OREANDA-NEWS. The Michaels Companies, Inc. today announced financial results for the first quarter ended April 30, 2016.

“I am pleased with our overall financial performance for the first quarter,” said Chuck Rubin, Chairman and Chief Executive Officer. “From a comparable store sales standpoint, the quarter got off to a strong start. We saw a very positive customer response to our Easter and Spring assortment before trends softened in April, resulting in a comp shortfall for the quarter versus our initial expectations.  Despite this, we expanded gross margins and leveraged expenses in the core Michaels business, driving adjusted earnings per share to the upper end of our guidance range, representing a 12.5% increase over the prior year. In addition we made progress against each of our initiatives, including the integration of Lamrite West, and we continued to make strategic investments in support of our Vision 2020 strategy.”

First Quarter Highlights

  • Net sales increased 7.5%, or 8.1% on a constant currency basis, to $1.16 billion, from $1.08 billion in the first quarter of fiscal 2015.  The increase was primarily a result of the acquisition of Lamrite West in February 2016 and sales from 24 additional stores (net of closures) during the quarter.  Comparable store sales increased 0.9%, or 1.4% on a constant currency basis.
     
  • Gross profit increased 5.2% to $464.8 million, from $441.8 million in the first quarter of fiscal 2015.  As a percentage of net sales, gross profit decreased to 40.1% compared to 41.0% in the first quarter of fiscal 2015. The decrease, as a percentage of net sales, was due to the acquisition of Lamrite West, including: the impact of Lamrite West’s wholesale business, which has a lower gross margin rate than the Michaels business; $3.6 million of net non-recurring, inventory-related purchase accounting adjustments; and the timing of profit recognition for the product Michaels procures through Lamrite West.
     
  • Selling, general and administrative expense, including store pre-opening costs, (“SG&A”) increased 7.3% to $319.4 million, from $297.8 million in the first quarter of fiscal 2015. The increase in SG&A was primarily due to $19.3 million associated with the acquisition of Lamrite West, including $4.1 million of integration expenses; expenses associated with operating 24 additional stores (net of closures); and increased advertising expense.  This increase was partially offset by lower professional fees.  As a percent of net sales, SG&A was flat compared to the first quarter of fiscal 2015.
     
  • Operating income increased 0.9% to $145.3 million, from $144.0 million in the first quarter of fiscal 2015.  As a percent of net sales, operating income decreased 82 basis points to 12.5% compared to 13.4% in the first quarter of fiscal 2015. The decrease was primarily due to the acquisition of Lamrite West. Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted operating income increased 6.3% to $153.0 million, or 13.2% of net sales.
     
  • Interest expense decreased $5.6 million to $32.2 million, from $37.8 million in the first quarter of fiscal 2015 due to the early redemption of $180.9 million of the 7.50%/8.25% PIK Toggle Notes during the second quarter of fiscal 2015 and a voluntary principal payment of $150.0 million on the Restated Term Loan Credit Facility in the fourth quarter of fiscal 2015.
     
  • Net income increased 6.0% to $70.8 million, from $66.7 million in the first quarter of fiscal 2015. Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted net income increased 13.2% to $75.5 million.
     
  • Diluted earnings per share increased 6.3% to $0.34, from $0.32 in the first quarter of fiscal 2015.  Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted diluted earnings per share increased 12.5% to $0.36.
     
  • During the first quarter of fiscal 2016, the Company opened 11 new Michaels stores and one new Pat Catan’s store and closed three Michaels stores and two Aaron Brothers stores, compared with ten new Michaels store openings, one Michaels store closure and two Aaron Brothers store closures in the first quarter of 2015. At the end of the first quarter, the Company operated 1,204 Michaels stores, 115 Aaron Brothers stores, and 33 Pat Catan’s stores.
     
  • The Company ended the first quarter of fiscal 2016 with $171.9 million in cash, $2,785.9 million in debt and $585.5 million in availability under its asset-based revolving credit facility. In May 2016, the Company entered into an amended and restated credit agreement to amend various terms of its Restated Revolving Credit Facility (“Amended Revolving Credit Facility”). The Amended Revolving Credit Facility provides for senior secured financing of up to $850.0 million maturing on May 25, 2021.
     
  • Inventory at the end of the first quarter increased 7.3% to $1,057.6 million, compared to $985.4 million in the first quarter of fiscal 2015.  The increase in inventory was due to $82.0 million in additional inventory from the acquisition of Lamrite West.  Average Michaels inventory on a per store basis, inclusive of distribution centers, in transit and inventory for the Company’s e-commerce site, decreased 2.8% to $787,000, compared to $810,000 at the end of the first quarter of fiscal 2015.  This decrease in inventory per store was primarily a result of higher inventory in fiscal 2015 resulting from the early receipt of seasonal merchandise in an effort to mitigate the impact of West Coast port issues in early 2015.
     
  • Capital expenditures for the quarter were $14.7 million, compared to $35.0 million in the first quarter of fiscal 2015.  The decline in capital expenditures was primarily due to the timing of new and relocated stores and the timing of capital investments in existing stores as compared to the first quarter of fiscal 2015.
     
  • During the quarter, the Company purchased $59.3 million, or 2.3 million shares, under its share repurchase authorization. The total remaining authorization for future repurchases is approximately $141 million.  The share repurchase program does not have an expiration date, and the timing and number of repurchase transactions under the program will depend on market conditions, corporate considerations, debt agreements, and regulatory requirements.

Executive Management Update

The Company announced today that Charles M. Sonsteby has been named to the newly created role of Vice Chairman of The Michaels Companies, Inc.  Mr. Sonsteby currently serves as Chief Administrative Officer and Chief Financial Officer.  In this new role, Mr. Sonsteby will assume executive responsibility for the growth and continued integration of Lamrite West, in addition to his current responsibilities.  The Company has launched a search for a new Chief Financial Officer.  Mr. Sonsteby will continue to serve as Chief Financial Officer until a successor has been named.

Second Quarter and Fiscal Year 2016 Outlook:

"As we turn to the balance of the year, we’ve seen nothing that warrants a change in our annual outlook,” concluded Mr. Rubin.  “While we face some unique, but anticipated, headwinds in the second quarter, we continue to expect to see the beneficial results of our strategic investments on profitability as we move through the second half of fiscal 2016.”

For fiscal 2016, the Company continues to expect:

  • Comparable store sales to increase 2.2% to 2.7%; 
  • Total net sales growth, including revenues from Lamrite West, of 8.0% to 9.0%;
  • Approximately 1.3% sales growth from 26 net new store openings, including 3 new Pat Catan’s stores;
  • Lamrite West to generate $225 million to $250 million in revenues;
  • Operating income to be in the range of $761 million to $786 million, excluding approximately $11 million to $12 million of integration costs and net non-recurring, inventory-related purchase accounting entries;
  • Annual interest expense to be approximately $129 million;
  • The effective tax rate to be approximately 37.0%;
  • Diluted earnings per common share to be between $1.89 and $1.97, based on diluted weighted average common shares of approximately 209 million; and
  • Capital expenditures of between $125 million and $135 million.

For the second quarter of fiscal 2016, the Company expects:

  • Comparable store sales growth of 0.4% to 1.4%;
  • Approximately 3 net new store openings;
  • Operating income of $87 million to $93 million;
  • Interest expense to be approximately $32 million;
  • The effective tax rate to be approximately 37.1%; and
  • Diluted earnings per common share of $0.16 to $0.18, based on diluted weighted average common shares of 208 million. 

The outlook for fiscal 2016 includes approximately $0.015 of favorable earnings per share impact related to 2.3 million shares repurchased in the first quarter of fiscal 2016 and includes the impact of unfavorable Canadian exchange rates.