The Michaels Companies, Inc.
2016-08-25

The Michaels Companies Announces Second Quarter Fiscal 2016 Financial Results

IRVING, Texas, Aug. 25, 2016 (GLOBE NEWSWIRE) -- The Michaels Companies, Inc. (NASDAQ:MIK) today announced financial results for the second quarter ended July 30, 2016.

"We are pleased that our team delivered second quarter results within our expectations, despite a retail environment which continues to be choppy. As anticipated, the quarter was uniquely challenged by the impact of investments we are making to support our Vision 2020 strategy, including the integration of Lamrite West and initiatives to reduce long-term product acquisition costs, as well as the unfavorable timing of distribution expenses," said Chuck Rubin, Chairman and Chief Executive Officer. "As we move into the second half of the year and into fiscal 2017, we expect to see the benefits of our strategic investments on sales and profitability."

Second Quarter Highlights

Third Quarter and Fiscal Year 2016 Outlook:

Commenting on expectations for the rest of fiscal 2016, Mr. Rubin said, "Although sales growth in the first half of fiscal 2016 was more challenging than we anticipated, we believe that we continue to gain market share. We are excited about our plans to engage customers and drive traffic into our stores in the second half. However, we believe it is prudent to be conservative with our comparable store sales expectations for the rest of fiscal 2016 to reflect a continuation of the current retail environment. Our team continues to manage the business well against this backdrop, and we remain confident that the investments we are making, including our sourcing initiatives and our tax planning efforts related to the acquisition of Lamrite West, will help drive double-digit earnings growth for the year."

For fiscal 2016, the Company expects:

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

The outlook for fiscal 2016 includes approximately $0.01 of favorable earnings per share impact related to 2.4 million shares repurchased in the second quarter of fiscal 2016.

Conference Call Information

A conference call to discuss second quarter financial results is scheduled for today, August 25, 2016, at 8:00 am Central Time.  Analysts and investors who would like to join the conference call are encouraged to pre-register for the conference call using the following link: http://dpregister.com/10091269. Callers who pre-register will be given a conference call passcode and a unique PIN to gain immediate access to the call and bypass the live operator. Participants may pre-register at any time, including up to and after the call start time.  Investors without internet access or who are unable to pre-register can join the call by dialing (866) 777-2509 or (412)-317-5413.

The conference call will also be webcast at http://investors.michaels.com/. To listen to the live call, please go to the website at least 15 minutes before the call is scheduled to begin to register and download any necessary audio software. The webcast will be accessible for 30 days after the call.  Additionally, a telephone replay will be available until September 8, 2016, by dialing (877) 344-7529 or (412) 317-0088, access code 10091269.

Non-GAAP Information

This press release includes non-GAAP measures including Adjusted EBITDA, operating income excluding integration benefits and costs and non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West ("Adjusted operating income"), net income excluding integration benefits and costs and non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West ("Adjusted net income"), and earnings per share excluding integration benefits and costs and non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West ("Adjusted earnings per share").  The Company has reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in a table accompanying this release. The Company believes that these non-GAAP financial measures not only provide its management with comparable financial data for internal financial analysis but also provide meaningful supplemental information to investors. Specifically, these non-GAAP financial measures allow investors to better understand the performance of the Company's business and facilitate a meaningful evaluation of its quarterly and fiscal 2016 diluted earnings per common share and actual results on a comparable basis with its quarterly and fiscal 2015 results.  

In evaluating these non-GAAP financial measures, investors should be aware that in the future the Company may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. The Company's presentation of non-GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. The Company has provided this information as a means to evaluate the results of its ongoing operations. Other companies in the Company's industry may calculate these items differently than it does. Each of these measures is not a measure of performance under GAAP and should not be considered as a substitute for the most directly comparable financial measures prepared in accordance with GAAP. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results as reported under GAAP.

Forward-Looking Statements

This news release includes forward-looking statements which reflect management's current views and estimates regarding the Company's industry, business strategy, goals and expectations concerning its market position, future operations, margins, profitability, capital expenditures, share repurchases, liquidity and capital resources, and other financial and operating information. The words "anticipate", "assume", "believe", "continue", "could", "estimate", "expect", "forecast", "future", "guidance", "imply", "intend", "may", "outlook", "plan", "potential", "predict", "project", and similar terms and phrases are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The Company cannot assure investors that future developments affecting the Company will be those that it has anticipated. Actual results may differ materially from these expectations due to risks relating to the effect of economic uncertainty, risks associated with our substantial outstanding indebtedness of $2.8 billion, changes in customer demand, risks relating to our failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information, increased competition including internet-based competition from other retailers, risks relating to our reliance on foreign suppliers, risks relating to how well we manage our business, risks related to our ability to open new stores and increase comparable store sales growth, damage to the reputation of the Michaels brand or our private and exclusive brands, risks associated with executing or integrating an acquisition, a business combination or major business initiative, and other risks and uncertainties including those identified under the heading "Risk Factors" in the Company's Form 10-K filed with the Securities and Exchange Commission ("SEC"), which is available at www.sec.gov, and other filings that the Company may make with the SEC in the future. If one or more of these risks or uncertainties materialize, or if any of the Company's assumptions prove incorrect, the Company's actual results may vary in material respects from those projected in these forward-looking statements. Any forward-looking statement made by the Company in this news release speaks only as of the date on which the Company makes it. Factors or events that could cause the Company's actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company does not undertake and specifically disclaims any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

About The Michaels Companies, Inc.:

The Michaels Companies, Inc. is North America's largest specialty provider of arts, crafts, framing, floral, wall décor, and seasonal merchandise for the hobbyist and do-it-yourself home decorator.  As of July 30, 2016, the Company owned and operated 1,356 stores in 49 states and Canada under the brands Michaels, Aaron Brothers, and Pat Catan's.  The Michaels Companies, Inc., also owns Artistree, a manufacturer of high quality custom and specialty framing merchandise, and Darice, a premier wholesale distributor in the craft, gift and decor industry.  The Michaels Companies, Inc. produces a number of exclusive private brands including Recollections®, Studio Decor™, Bead Landing®, Creatology®, Ashland®, Celebrate It®, Art Minds®, Artist's Loft®, Craft Smart®, Loops & Threads®, Make Market®, Foamies®, LockerLookz®, and Sticky Sticks®. Learn more about Michaels at www.michaels.com.

Investor Contact:
Kiley F. Rawlins, CFA
972.409.7404
Kiley.Rawlins@michaels.com 

ICR, Inc.
Farah Soi/Anne Rakunas
203.682.8200
Farah.Soi@icrinc.com/Anne.Rakunas@icrinc.com 

or

Financial Media Contact:
ICR, Inc.
Michael Fox/ Jessica Liddell
203.682.8200/ 203.682.8208
Michaels@icrinc.com

The Michaels Companies, Inc.   
Consolidated Statements of Comprehensive Income   
(Unaudited)  
               
  13 Weeks Ended 26 Weeks Ended  
  July 30, August 1, July 30, August 1,  
(in thousands, except per share data) 2016 2015 2016 2015  
Net sales $  1,060,353   $   984,270   $  2,219,233   $  2,061,870    
Cost of sales and occupancy expense     669,656      610,949     1,363,785     1,246,752   
Gross profit     390,697       373,321       855,448        815,118    
Selling, general and administrative      302,712      275,699      620,512      571,270   
Store pre-opening costs      908      1,040      2,534      3,284   
Operating income     87,077       96,582       232,402       240,564    
Interest expense     31,954      34,311      64,173      72,127   
Losses on early extinguishments of debt and refinancing costs    405      6,072      405      6,072   
Other (income) expense, net     (515)     (136)     (69)     59   
Income before income taxes     55,233       56,335       167,893       162,306    
Provision for income taxes      19,616      20,624      61,511      59,857   
Net income  $   35,617   $   35,711   $   106,382   $   102,449    
               
Other comprehensive income, net of tax:               
Foreign currency translation adjustment and other      (4,759)     (7,223)     9,450      (2,907)  
Comprehensive income  $   30,858   $   28,488   $   115,832   $   99,542    
               
Earnings per common share:              
Basic $   0.17  $   0.17  $    0.51  $   0.49   
Diluted  $   0.17  $   0.17  $   0.51  $   0.49   
Weighted-average common shares outstanding:               
Basic      205,881      206,941      206,437      206,283   
Diluted     207,547      209,423      208,269      209,240   
               
                
The following table sets forth the percentage relationship to net sales of each line item of our unaudited consolidated statements of comprehensive income:  
   
   13 Weeks Ended  26 Weeks Ended  
   July 30,  August 1,  July 30,  August 1,  
    2016    2015    2016    2015   
Net sales     100.0  %   100.0  %    100.0  %   100.0  %
Cost of sales and occupancy expense     63.2      62.1      61.5      60.5   
Gross profit     36.8       37.9       38.5       39.5    
Selling, general and administrative      28.5      28.0      28.0      27.7   
Store pre-opening costs      0.1      0.1      0.1      0.2    
Operating income     8.2       9.8       10.5       11.7    
Interest expense     3.0      3.5      2.9      3.5   
Losses on early extinguishments of debt and refinancing costs        0.6          0.3   
Other (income) expense, net                  
Income before income taxes     5.2       5.7       7.6       7.9    
Provision for income taxes      1.8      2.1      2.8      2.9   
Net income      3.4  %   3.6  %    4.8  %   5.0  %
               

 

The Michaels Companies, Inc. 
Consolidated Balance Sheets 
(Unaudited) 
           
  July 30, January 30, August 1, 
(in thousands, except per share data) 2016  2016 2015* 
ASSETS          
Current Assets:          
Cash and equivalents $   114,849  $   409,391  $   70,368  
Merchandise inventories   1,145,422    1,002,607    1,073,722  
Prepaid expenses and other     77,472      77,000      75,027  
Accounts receivable, net     26,920      9,484      8,217  
Income tax receivables     42,676      1,231       53,499  
Total current assets   1,407,339    1,499,713    1,280,833  
Property and equipment, at cost   1,724,291    1,661,234    1,632,755  
Less accumulated depreciation and amortization   (1,325,603)   (1,282,727)   (1,238,069) 
Property and equipment, net     398,688      378,507      394,686  
Goodwill     119,074      94,290      94,290   
Other intangible assets, net     23,703      471      505  
Deferred income taxes     39,780      40,399      42,496  
Other assets     12,387       9,897      6,059  
Total assets $ 2,000,971   $ 2,023,277   $ 1,818,869   
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current Liabilities:          
Accounts payable  $   462,099  $   457,704  $   418,745  
Accrued liabilities and other     347,349      377,606      349,777  
Current portion of long-term debt     66,900      24,900      48,900  
Income taxes payable          44,640      873  
Total current liabilities     876,348      904,850      818,295  
Long-term debt   2,735,187    2,744,942    2,902,099  
Other liabilities     97,232      97,580      91,032  
Total liabilities   3,708,767     3,747,372      3,811,426   
           
Stockholders' Deficit:          
Common Stock, $0.06775 par value, 350,000 shares authorized; 205,824 shares issued and outstanding at July 30, 2016; 208,996 shares issued and outstanding at January 30, 2016; and 208,011 shares issued and outstanding at August 1, 2015     13,770      13,979      13,952  
Additional paid-in-capital     493,096      592,420      577,104  
Accumulated deficit   (2,202,056)   (2,308,438)   (2,568,901) 
Accumulated other comprehensive loss     (12,606)     (22,056)     (14,712) 
Total stockholders' deficit    (1,707,796)   (1,724,095)   (1,992,557 ) 
Total liabilities and stockholders' deficit $ 2,000,971    $ 2,023,277   $ 1,818,869   
 
*Certain reclassifications of the amounts for fiscal 2015 have been made to conform to the presentation for fiscal 2016.
 

 

The Michaels Companies, Inc. 
Consolidated Statements of Cash Flows 
(Unaudited) 
        
  26 Weeks Ended 
  July 30, August 1, 
(in thousands)  2016 2015* 
Cash flows from operating activities:       
Net income  $   106,382  $   102,449  
Adjustments to reconcile net income to net cash used in operating activities:      
Depreciation and amortization     58,468      55,949  
Share-based compensation     6,590      6,225  
Debt issuance costs amortization     3,760      4,366  
Accretion of long-term debt, net      (124)     (66) 
Deferred income taxes     619      6,514  
Losses on early extinguishments of debt and refinancing costs     405      6,072  
Losses on disposition of property and equipment     35      
Excess tax benefits from share-based compensation     (7,271)     (12,952) 
Changes in assets and liabilities, excluding acquired net assets:       
Merchandise inventories     (58,612)     (115,198) 
Prepaid expenses and other     639      (2,875) 
Accounts receivable     4,858      4,534  
Other assets     (445)     (86) 
Accounts payable     (20,171)     (19,546) 
Accrued interest     (5,045)     89  
Accrued liabilities and other      (35,091)     (53,634) 
Income taxes     (78,816)     (62,845) 
Other liabilities     (605)     (2,067) 
Net cash used in operating activities     (24,424)     (83,071) 
        
Cash flows from investing activities:       
Additions to property and equipment     (38,395)     (63,241) 
Acquisition of Lamrite West, net of cash acquired     (151,100)     
Net cash used in investing activities     (189,495)     (63,241) 
         
Cash flows from financing activities:       
Payment of PIK notes         (184,467) 
Payments on restated term loan credit facility     (12,450)     (12,450) 
Borrowings on asset-based revolving credit facility     42,000      24,000  
Payment of debt issuance costs     (3,048)     
Payment of dividends     (415)     (443) 
Proceeds from stock options exercised     15,058      19,586  
Excess tax benefits from share-based compensation     7,271      12,952  
Common stock repurchased     (129,039)     (19,822) 
Other financing activities         (971) 
Net cash used in financing activities     (80,623)     (161,615) 
        
Net change in cash and equivalents     (294,542)     (307,927) 
Cash and equivalents at beginning of period     409,391      378,295  
Cash and equivalents at end of period $   114,849  $   70,368  
 
 
*Certain reclassifications of the amounts for fiscal 2015 have been made to conform to the presentation for fiscal 2016.
 

 

The Michaels Companies, Inc. 
Summary of Operating Data 
(Unaudited) 
           
The following table sets forth certain of our unaudited operating data:       
        
  13 Weeks Ended 26 Weeks Ended 
  July 30, August 1, July 30, August 1, 
   2016   2015   2016   2015  
Michaels stores:         
Open at beginning of period    1,204     1,177     1,196      1,168  
New stores    5     9     16     19  
Relocated stores opened    4     3   10     13  
Closed stores          (3)     (1) 
Relocated stores closed    (4)    (3)    (10)    (13) 
Michaels stores open at end of period    1,209     1,186     1,209     1,186  
          
Aaron Brothers stores:         
Open at beginning of period    115     118     117     120   
Closed stores    (3)       (5)    (2) 
Aaron Brothers stores open at end of period    112     118     112     118  
          
Pat Catan's stores:         
Open at beginning of period    33           
Acquired stores          32     
New stores    2        3     
Pat Catan's stores open at end of period    35        35     
          
Total store count at end of period    1,356      1,304      1,356      1,304   
           
          
Other Operating Data:         
Average inventory per Michaels store (in thousands)1$  846  $  880  $  846  $  880  
Comparable store sales   0.7%  1.6%  0.8%  0.9% 
Comparable store sales, at constant currency  1.0%  2.9%  1.2%  2.1% 
           
1 The calculation of average inventory per Michaels store excludes our Aaron Brothers and Pat Catan's stores. 

 

The Michaels Companies, Inc.
Reconciliation of Adjusted EBITDA (Excluding losses on early extinguishments of debt and refinancing costs)
(Unaudited)
             
  13 Weeks Ended 26 Weeks Ended
  July 30,  August 1 July 30, August 1
(in thousands) 2016 2015 2016 2015
Net cash used in operating activities $   (561) $   (11,194) $   (24,424) $   (83,071)
Depreciation and amortization     (28,998)     (28,004)     (58,468)     (55,949)
Share-based compensation     (3,461)      (3,505)     (6,590)     (6,225)
Debt issuance costs amortization     (1,786)     (2,089)     (3,760)     (4,366)
Accretion of long-term debt, net     62       33      124      66 
Deferred income taxes     (4,610)     (1,410)     (619)     (6,514)
Losses on early extinguishments of debt and refinancing costs     (405)     (6,072)     (405)     (6,072)
Losses on disposition of property and equipment     (3)         (35)    
Excess tax benefits from share-based compensation     2,672      2,753       7,271      12,952 
Changes in assets and liabilities     72,707      85,199      193,288      251,628 
Net income      35,617       35,711       106,382        102,449  
Interest expense     31,954      34,311      64,173      72,127 
Losses on early extinguishments of debt and refinancing costs     405      6,072      405      6,072 
Provision for income taxes     19,616      20,624      61,511       59,857 
Depreciation and amortization     28,998      28,004      58,468      55,949 
Interest income     (173)     (57)     (453)     (180)
EBITDA (Excluding losses on early extinguishments of debt and refinancing costs)     116,417       124,665       290,486       296,274  
Adjustments:            
Share-based compensation     3,461      3,505      6,590       6,225 
Severance costs     174      302      920      1,162 
Store pre-opening costs     939      1,047      2,568      3,310 
Store remodel costs     71      1,167      (10)     1,827 
Foreign currency transaction (gains) losses      (388)     14      548      (23)
Store closing costs     1,054      332      2,152      (361)
Lamrite integration costs     1,874           6,019     
Other (a)     748      1,449      1,526      2,476 
Adjusted EBITDA $   124,350   $   132,481   $   310,799   $   310,890  
             
(a) Other adjustments primarily relate to items such as moving and relocation expenses, franchise taxes, sign on bonuses, and certain legal expenses.

 

The Michaels Companies, Inc.
Reconciliation of GAAP basis to Adjusted operating income, Adjusted net income and Adjusted earnings per share
(Unaudited)
             
  13 Weeks Ended 26 Weeks Ended
  July 30, August 1, July 30, August 1,
(In thousands, except per share) 2016 2015 2016 2015
Operating income $   87,077   $  96,582  $   232,402   $  240,564
Add: Non-recurring, inventory-related purchase      (1,363)    —     2,214     —
accounting adjustments (a)            
Add: Non-recurring integration expenses (b)      1,874     —     6,019     —
Adjusted operating income  $   87,588   $  96,582  $   240,635   $  240,564
             
Net income $   35,617   $  35,711  $   106,382   $  102,449
Add: Non-recurring, inventory-related purchase      (1,363)    —     2,214     —
accounting adjustments (a)            
Add: Non-recurring integration expenses (b)     1,874     —     6,019     —
Less tax adjustment for above add-backs (c)      (206)    —      (3,200)    —
Adjusted net income  $   35,922   $  35,711  $   111,415   $  102,449
             
Earnings per common share, diluted $   0.17   $  0.17  $   0.51   $  0.49
Adjusted earnings per common share, diluted $   0.17   $  0.17  $   0.53   $  0.49
             
(a) Excludes non-recurring, inventory-related purchase accounting adjustments related to the acquisition of Lamrite West.
(b) Excludes non-recurring integration expenses related to the acquisition of Lamrite West. 
(c) Adjusts for the tax impact of integration costs and purchase accounting adjustments related to the acquisition of Lamrite West.
  


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Source: Michaels Stores, Inc.

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