A month has gone by since the last earnings report for Michaels (MIK). Shares have added about 0.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Michaels due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Michaels Surpasses Earnings & Sales Estimates in Q2
The Michaels Companies posted solid second-quarter fiscal 2020 results, wherein both top and bottom lines improved year over year. Results gained from sturdy demand, robust store traffic and enhanced omni-channel capabilities. Further, it is progressing well with the Maker strategy. Moreover, timely efforts to strengthen cash position led to positive free cash flow. The company also informs that all its stores have reopened from July. However, management refrained from issuing any guidance for fiscal 2020, citing unprecedented impacts of COVID-19.
Michaels’ adjusted earnings of 30 cents per share were up 57.9% from 19 cents in the prior-year quarter. Also, the figure beat the Zacks Consensus Estimate of a loss of 5 cents.
Net sales of this arts and crafts specialty retailer grew 11.1% year over year to $1,148 million and exceeded the Zacks Consensus Estimate of $1,005 million. This uptick can be attributable to strong comps growth and sales gain from an additional 13 stores, which more than offset softness due to wholesale store closures. Further, comparable store sales (comps) rose 12%, driven by a rise in new customers, strength in e-commerce business stemming from robust demand and solid store traffic after stores reopened.
Moreover, the company registered e-commerce growth of more than 350% year over year in the fiscal second quarter on enhanced and expanded omnichannel capabilities. The company’s omnichannel efforts included new delivery options, like curbside pick-up, same-day delivery, expanded shipment from store and BOPIS along with in-app purchases.
Gross profit declined 6.7% year over year to $342.5 million and gross margin contracted 570 basis points (bps) to 29.8%. Lower gross margin can be attributed to wholesale store closures, negative channel mix and higher tariffs.
SG&A expenses, including pre-opening costs, fell 0.4% to $289.1 million. As a percentage of sales, SG&A expenses, including pre-opening costs, decreased 290 bps to 25.2%.
Adjusted operating income was $105.8 million, up 40.7% from $75.2 million in the prior-year quarter. This might be due to lower gross profit, somewhat offset by a decline in SG&A expenses.
Michaels had cash and equivalents of $651.1 million, long-term debt of $2,633.6 million and total stockholders’ deficit of $1,509.9 million as of Aug 1, 2020. Total merchandise inventory slumped 18.7% to $1,021.7 million at the end of the quarter under review.
In March, the company withdrew $600 million from its revolving credit facility. In the fiscal second quarter, it repaid debt of $300 million from the credit facility, leaving it with full availability under its revolving credit facility.
Further, the company generated positive free cash flow of $331 million in the fiscal second quarter. Consequently, it had liquidity of $1.3 billion, including the aforementioned cash balance and availability under its credit facility.
Management’s contactless in-store shopping facility along with the Michaels app is expected to aid growth in the near term. Going forward, it intends to open its converted AC Moore stores in 2021. In August, the company launched its revamped Michaels rewards loyalty program. Also, the sales trend in the third quarter seems encouraging as of now.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 88.71% due to these changes.
At this time, Michaels has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Michaels has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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