Why Michaels Could Have Turnaround Potential
Michaels Companies Inc (NASDAQ:MIK) could produce a stock price recovery, in my opinion, after its 60% decline in the past year.
The arts and crafts retailer is making changes to its stores, trades on a low valuation and is using increasing amounts of customer data to boost its sales performance.
Store changes
The company is refurbishing its stores to improve the shopping experience of its customers. For example, it opened a pilot store in its fiscal 2020 third quarter that includes a larger range of its products and a revised layout compared to its existing stores. It plans to expand its number of pilot stores in fiscal 2021, and will implement the successful parts of them across all of its stores.
Additionally, it is including a larger number of products that have delivered strong sales growth so far in fiscal 2020 in its stores. For instance, it doubled the size of its technology department and added over 1,000 new drawing and paint items in the third quarter. They could catalyze its financial performance without requiring significant upfront costs.
Data use
Michaels plans to increase its use of data to produce personalized offers and recommendations for its customers. It will use the 31 million active email addresses it has in its loyalty program database to increase the proportion of its emails that are personalized from 1% in the fiscal 2020 first quarter to 15% by the end of the fourth quarter. The company has found that its personalized emails are three times more likely to lead to a sale compared to its non-personalized emails.
In addition, the retailer launched a personalized version of its website in the third quarter. Its customers will see a different website layout based on their shopping history with the company. This has increased the company's sales per customer by 20% in its previous tests, and could boost its overall performance when it is fully rolled out in fiscal 2021.
The company launched its website in Canada in the third quarter. It has recorded encouraging customer satisfaction scores so far, with its online sales in Canada rising in every week since its website was launched. This could improve the company's profitability, as well as reduce its reliance on the U.S. market in the upcoming years.
Potential risks
The retailer's performance in the third quarter was disappointing. It reported a 2.2% decline in its store sales when compared to the same quarter of the previous year. It faced a continued deterioration in demand for its products that has been present in its recent quarterly updates and which could persist in the upcoming quarters. This may negatively impact investor sentiment towards the business and could mean that Michaels experiences continued volatility in its stock price in the short run.
In response, the business has conducted a review of its underperforming categories. It will introduce a new range of products within those categories that experienced disappointing sales growth in the third quarter. It will also reduce the amount of space that some of its underperforming categories take up in its stores.
It plans to invest larger amounts of money in online marketing and social media to appeal to a broader range of consumers. In addition, it is aiming to improve the efficiency of its distribution centers to ensure that its products are available throughout the year.
Outlook
Market analysts forecast that the company will report a 2.9% rise in its earnings per share in fiscal 2021. Its price-earnings ratio of 3.7 suggests that it offers a wide margin of safety and could deliver a successful stock price recovery.
Disclosure: the author has no position in any stocks mentioned.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here
This article first appeared on GuruFocus.
