pat Catan locations.

In the short term, first-quarter comps are seen falling by "low single digit" percentages. Adjusted earnings were guided to approximately $0.31 per diluted share, down from $0.39 in the first quarter of 2018. The company did not provide a direct revenue target for this period.

More From The Motley Fool

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and Michaels Stores. The Motley Fool has a disclosure policy.