The Michaels Companies, Inc.
2017-03-07

The Michaels Companies Announces Fourth Quarter and Fiscal 2016 Results

IRVING, Texas--(BUSINESS WIRE)-- The Michaels Companies, Inc. (NASDAQ: MIK) today announced financial results for the fourth quarter and fiscal year ended January 28, 2017.

"Today, we reported fourth quarter results within our initial guidance, and I am encouraged that we delivered market share gains and increased earnings," said Chuck Rubin, Chairman and Chief Executive Officer. "Looking back on the year, I am pleased we increased our free cash flow to $450 million and utilized the strength of our balance sheet to deliver value to our shareholders. Importantly, we made progress against each of the priorities of our Vision 2020 strategy, which is our long-term strategy to increase market share and drive shareholder return."

Fourth Quarter Income Statement Highlights

Fiscal 2016 Income Statement Highlights

Balance Sheet and Cash Flow Statement Highlights

Outlook

"As we begin 2017, we will incorporate key lessons learned in fiscal 2016. We will strengthen our focus on expanding our market share and delivering greater value for our customers with a more inclusive and experiential shopping experience, online and in stores; with more trend-right and exclusive products; and with more targeted and impactful marketing," concluded Rubin. "We are the largest player in the arts and crafts industry and operate a business model that consistently generates strong cash flow. As we continue to pursue our Vision 2020 strategy, we believe we can continue to leverage our size and leadership position to increase our market share and deliver returns to shareholders."

For fiscal 2017, a 53-week year, the Company expects:

For the first quarter of fiscal 2017, the Company expects:

Conference Call Information

A conference call to discuss the Company's financial results is scheduled for today, March 7, 2017, at 8:00 am CST. 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/10100489. Callers who pre-register will be given a phone number 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 March 23, 2017, by dialing (877) 344-7529 or (412) 317-0088, access code 10100489.

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"); 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"); and cash flow from operations less capital expenditures ("Free Cash Flow"). 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; substantial changes to fiscal and tax policies; our reliance on foreign suppliers; regulatory changes; the seasonality of our business; changes in customer demand; damage to the reputation of the Michaels brand or our private and exclusive brands; unexpected or unfavorable consumer responses to our promotional or merchandising programs; 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; 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 January 28, 2017, the Company owned and operated 1,367 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 private brands including Recollections®, Studio Decor™®, Bead Landing®, Creatology®, Ashland®, Celebrate It®, ArtMinds®, Artist's Loft®, Craft Smart®, Loops & Threads®, Make Market™, Foamies®, LockerLookz®, Imagin8®, and Sticky Sticks®. Learn more about Michaels at www.michaels.com.

       
 
The Michaels Companies, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
       
Quarter Ended Fiscal Year Ended
January 28, January 30,

January 28,

January 30,

(in thousands, except per share data) 2017 2016 2017 2016
Net sales $ 1,750,854 $ 1,682,489 $ 5,197,292 $ 4,912,782
Cost of sales and occupancy expense   1,045,093     994,854     3,169,476     2,944,431  
Gross profit 705,761 687,635 2,027,816 1,968,351
Selling, general and administrative 368,960 362,987 1,308,052 1,242,961
Store pre-opening costs   245     460     4,484     4,786  
Operating income 336,556 324,188 715,280 720,604
Interest expense 30,560 33,438 126,270 139,405
Losses on early extinguishments of debt and refinancing costs 2,413 7,292 8,485
Other (income) expense, net   (244 )   423     (55 )   594  
Income before income taxes 306,240 287,914 581,773 572,120
Income taxes   110,922     104,248     203,614     209,208  
Net income $ 195,318   $ 183,666   $ 378,159   $ 362,912  
 
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other   2,032     (7,432 )   7,832     (10,251 )
Comprehensive income $ 197,350   $ 176,234   $ 385,991   $ 352,661  
 
Earnings per common share:
Basic $ 0.96 $ 0.88 $ 1.84 $ 1.75
Diluted $ 0.95 $ 0.87 $ 1.82 $ 1.72
Weighted-average common shares outstanding:
Basic 202,201 207,492 204,735 206,845
Diluted 203,498 209,409 206,354 209,346
 
 
The following table sets forth the percentage relationship to net sales of each line item of our unaudited consolidated statements of comprehensive income:
 
Quarter Ended Fiscal Year Ended
January 28,

January 30,

January 28,

January 30,

2017 2016 2017 2016
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales and occupancy expense   59.7     59.1     61.0     59.9  
Gross profit 40.3 40.9 39.0 40.1
Selling, general and administrative 21.1 21.6 25.2 25.3
Store pre-opening costs   0.0     0.0     0.1     0.1  
Operating income 19.2 19.3 13.8 14.7
Interest expense 1.7 2.0 2.4 2.8
Losses on early extinguishments of debt and refinancing costs 0.1 0.1 0.2
Other (income) expense, net                
Income before income taxes 17.5 17.1 11.2 11.6
Income taxes   6.3     6.2     3.9     4.3  
Net income   11.2 %   10.9 %   7.3 %   7.4 %

       
 
The Michaels Companies, Inc.
Consolidated Balance Sheets
(Unaudited)
 
January 28, January 30,
(in thousands, except per share data) 2017 2016
ASSETS
Current Assets:
Cash and equivalents $ 298,813 $ 409,391
Merchandise inventories 1,127,777 1,002,607
Prepaid expenses and other 87,175 85,010
Accounts receivable, net 23,215 9,484
Income taxes receivable   5,825     1,231  
Total current assets   1,542,805     1,507,723  
Property and equipment, net 413,164 378,507
Goodwill 119,074 94,290
Other intangible assets, net 23,702 471
Deferred income taxes 36,834 40,399
Other assets   12,061     9,897  
Total assets $ 2,147,640   $ 2,031,287  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 517,268 $ 457,704
Accrued liabilities and other 397,497 385,616
Current portion of long-term debt 31,125 24,900
Income taxes payable   78,334     44,640  
Total current liabilities   1,024,224     912,860  
Long-term debt 2,723,187 2,744,942
Other liabilities   98,655     97,580  
Total liabilities   3,846,066     3,755,382  
 
Stockholders' Deficit:
Common Stock, $0.06775 par value, 350,000 shares authorized; 193,311 shares issued and outstanding at January 28, 2017; 208,996 shares issued and outstanding at January 30, 2016 12,948 13,979
Additional paid-in-capital 233,129 592,420
Accumulated deficit (1,930,279 ) (2,308,438 )
Accumulated other comprehensive loss   (14,224 )   (22,056 )
Total stockholders' deficit   (1,698,426 )   (1,724,095 )
Total liabilities and stockholders' deficit $ 2,147,640   $ 2,031,287  
 
*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)
 
Fiscal Year Ended
January 28, January 30,
(in thousands)

2017

2016

Cash flows from operating activities:
Net income $ 378,159 $ 362,912
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 115,801 114,756
Share-based compensation 16,506 15,064
Debt issuance costs amortization 6,583 8,467
Accretion of long-term debt, net (334 ) (150 )
Deferred income taxes 4,570 8,611
Losses on early extinguishments of debt and refinancing costs 7,292 8,485
Losses (gains) on disposition of property and equipment 120 (25 )
Excess tax benefits from share-based compensation (10,027 ) (14,507 )
Changes in assets and liabilities, excluding acquired net assets:
Merchandise inventories (40,800 ) (44,213 )
Prepaid expenses and other (1,004 ) (4,875 )
Accounts receivable 8,948 3,725
Other assets (711 ) (34 )
Accounts payable 38,248 24,217
Accrued interest 7,015 1,852
Accrued liabilities and other (4,806 ) (23,530 )
Income taxes 37,276 44,941
Other liabilities   1,581   (1,649 )
Net cash provided by operating activities   564,417   504,047  
 
Cash flows from investing activities:
Additions to property and equipment (114,462 ) (123,920 )
Acquisition of Lamrite West, net of cash acquired (151,100 )
Purchases of long-term investments   (1,325 )   (5,000 )
Net cash used in investing activities   (266,887 )   (128,920 )
 
Cash flows from financing activities:
Common stock repurchased (404,971 ) (21,977 )
Payment of PIK notes (184,467 )
Payments on term loan credit facility (18,675 ) (174,900 )
Borrowings on asset-based revolving credit facility 42,000 45,047
Payments on asset-based revolving credit facility (42,000 ) (45,047 )
Payment of debt issuance costs (11,326 )
Payment of dividends (415 ) (492 )
Proceeds from stock options exercised 17,252 22,655
Excess tax benefits from share-based compensation 10,027 14,507
Other financing activities     643  
Net cash used in financing activities   (408,108 )   (344,031 )
 
Net change in cash and equivalents (110,578 ) 31,096
Cash and equivalents at beginning of period   409,391   378,295  
Cash and equivalents at end of period $ 298,813 $ 409,391  
 
*Certain reclassifications of the amounts for fiscal 2015 have been made to conform to the presentation for fiscal 2016.

               
 
The Michaels Companies, Inc.
Earnings per Share
(in thousands, except per share data)
(Unaudited)
 
 
The following table sets forth the computation of basic and diluted earnings per share:
 
Quarter Ended Fiscal Year Ended
January 28, January 30, January 28, January 30,

2017

2016

2017

2016

Basic earnings per common share:
Net income $ 195,318 $ 183,666 $ 378,159 $ 362,912
Less income related to unvested restricted shares   (1,021 )   (1,341 )   (2,323 )   (1,900 )
Income available to common shareholders - Basic

$

194,297  

$

182,325   $ 375,836   $ 361,012  
 
Weighted-average common shares outstanding - Basic   202,201     207,492     204,735     206,845  
Basic earnings per common share $ 0.96 $ 0.88 $ 1.84 $ 1.75
 
Diluted earnings per common share:
Net income $ 195,318 $ 183,666 $ 378,159 $ 362,912
Less income related to unvested restricted shares   (1,014 )   (1,329 )   (2,305 )   (1,877 )
Income available to common shareholders - Diluted

$

194,304  

$

182,337   $ 375,854   $ 361,035  
 
Weighted-average common shares outstanding - Basic 202,201 207,492 204,735 206,845
Effect of dilutive stock options and restricted stock units   1,297     1,917     1,619     2,501  
Weighted-average common shares outstanding - Diluted   203,498     209,409     206,354     209,346  
Diluted earnings per common share

$

0.95 $ 0.87 $ 1.82 $ 1.72

               
 
The Michaels Companies, Inc.
Summary of Operating Data
(Unaudited)
 
 
The following table sets forth certain of our unaudited operating data:
 
Quarter Ended Fiscal Year Ended
January 28, January 30, January 28, January 30,
2017 2016 2017 2016
Michaels stores:
Open at beginning of period 1,221 1,196 1,196 1,168
New stores 2 1 32 30
Relocated stores opened 14 17
Closed stores (1 ) (5 ) (2 )
Relocated stores closed           (14 )   (17 )
Michaels stores open at end of period   1,223     1,196     1,223     1,196  
 
Aaron Brothers stores:
Open at beginning of period 112 118 117 120
New stores 1 1
Closed stores   (4 )   (1 )   (9 )   (3 )
Aaron Brothers stores open at end of period   109     117     109     117  
 
Pat Catan's stores:
Open at beginning of period 35
Acquired stores 32
New stores 3
Relocated stores opened 1 1
Relocated stores closed   (1 )       (1 )    
Pat Catan's stores open at end of period   35         35      
 
Total store count at end of period   1,367     1,313     1,367     1,313  
 
 
Other Operating Data:
Average inventory per Michaels store (in thousands)1 $ 826 $ 813 $ 826 $ 813
Comparable store sales -1.0 % 3.1 % -0.5 % 1.8 %
Comparable store sales, at constant currency -1.2 % 4.7 % -0.4 % 3.2 %
 

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)
 
Quarter Ended Fiscal Year Ended
January 28, January 30, January 28, January 30,
(in thousands) 2017 2016 2017 2016
Net cash provided by operating activities $ 427,901 $ 486,177 $ 564,417 $ 504,047
Depreciation and amortization (29,122 ) (29,374 ) (115,801 ) (114,756 )
Share-based compensation (4,622 ) (5,581 ) (16,506 ) (15,064 )
Debt issuance costs amortization (1,275 ) (2,012 ) (6,583 ) (8,467 )
Accretion of long-term debt, net 117 52 334 150
Deferred income taxes 5,536 (1,058 ) (4,570 ) (8,611 )
Losses on early extinguishments of debt and refinancing costs (2,413 ) (7,292 )

 

(8,485 )
(Losses) gains on disposition of property and equipment (64 ) 25 (120 ) 25
Excess tax benefits from share-based compensation 2,542 468 10,027 14,507
Changes in assets and liabilities   (205,695 )   (262,618 )   (45,747 )   (434 )
Net income 195,318 183,666 378,159 362,912
Interest expense 30,560 33,438 126,270 139,405
Losses on early extinguishments of debt and refinancing costs 2,413 7,292 8,485
Income taxes 110,922 104,248 203,614 209,208
Depreciation and amortization 29,122 29,374 115,801 114,756
Interest income   (299 )   (389 )   (820 )   (615 )
EBITDA (excluding losses on early extinguishments of debt and refinancing costs) 365,623 352,750 830,316 834,151
Adjustments:
Share-based compensation 4,622 5,581 16,506 15,064
Severance costs 3,012 1,240 6,113 2,733
Store pre-opening costs 270 489 4,554 4,858
Store remodel costs 2,412 802 4,554
Foreign currency transaction (gains) losses (27 ) 465 667 579
Store closing costs (199 ) (192 ) 2,877 (104 )
Lamrite integration costs (215 ) 7,390
Other (a)   958     1,424     3,475     4,336  
Adjusted EBITDA $ 374,044   $ 364,169   $ 872,700   $ 866,171  
 
(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)
 
Quarter Ended Fiscal Year Ended
January 28, January 30, January 28, January 30,
(In thousands, except per share) 2017 2016 2017 2016
Operating income $ 336,556 $ 324,188 $ 715,280 $ 720,604

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

1,095 4,001
Add: Non-recurring integration expenses (b)   (214 )       7,390      
Adjusted operating income $ 337,437   $ 324,188   $ 726,671   $ 720,604  
 
Net income $ 195,318 $ 183,666 $ 378,159 $ 362,912

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

1,095 4,001
Add: Non-recurring integration expenses (b) (214 ) 7,390

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

2,413 7,292 8,485
Less tax adjustment for above add-backs (d)   (339 )   (929 )   (7,228 )   (3,267 )
Adjusted net income $ 195,860   $ 185,150   $ 389,614   $ 368,130  
 
Earnings per common share, diluted $ 0.95 $ 0.87 $ 1.82 $ 1.72
Adjusted earnings per common share, diluted $ 0.96 $ 0.88 $ 1.88 $ 1.75

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

Source: The Michaels Companies, Inc.

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