The Michaels Companies, Inc.
2016-12-06

The Michaels Companies Announces Third Quarter Fiscal 2016 Financial Results and Increase of Share Repurchase Program

IRVING, Texas--(BUSINESS WIRE)-- The Michaels Companies, Inc. (NASDAQ: MIK) today announced financial results for the third quarter ended October 29, 2016.

"In a tough environment, I am encouraged we continued to increase adjusted net income, gain market share, and invest to support our long-term strategy. We are disappointed our plans did not result in expected comp and earnings growth, and we have taken steps to position the fourth quarter for better performance," said Chuck Rubin, Chairman and Chief Executive Officer. "We are the leader in the channel, and we have a strong financial model with consistent cash flows. Although the industry may be facing some temporary headwinds, we intend to leverage our leadership position to continue to expand our market share while continuing to return cash to shareholders."

Third Quarter Highlights

Share Repurchase Authorization

In December 2016, the Board of Directors authorized the Company to purchase, from time to time, as market conditions warrant, $300 million of the Company's common stock, which is in addition to its prior repurchase authorization. As of December 6, 2016, the total authorization for future repurchases was approximately $343.5 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.

Fourth Quarter and Fiscal Year 2016 Outlook:

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

For fiscal 2016, the Company expects:

Conference Call Information

A conference call to discuss third quarter financial results is scheduled for today, December 6, 2016, at 8:00 am CST. 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/10096593. 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 December 13, 2016, by dialing (877) 344-7529 or (412) 317-0088, access code 10096593.

Non-GAAP Information

This press release includes non-GAAP measures including Adjusted EBITDA; operating income excluding integration costs and non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West ("Adjusted operating income"); net income excluding integration costs, non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West, and losses on early extinguishments of debt and refinancing costs ("Adjusted net income"); and earnings per share excluding integration costs, non-recurring, inventory-related purchase accounting entries related to the acquisition of Lamrite West, and losses on early extinguishments of debt and refinancing costs ("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 Annual Report on 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 or revise 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 October 29, 2016, the Company owned and operated 1,368 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.

 
 
 
 
The Michaels Companies, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
                 
13 Weeks Ended 39 Weeks Ended
October 29, October 31, October 29, October 31,
(in thousands, except per share data) 2016 2015 2016 2015
Net sales $ 1,227,206 $ 1,168,423 $ 3,446,438 $ 3,230,293
Cost of sales and occupancy expense   760,598     702,825     2,124,383     1,949,577  
Gross profit 466,608 465,598 1,322,055 1,280,716
Selling, general and administrative 318,580 308,704 939,093 879,974
Store pre-opening costs   1,704     1,042     4,238     4,326  
Operating income 146,324 155,852 378,724 396,416
Interest expense 31,538 33,840 95,711 105,967
Losses on early extinguishments of debt and refinancing costs 6,887 7,292 6,072
Other expense, net   259     112     188     171  
Income before income taxes 107,640 121,900 275,533 284,206
Provision for income taxes   31,181     45,103     92,692     104,960  
Net income $ 76,459   $ 76,797   $ 182,841   $ 179,246  
 
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other   (3,650 )   88     5,800     (2,819 )
Comprehensive income $ 72,809   $ 76,885   $ 188,641   $ 176,427  
 
Earnings per common share:
Basic $ 0.37 $ 0.37 $ 0.88 $ 0.86
Diluted $ 0.37 $ 0.37 $ 0.88 $ 0.85
Weighted-average common shares outstanding:
Basic 203,864 207,323 205,580 206,629
Diluted 205,313 209,510 207,293 209,325
 
 
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 39 Weeks Ended
October 29, October 31,

October 29,

October 31,

2016 2015 2016 2015
Net sales 100.0 % 100.0 %

100.0

%

100.0

%

Cost of sales and occupancy expense   62.0     60.2     61.6     60.4  
Gross profit 38.0 39.8 38.4 39.6
Selling, general and administrative 26.0 26.4 27.2 27.2
Store pre-opening costs   0.1     0.1     0.1     0.1  
Operating income 11.9 13.3 11.0 12.3
Interest expense 2.6 2.9 2.8 3.3
Losses on early extinguishments of debt and refinancing costs 0.6 0.2 0.2
Other expense, net                
Income before income taxes 8.8 10.4 8.0 8.8
Provision for income taxes   2.5     3.9     2.7     3.2  
Net income   6.2 %   6.6 %   5.3

%

 

5.5

%

 
 
 
The Michaels Companies, Inc.
Consolidated Balance Sheets
(Unaudited)
             
October 29, January 30, October 31,
(in thousands, except per share data) 2016 2016 2015*
ASSETS
Current Assets:
Cash and equivalents $ 149,970 $ 409,391 $ 114,746
Merchandise inventories 1,394,092 1,002,607 1,277,053
Prepaid expenses and other 85,681 77,000 85,709
Accounts receivable, net 36,927 9,484 9,337
Income tax receivables   26,757     1,231     19,566  
Total current assets   1,693,427     1,499,713     1,506,411  
Property and equipment, at cost 1,759,229 1,661,234 1,645,328
Less accumulated depreciation and amortization   (1,347,027 )   (1,282,727 )   (1,259,921 )
Property and equipment, net   412,202     378,507     385,407  
Goodwill 119,074 94,290 94,290
Other intangible assets, net 24,457 471 488
Deferred income taxes 30,293 40,399 41,457
Other assets   12,016     9,897     10,480  
Total assets $ 2,291,469   $ 2,023,277   $ 2,038,533  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 714,198 $ 457,704 $ 557,170
Accrued liabilities and other 378,270 377,606 370,671
Current portion of long-term debt 24,900 24,900 24,900
Income taxes payable       44,640     6,285  
Total current liabilities   1,117,368     904,850     959,026  
Long-term debt 2,734,758 2,744,942 2,897,367
Other liabilities   98,866     97,580     92,065  
Total liabilities   3,950,992     3,747,372     3,948,458  
 
Stockholders' Deficit:
Common Stock, $0.06775 par value, 350,000 shares authorized; 204,584 shares issued and outstanding at October 29, 2016; 208,996 shares issued and outstanding at January 30, 2016; and 208,922 shares issued and outstanding at October 31, 2015 13,703 13,979 13,970
Additional paid-in-capital 468,627 592,420 582,833
Accumulated deficit (2,125,597 ) (2,308,438 ) (2,492,104 )
Accumulated other comprehensive loss   (16,256 )   (22,056 )   (14,624 )
Total stockholders' deficit   (1,659,523 )   (1,724,095 )   (1,909,925 )
Total liabilities and stockholders' deficit $ 2,291,469   $ 2,023,277   $ 2,038,533  
 
 
 
*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)
 
      39 Weeks Ended
October 29, October 31,
(in thousands) 2016 2015*
Cash flows from operating activities:
Net income $ 182,841 $ 179,246
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 86,679 85,382
Share-based compensation 11,884 9,483
Debt issuance costs amortization 5,308 6,455
Accretion of long-term debt, net (217 ) (98 )
Deferred income taxes 10,106 7,553
Losses on early extinguishments of debt and refinancing costs 7,292 6,072
Losses on disposition of property and equipment 56
Excess tax benefits from share-based compensation (7,485 ) (14,039 )
Changes in assets and liabilities, excluding acquired net assets:
Merchandise inventories (306,925 ) (318,365 )
Prepaid expenses and other (7,554 ) (13,583 )
Accounts receivable (4,764 ) 3,415
Other assets (353 ) (43 )
Accounts payable 233,266 119,064
Accrued interest 6,716 5,345
Accrued liabilities and other (18,613 ) (34,540 )
Income taxes (63,001 ) (22,412 )
Other liabilities   1,280     (1,065 )
Net cash provided by operating activities   136,516     17,870  
 
Cash flows from investing activities:
Additions to property and equipment (82,163 ) (89,726 )
Acquisition of Lamrite West, net of cash acquired (151,100 )
Purchase of long-term investment   (1,325 )   (5,000 )
Net cash used in investing activities   (234,588 )   (94,726 )
 
Cash flows from financing activities:
Payment of PIK notes (184,467 )
Payments on term loan credit facility (12,450 ) (18,675 )
Borrowings on asset-based revolving credit facility 42,000 45,040
Payments on asset-based revolving credit facility (42,000 ) (45,040 )
Payment of debt issuance costs (11,542 )
Payment of dividends (415 ) (492 )
Proceeds from stock options exercised 15,860 21,398
Excess tax benefits from share-based compensation 7,485 14,039
Common stock repurchased (160,287 ) (20,428 )
Other financing activities       1,932  
Net cash used in financing activities   (161,349 )   (186,693 )
 
Net change in cash and equivalents (259,421 ) (263,549 )
Cash and equivalents at beginning of period   409,391     378,295  
Cash and equivalents at end of period $ 149,970   $ 114,746  
 
 
*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 39 Weeks Ended
October 29, October 31, October 29, October 31,
2016 2015 2016 2015
Michaels stores:
Open at beginning of period 1,209 1,186 1,196 1,168
New stores 14 10 30 29
Relocated stores opened 4 4 14 17
Closed stores (2 ) (5 ) (1 )
Relocated stores closed   (4 )   (4 )   (14 )   (17 )
Michaels stores open at end of period   1,221     1,196     1,221     1,196  
 
Aaron Brothers stores:
Open at beginning of period 112 118 117 120
Closed stores           (5 )   (2 )
Aaron Brothers stores open at end of period   112     118     112     118  
 
Pat Catan's stores:
Open at beginning of period 35
Acquired stores 32
New stores           3      
Pat Catan's stores open at end of period   35         35      
 
Total store count at end of period   1,368     1,314     1,368     1,314  
 
 
Other Operating Data:
Average inventory per Michaels store (in thousands)1 $ 1,040 $ 1,041 $ 1,040 $ 1,041
Comparable store sales -2.0 % 1.5 % -0.2 % 1.1 %
Comparable store sales, at constant currency -2.0 % 3.1 % 0.1 % 2.5 %
 

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 39 Weeks Ended
October 29, October 31, October 29, October 31,
(in thousands) 2016 2015 2016 2015
Net cash provided by operating activities $ 160,940 $ 100,941 $ 136,516 $ 17,870
Depreciation and amortization (28,211 ) (29,433 ) (86,679 ) (85,382 )
Share-based compensation (5,294 ) (3,258 ) (11,884 ) (9,483 )
Debt issuance costs amortization (1,548 ) (2,089 ) (5,308 ) (6,455 )
Accretion of long-term debt, net 93 32 217 98
Deferred income taxes (9,487 ) (1,039 ) (10,106 ) (7,553 )
Losses on early extinguishments of debt and refinancing costs (6,887 ) (7,292 ) (6,072 )
Losses on disposition of property and equipment (21 ) (56 )
Excess tax benefits from share-based compensation 214 1,087 7,485 14,039
Changes in assets and liabilities   (33,340 )   10,556     159,948     262,184  
Net income 76,459 76,797 182,841 179,246
Interest expense 31,538 33,840 95,711 105,967
Losses on early extinguishments of debt and refinancing costs 6,887 7,292 6,072
Provision for income taxes 31,181 45,103 92,692 104,960
Depreciation and amortization 28,211 29,433 86,679 85,382
Interest income   (68 )   (46 )   (521 )   (226 )
EBITDA (excluding losses on early extinguishments of debt and refinancing costs) 174,208 185,127 464,694 481,401
Adjustments:
Share-based compensation 5,294 3,258 11,884 9,483
Severance costs 2,181 331 3,101 1,493
Store pre-opening costs 1,716 1,059 4,284 4,369
Store remodel costs 905 315 895 2,142
Foreign currency transaction losses 146 137 694 114
Store closing costs 924 449 3,076 88
Lamrite integration costs 1,586 7,605
Other (a)   898     436     2,424     2,912  
Adjusted EBITDA $ 187,858   $ 191,112   $ 498,657   $ 502,002  
 
(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 39 Weeks Ended
October 29, October 31, October 29, October 31,
(In thousands, except per share) 2016 2015

 

2016 2015
Operating income $ 146,324 $ 155,852 $ 378,724 $ 396,416

Add: Non-recurring, inventory-related purchase accounting adjustments (a)

691 2,906
Add: Non-recurring integration expenses (b)   1,586       7,605      
Adjusted operating income $ 148,601   $ 155,852 $ 389,235   $ 396,416  
 
Net income $ 76,459 $ 76,797 $ 182,841 $ 179,246

Add: Non-recurring, inventory-related purchase accounting adjustments (a)

691 2,906
Add: Non-recurring integration expenses (b) 1,586 7,605

Add: Losses on early extinguishments of debt and refinancing costs (c)

6,887 7,292 6,072
Less tax adjustment for above add-backs (d)   (3,533 )     (6,889 )   (2,338 )
Adjusted net income $ 82,090   $ 76,797 $ 193,755   $ 182,980  
 
Earnings per common share, diluted $ 0.37 $ 0.37 $ 0.88 $ 0.85
Adjusted earnings per common share, diluted $ 0.40 $ 0.37 $ 0.93 $ 0.87
 
(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) Eliminates the loss on early extinguishments of debt and refinancing costs

(d) Adjusts for the tax impact of integration costs and purchase accounting adjustments related to the acquisition of Lamrite West and loss on early extinguishments of debt and refinancing costs.

 
 
 

Investor Contacts:
The Michaels Companies, Inc.
Kiley F. Rawlins, CFA, 972-409-7404
Kiley.Rawlins@michaels.com
or
ICR, Inc.
Farah Soi / Anne Rakunas, 203-682-8200
Farah.Soi@icrinc.com / Anne.Rakunas@icrinc.com
or
Financial Media Contact:
ICR, Inc.
Jessica Liddell, 203-682-8200
Julia Young, 203-682-8208
Michaels@icrinc.com

Source: The Michaels Companies, Inc.

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