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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


 

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the fiscal year ended January 28, 2017

 

Commission file number 001-36501


 

THE MICHAELS COMPANIES, INC.

A Delaware Corporation

 

IRS Employer Identification No. 37-1737959

 

 

8000 Bent Branch Drive

Irving, Texas 75063

 

(972) 409-1300


 

 

 

The Michaels Companies, Inc.’s common stock, par value $0.06775 per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act) and is listed on the NASDAQ Global Select Market. The Michaels Companies, Inc. does not have any securities registered under Section 12(g) of the Act.

 

The Michaels Companies, Inc. is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

 

 

The Michaels Companies, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

 

The Michaels Companies, Inc. has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

 

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will be contained, to the best of the Registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

 

The Michaels Companies, Inc. is a large accelerated filer.

 

The Michaels Companies, Inc. is not a shell company (as defined in Rule 12b-2 of the Exchange Act). 

 

The aggregate market value of The Michaels Companies, Inc.’s common stock held by non-affiliates as of July 30, 2016 was approximately $2,415,252,000 based upon the closing sales price of $26.36 quoted on The NASDAQ Global Select Market as of July 29, 2016. For this purpose, directors and officers have been assumed to be affiliates.

 

As of March 1, 2017, 188,894,383 shares of The Michaels Companies, Inc.’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

The registrant will incorporate by reference information required in response to Part III, items 10-14, from its definitive proxy statement for its annual meeting of shareholders, to be held on June 7, 2017.

 

 

 

 

 

 


 

Table of Contents

 

 

THE MICHAELS COMPANIES, INC.

TABLE OF CONTENTS

 

Part I. 

Page

 

 

Item 1.     Business 

 

 

Item 1A.  Risk Factors 

 

 

Item 1B.  Unresolved Staff Comments 

20 

 

 

Item 2.     Properties 

21 

 

 

Item 3.     Legal Proceedings 

23 

 

 

Item 4.     Mine Safety Disclosures 

23 

 

 

Part II. 

 

 

 

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 

23 

 

 

Item 6.     Selected Financial Data 

25 

 

 

Item 7.     Management Discussion and Analysis of Financial Condition and Results of Operations 

26 

 

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk 

41 

 

 

Item 8.     Consolidated Financial Statements and Supplementary Data 

41 

 

 

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 

41 

 

 

Item 9A.  Controls and Procedures 

41 

 

 

Part III. 

 

 

 

Item 10.   Directors, Executive Officers and Corporate Governance 

43 

 

 

Item 11.   Executive Compensation 

43 

 

 

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 

43 

 

 

Item 13.   Certain Relationships and Related Transactions, and Director Independence 

43 

 

 

Item 14.   Principal Accounting Fees and Services 

43 

 

 

Part IV. 

 

 

 

Item 15.   Exhibits and Financial Statement Schedules 

44 

 

 

 

 

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PART I

 

ITEM 1.  BUSINESS.

 

The following discussion, as well as other portions of this Annual Report on Form 10-K, contains forward-looking statements that reflect our plans, estimates and beliefs. Any statements contained herein (including, but not limited to, statements to the effect that Michaels or its management “anticipates”, “plans”, “estimates”, “expects”, “believes”, “intends”, and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. Specific examples of forward-looking statements include, but are not limited to, statements regarding our forecasts of financial performance, share repurchases, store openings, capital expenditures and working capital requirements. Our actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K and particularly in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Unless the context otherwise indicates, references in this Annual Report on Form 10-K to “we”, “our”, “us”, “our Company”, “the Company”, and “Michaels” mean The Michaels Companies, Inc., together with its subsidiaries.

 

General

 

Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state of Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The Michaels Companies, Inc. was incorporated in Delaware in connection with the reorganization.

 

With $5,197.3 million in sales in fiscal 2016, the Company is the largest arts and crafts specialty retailer in North America (based on store count) providing materials, project ideas and education for creative activities. Our mission is to inspire and enable customer creativity, create a fun and rewarding place to work, foster meaningful connections with our communities and lead the industry in growth and innovation. With crafting classes, store events, project sheets, store displays, mobile applications and online videos, we offer a shopping experience that can inspire creativity and build confidence in our customers’ artistic abilities. 

 

On February 2, 2016, we completed the acquisition of Lamrite West, Inc. and certain of its affiliates and subsidiaries (“Lamrite”) for $150.0 million, prior to certain purchase price adjustments, utilizing our existing cash on hand. Lamrite operates an international wholesale business under the Darice brand name (“Darice”) and 35 arts and crafts retail stores, located primarily in Ohio and the surrounding states, under the Pat Catan’s brand name (“Pat Catan’s”). We acquired Lamrite to enhance our private brand development capabilities, accelerate our direct sourcing initiatives and strengthen our business-to-business capabilities.

 

As of January 28, 2017, we operated 1,223 Michaels retail stores in 49 states and Canada, with approximately 18,000 average square feet of selling space per store. We operated 109 Aaron Brothers stores in nine states, with approximately 5,500 average square feet of selling space and 35 Pat Catan’s stores in five states, with approximately 32,000 average square feet of selling space. We also operate an international wholesale business under the Darice brand name.

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Merchandising

 

Michaels. Each Michaels store offers approximately 33,000 basic stock-keeping units (“SKUs”) in a number of product categories. The following table shows a breakdown of sales for Michaels stores by department as a percentage of total net sales:

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

    

2016

 

2015

 

2014

 

General crafts

 

50

%

52

%

52

%

Home décor and seasonal

 

22

 

21

 

21

 

Framing

 

17

 

17

 

17

 

Papercrafting

 

11

 

10

 

10

 

 

 

100

%

100

%

100

%

 

We have a product development and design team focused on quality, innovation and cost mitigation. Our internal product development and global sourcing teams position us to continue delivering a differentiated level of innovation, quality and value to our customers. Our global sourcing network allows us to control new product introductions, maintain quality standards, monitor delivery times, and manage product costs and inventory levels to enhance profitability. In an industry with few well-known national brands, our private brands are recognized as a leader in many categories. We continue to expand our private brands and improve the selection of products we design, develop and deliver to our customers. In fiscal 2016, we acquired Lamrite as part of our strategy to enhance our private brand and direct sourcing capabilities. Our private brands totaled approximately 57% of net sales in fiscal 2016 and include, among others, 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®.

 

We continue to search for ways to leverage our position as a market leader by establishing strategic partnerships and exclusive product relationships to provide our customers with exciting merchandise. We have partnerships with popular brands such as Wilton, Crayola and Elmer’s. We will continue to explore opportunities to form future partnerships and exclusive product associations.

 

Aaron Brothers. Each Aaron Brothers store offers approximately 5,900 SKUs, including photo frames, a full line of ready-made frames, art prints, framed art, art supplies and custom framing services. The merchandising strategy for our Aaron Brothers stores is to provide a unique, upscale framing assortment in an appealing environment with attentive customer service.

 

Pat Catan’s. Each Pat Catan’s store offers approximately 53,000 SKUs, including an assortment of kids craft items, fine art supplies, yarn, floral supplies, scrapbooking materials, home décor, bakeware and wedding related merchandise. The merchandising strategy for our Pat Catan’s stores is to provide a wide variety of affordably priced craft supplies.

 

Darice. We operate an international wholesale business under the Darice brand name. Darice sources products from domestic and foreign suppliers for resale to a variety of retail outlets worldwide, including our Michaels and Pat Catan’s stores.  Darice offers over 50,000 SKUs consisting of a wide range of craft and hobby items.  We also develop Darice branded products carried by both Company owned and third-party stores reflecting the breadth of our product line and our ability to distribute and source quality products at competitive prices.

 

E-commerce. While we expect e-commerce to remain a relatively small portion of our business, we believe it provides an important avenue to communicate with our customers in an interactive way that reinforces the Michaels brand and drives traffic to our stores and website. Since the launch of our e-commerce platform in fiscal 2014, we continue to develop new features, functionality, marketing programs and product assortments.

 

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Seasonality

 

Our business is highly seasonal, with higher sales in the third and fourth fiscal quarters. Our fourth quarter, which includes the Holiday selling season, has on average accounted for approximately 34% of our net sales and approximately 45% of our operating income.

 

Purchasing and Inventory Management

 

We purchase merchandise from a variety of different vendors through our wholly-owned subsidiary, Michaels Stores Procurement Company, Inc. We believe our buying power and ability to make centralized purchases enable us to acquire products on favorable terms. Centralized merchandising management teams negotiate with vendors in an attempt to obtain the lowest net merchandise costs and to improve product mix and inventory levels. In fiscal 2016, there were no vendors or sourcing agents accounting for more than 10% of total purchases.

 

In fiscal 2016, we formed Darice International Sourcing Group as part of our strategy to develop our direct sourcing capabilities. We believe our direct sourcing operation allows us to maintain greater control over the manufacturing process resulting in improved product quality and lower costs. In addition, our stores purchase custom frames, framing supplies and mats from our framing operation and wholly-owned subsidiary, Artistree, Inc. (“Artistree”), which consists of a manufacturing facility and four regional processing centers.

 

The majority of the products sold in our stores are manufactured in Asia. Goods manufactured in Asia generally require long lead times and are ordered four to six months in advance of delivery. Those products are either imported directly by us or acquired from distributors based in the U.S.

 

Our automated replenishment system uses perpetual inventory records to analyze on-hand SKU quantities by store, as well as other pertinent information such as sales forecasts, seasonal selling patterns, promotional events and vendor lead times, to generate recommended merchandise reorder information. These recommended orders are reviewed daily and purchase orders are delivered electronically to our vendors and our distribution centers. In addition to improving our store in-stock position, these systems enable us to better forecast merchandise ordering quantities for our vendors and give us the ability to identify, order and replenish the stores’ merchandise using less store labor. These systems also allow us to react more quickly to sales trends and allow our store team members to devote more time to customer service, thereby improving inventory productivity and sales opportunities.

 

Artistree

 

We own and operate Artistree, a vertically-integrated framing operation which supplies precut mats and high quality custom framing merchandise across our store networks. We believe Artistree provides a competitive advantage to our stores and gives us quality control over the entire framing process. Custom framing orders are processed and shipped to our stores where the custom frame order is completed for customer pick-up.

 

Our moulding manufacturing plant, located in Kernersville, North Carolina, converts lumber into finished frame moulding that is used at our regional processing centers to fulfill custom framing orders for our stores. We manufacture approximately 33% of the moulding that we process and import approximately 45% from quality manufacturers in Brazil, Indonesia, Malaysia, China and Italy.

 

During fiscal 2016, we operated four regional processing centers located in City of Industry, California; DFW Airport, Texas; Kernersville, North Carolina; and Mississauga, Ontario. Combined, these facilities occupy approximately 579,000 square feet and, in fiscal 2016, processed 29.4 million linear feet of frame moulding and 4.3 million individual custom cut mats and foam boards for our stores. Our precut mats and custom frame supplies are packaged and distributed out of our DFW Airport regional processing center.

 

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Distribution

 

We currently operate eight distribution centers to supply our stores with merchandise. Approximately 90% of our stores’ merchandise receipts are shipped through the distribution network with the remainder shipped directly from vendors to stores. Our distribution centers are located in California, Florida, Illinois, Ohio, Pennsylvania, Texas and Washington. We also utilize a third-party warehouse to support the distribution of our seasonal merchandise, as well as a third-party fulfillment center for our e-commerce merchandise.

 

Our distribution facilities use warehouse management and control software systems to maintain and support product purchase decisions. Store replenishment order selection is performed using pick-to-light and radio frequency processing technologies. Product is delivered to stores using a dedicated fleet of trucks and contract carriers.

 

Our Industry

 

According to recent internal market research, approximately 55% of U.S. households participated in at least one crafting project during 2016, which represented approximately 68 million households. This research indicated that crafting activities continue to grow in popularity and market size has expanded to approximately $35.8 billion relative to prior studies. We believe the broad, multi-generational appeal, high personal attachment and the low-cost, project-based nature of crafting creates a loyal, resilient following consistent with the research insights.

 

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Store Expansion and Relocation

 

The following table shows our total store growth for the last five years: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2016

 

2015

 

2014

 

2013

 

2012

 

Michaels stores:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open at beginning of period

 

 

1,196

 

 

1,168

 

 

1,136

 

 

1,099

 

 

1,064

 

New stores

 

 

32

 

 

30

 

 

32

 

 

40

 

 

38

 

Relocated stores opened

 

 

14

 

 

17

 

 

13

 

 

14

 

 

13

 

Closed stores

 

 

(5)

 

 

(2)

 

 

 —

 

 

(3)

 

 

(3)

 

Relocated stores closed

 

 

(14)

 

 

(17)

 

 

(13)

 

 

(14)

 

 

(13)

 

Open at end of period

 

 

1,223

 

 

1,196

 

 

1,168

 

 

1,136

 

 

1,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aaron Brothers stores:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open at beginning of period

 

 

117

 

 

120

 

 

121

 

 

125

 

 

134

 

  New stores

 

 

1

 

 

 —

 

 

5

 

 

 —

 

 

 —

 

  Relocated stores opened

 

 

 —

 

 

 —

 

 

 —

 

 

2

 

 

 —

 

Closed stores

 

 

(9)

 

 

(3)

 

 

(6)

 

 

(5)

 

 

(8)

 

  Relocated stores closed

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

 

(1)

 

Open at end of period

 

 

109

 

 

117

 

 

120

 

 

121

 

 

125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pat Catan's stores:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open at beginning of period

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Acquired stores

 

 

32

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

New stores

 

 

3

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

  Relocated stores opened

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Closed stores

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

  Relocated stores closed

 

 

(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Open at end of period

 

 

35

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total store count at end of period

 

 

1,367

 

 

1,313

 

 

1,288

 

 

1,257

 

 

1,224

 

 

We believe, based on an internal real estate and market penetration study of Michaels stores, that the combined U.S. and Canadian markets can support between 1,400 and 1,500 Michaels stores. We plan to open approximately 30 Michaels stores, including approximately 13 relocations in fiscal 2017. We continue to pursue a store relocation program to improve the real estate location quality and performance of our store base. During fiscal 2017, we plan to close up to five Michaels stores and 15 Aaron Brothers stores. Many of our store closings are stores that have reached the end of their lease term. We believe our ongoing store evaluation process results in strong performance across our store base.

 

We have developed a standardized procedure to allow for the efficient opening of new stores and their integration into our information and distribution systems. We develop the merchandise layout floor plan and organize the advertising and promotions in connection with the opening of each new store. In addition, we maintain qualified store opening teams to provide new store team members with training.

 

Our Michaels store operating model, which is based on historical store performance, assumes an average store size of approximately 18,000 selling square feet. Our fiscal 2016 average initial net investment, which varies by site and specific store characteristics, was $1.2 million per Michaels store, including store build-out costs, pre-opening expenses and average first year inventory.

 

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Employees

 

As of January 28, 2017, we employed approximately 50,000 team members, approximately 38,000 of whom were employed on a part-time basis. The number of part-time team members substantially increases during the Holiday selling season. Of our full-time team members, approximately 4,400 are engaged in various executive, operating, training, distribution and administrative functions in our support center, division offices, administrative offices and distribution centers and the remainder are engaged in store operations. None of our team members are subject to a collective bargaining agreement.

 

Competition

 

We are the largest arts and crafts specialty retailer in North America based on store count. The market in which we compete is highly fragmented and includes stores across the U.S. and Canada operated primarily by small, independent retailers along with a few regional and national chains. We believe customers choose where to shop based upon store location, breadth of selection, price, quality of merchandise, availability of product and customer service. We compete with many different types of retailers and classify our competition within the following categories:

 

·

Multi-store chains. This category consists of several multi-store chains, each operating more than 100 stores, including: Hobby Lobby Stores, Inc., which operates more than 700 stores in 47 states; Jo-Ann Stores, Inc., which operates approximately 850 stores in 49 states; and A.C. Moore Arts & Crafts, Inc., which operates approximately 140 stores primarily in the Eastern U.S. We believe all of these chains are significantly smaller than Michaels with respect to net sales.

 

·

Mass merchandisers. This category of retailers typically dedicate only a small portion of their selling space to a limited selection of home décor, arts and crafts supplies and seasonal merchandise, but they do seek to capitalize on the latest trends by stocking products that are complementary to those trends and their current merchandise offerings. These mass merchandisers generally have limited customer service staffs with minimal experience in crafting projects.

 

·

Small, local specialty retailers. This category includes local independent arts and crafts retailers and custom framing shops. Typically, these stores are single-store operations managed by the owner. These stores generally have limited resources for advertising, purchasing and distribution. Many of these stores have established a loyal customer base within a given community and compete based on relationships and customer service.

 

·

Internet.  This category includes all internet-based retailers that sell arts and crafts merchandise, completed projects and online custom framing. Our internet competition is inclusive of those companies discussed in the categories above, as well as others that may only sell products online. These retailers provide consumers with the ability to search and compare products and prices without having to visit a physical store. These sellers generally offer a wide variety of products but do not offer product expertise or project advice.

 

Foreign Sales

 

Substantially all of our international business is in Canada, which accounted for approximately 9% of total sales in fiscal 2016 and fiscal 2015 and 10% of total sales in fiscal 2014. Approximately 8% of our assets were located outside of the U.S. in fiscal 2016 and approximately 7% of our assets were located outside of the U.S. in fiscal 2015 and fiscal 2014. See Note 12 to the consolidated financial statements for net sales and total assets by country.

 

Trademarks and Service Marks

 

As of January 28, 2017, we own or have rights to trademarks, service marks or trade names we use in connection with the operation of our business, including “Aaron Brothers”, “Artistree”, “Darice”, “Lamrite”, “Michaels”, “Michaels the Arts and Crafts Store”, “Pat Catan’s”, “Recollections”, “Make Creativity Happen”, “Where Creativity Happens”, and the stylized Michaels logo. We have registered our primary private brands including Recollections®, Studio Decor®, Bead Landing®, Creatology®, Ashland®, Celebrate It®, ArtMinds®, Artist’s Loft®, Craft Smart®, Loops & Threads®, Make

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Market™, Foamies®, LockerLookz®, Imagin8® and Sticky Sticks® and various sub-brands associated with these primary marks. Solely for convenience, some of the trademarks, service marks and trade names referred to in this Annual Report on Form 10-K are listed without the copyright, trademark and registered trademark symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks, service marks, trade names and domain names.

 

Available Information

 

We provide links to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on our Internet website, free of charge, at www.michaels.com under the heading “Investor Relations”. These reports are available as soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission (“SEC”). The reports may also be accessed at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These filings are also available through the SEC’s EDGAR system at www.sec.gov.

We use our website (www.michaels.com) as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” section. Accordingly, investors should monitor this portion of our website, in addition to following our press releases, SEC filings, public conference calls and webcasts.

We webcast our earnings calls and certain events we participate in or host with members of the investment community on the investor relations section of our website. Additionally, we provide notifications of news or announcements regarding press and earnings releases as part of the investor relations section of our website. The contents of our website are not part of this Annual Report on Form 10-K, or any other report we file with, or furnish to, the SEC.

 

ITEM 1A.  RISK FACTORS. 

 

Our financial performance is subject to various risks and uncertainties. The risks described below are those we believe are the material risks we face. Any of the risk factors described below, as well as risks not currently known to us, could significantly and adversely affect our business, prospects, sales, revenues, gross profit, cash flows, financial condition and results of operations.

 

We face risks related to the effect of economic uncertainty.

 

In the event of an economic downturn or slow recovery, our growth, prospects, results of operations, cash flows and financial condition could be adversely impacted. Our stores offer arts and crafts supplies and products for the crafter and custom framing for the do-it-yourself home decorator, which some customers may perceive as discretionary. Pressure on discretionary income brought on by economic downturns and slow recoveries, including housing market declines, rising energy prices and weak labor markets, may cause consumers to reduce the amount they spend on discretionary items. The inherent uncertainty related to predicting economic conditions makes it difficult for us to accurately forecast future demand trends, which could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or limit our ability to satisfy customer demand and potentially lose market share.

 

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We face risks related to our substantial indebtedness.

 

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk associated with our variable rate debt and prevent us from meeting our obligations under our notes and credit facilities. As of January 28, 2017, we had total outstanding debt of $2,773.5 million, of which $2,263.5 million was subject to variable interest rates and $510.0 million was subject to fixed interest rates. As of January 28, 2017, we had $735.5 million of additional borrowing capacity (after giving effect to $57.6 million of letters of credit then outstanding) under our Amended Revolving Credit Facility. Our substantial indebtedness could have important consequences to us, including:

 

·

making it more difficult for us to satisfy our obligations with respect to our debt, and any failure to comply with the obligations under our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing our indebtedness;

 

·

increasing our vulnerability to general economic and industry conditions;

 

·

requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, selling and marketing efforts, product development, future business opportunities and other purposes;

 

·

exposing us to the risk of increased interest rates as certain of our borrowings, including under our Senior Secured Credit Facilities, which consist of the Amended Revolving Credit Facility and the Amended Term Loan Credit Facility (each, as defined below), are at variable rates;

 

·

restricting us from making strategic acquisitions or causing us to make non‑strategic divestitures;

 

·

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; or

 

·

limiting our ability to plan for, or adjust to, changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.

 

The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations, and ability to satisfy our obligations under our indebtedness.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject, in the case of MSI and Michaels Funding, Inc. (“Holdings”) and their subsidiaries, to the restrictions contained in our Senior Secured Credit Facilities and the indenture governing our notes. In addition, our Senior Secured Credit Facilities and indenture governing our notes do not restrict us from creating new holding companies that may be able to incur indebtedness without regard to the restrictions set forth in our Senior Secured Credit Facilities and indenture governing our notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

 

Our debt agreements contain restrictions that limit our flexibility in operating our business.

 

Our Senior Secured Credit Facilities and the indenture governing our notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit the ability of the relevant borrowers, issuers, guarantors and their restricted subsidiaries to, among other things:

 

·

incur or guarantee additional debt;

 

·

pay dividends or distributions on their capital stock or redeem, repurchase or retire their capital stock or indebtedness;

 

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·

issue stock of subsidiaries;

 

·

make certain investments, loans, advances and acquisitions;

 

·

create liens on our assets to secure debt;

 

·

enter into transactions with affiliates;

 

·

merge or consolidate with another company; or

 

·

sell or otherwise transfer assets.

 

In addition, under the Amended Term Loan Credit Facility, MSI is required to meet specified financial ratios in order to undertake certain actions, and under our Amended Revolving Credit Facility, MSI is required to meet specified financial ratios in order to undertake certain actions, and under certain circumstances, MSI may be required to maintain a specified fixed charge coverage ratio. Our ability to meet those tests can be affected by events beyond our control, and we cannot assure you we will meet them. A breach of any of these covenants could result in a default under our Senior Secured Credit Facilities, which could also lead to an event of default under our notes if any of the Senior Secured Credit Facilities were accelerated. Upon the occurrence of an event of default under our Senior Secured Credit Facilities, the lenders could elect to declare all amounts outstanding under our Senior Secured Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our Senior Secured Credit Facilities could proceed against the collateral granted to them to secure such indebtedness. Holdings, MSI and certain of MSI’s subsidiaries have pledged substantially all of their assets, including the capital stock of MSI and certain of its subsidiaries, as collateral under our Senior Secured Credit Facilities. If the indebtedness under our Senior Secured Credit Facilities or our notes were to be accelerated, our assets may not be sufficient to repay such indebtedness in full.

 

Changes in customer demands could materially adversely affect our sales, results of operations and cash flow.

 

Our success depends on our ability to anticipate and respond in a timely manner to changing customer demands and preferences for products and supplies used in creative activities. If we misjudge the market, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, or experience shortages of key items, either of which could have a material adverse impact on our operating results and cash flow. In addition, adverse weather conditions, economic instability and consumer confidence volatility could have material adverse impacts on our sales and operating results.

 

We have experienced a data breach in the past and any future failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information could result in an additional data breach which could materially adversely affect our reputation, financial condition and operating results.

 

The protection of our customer, team members and Company data is critically important to us. Our customers and team members have a high expectation that we will adequately safeguard and protect their sensitive personal information. We have become increasingly centralized and dependent upon automated information technology processes. In addition, a portion of our business operations is conducted electronically, increasing the risk of attack or interception that could cause loss or misuse of data, system failures or disruption of operations. This risk has increased with the launch of our e‑commerce platform in fiscal 2014. Improper activities by third parties, exploitation of encryption technology, new data‑hacking tools and discoveries and other events or developments may result in a future compromise or breach of our networks, payment card terminals or other payment systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. Any failure to maintain the security of our customers’ sensitive information, or data belonging to ourselves or our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse impact on our financial condition and results of operations. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects

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of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. There can be no assurance that we will not suffer a criminal attack in the future, that unauthorized parties will not gain access to personal information, or that any such incident will be discovered in a timely manner.

 

Competition, including Internet-based competition, could negatively impact our business.

 

The retail arts and crafts industry, including custom framing, is competitive, which could result in pressure to reduce prices and losses in our market share. We must remain competitive in the areas of quality, price, breadth of selection, customer service and convenience to retain and grow our market share. We compete with mass merchants, which dedicate a portion of their selling space to a limited selection of craft supplies and seasonal and holiday merchandise, along with national and regional chains and local merchants. We also compete with specialty retailers, which include Hobby Lobby Stores, Inc., A.C. Moore Arts & Crafts, Inc. and Jo‑Ann Stores, Inc. Some of our competitors, particularly the mass merchants, are larger and have greater financial resources than we do. We also face competition from Internet‑based retailers, such as Amazon.com, Inc., in addition to traditional store‑based retailers, who may be larger, more experienced and able to offer products we cannot. This could result in increased price competition since our customers could more readily search and compare non‑private brand products. Furthermore, we ultimately compete with alternative sources of entertainment and leisure for our customers.

 

Our reliance on foreign suppliers increases our risk of obtaining adequate, timely and cost-effective product supplies.

 

To a significant extent, we rely on foreign manufacturers for our merchandise, particularly manufacturers located in China. In addition, many of our domestic suppliers purchase a portion of their products from foreign sources. This reliance increases the risk that we will not have adequate and timely supplies of various products due to local political, economic, social or environmental conditions (including acts of terrorism, the outbreak of war or the occurrence of a natural disaster), transportation delays (including dock strikes and other work stoppages), restrictive actions by foreign governments, or changes in U.S. laws and regulations affecting imports or domestic distribution. Reliance on foreign manufacturers also increases our exposure to trade infringement claims and reduces our ability to return product for various reasons.

 

We are at a risk for higher costs associated with goods manufactured in China. Significant increases in wages or wage taxes paid by contract facilities may increase the cost of goods manufactured, which could have a material adverse effect on our profit margins and profitability.

 

All of our products manufactured overseas and imported into the U.S. are subject to duties collected by the U.S. Customs Service. We may be subjected to additional duties or tariffs, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import, or the loss of import privileges if we or our suppliers are found to be in violation of U.S. laws and regulations applicable to the importation of our products.

 

Our growth depends on our ability to open new stores and increase comparable store sales.

 

One of our key business strategies is to expand our base of retail stores. If we are unable to continue this strategy, our ability to increase our sales, profitability and cash flow could be impaired. To the extent we are unable to open new stores as we anticipate, our sales growth would primarily come from increases in comparable store sales. Growth in profitability would then depend significantly on our ability to improve gross margin. We may be unable to continue our store growth strategy if we cannot identify suitable sites for additional stores, negotiate acceptable leases, access sufficient capital to support store growth, or hire and train a sufficient number of qualified team members.

 

Damage to the reputation of the Michaels brand or our private and exclusive brands could adversely affect our sales.

 

We believe the Michaels brand name and many of our private and exclusive brand names are powerful sales and marketing tools and we devote significant resources to promoting and protecting them. To be successful in the future, we must continue to preserve, grow and utilize the value of Michaels’ reputation. Reputational value is based in large part on perceptions of subjective qualities, and even isolated incidents may erode trust and confidence. In addition, we develop and promote private and exclusive brands, which we believe have generated national recognition. Our Michaels private

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brands totaled approximately 57% of net sales in fiscal 2016 and 54% of net sales in fiscal 2015. Damage to the reputations (whether or not justified) of our brand names could arise from product failures, data privacy or security incidents, litigation or various forms of adverse publicity (including adverse publicity generated as a result of a vendor’s or a supplier’s failure to comply with general social accountability practices), especially in social media outlets, and may generate negative customer sentiment, potentially resulting in a reduction in our sales and earnings.

 

A weak fourth quarter would materially adversely affect our result of operations.

 

Our business is highly seasonal. Our inventories and short-term borrowings may grow in the third fiscal quarter as we prepare for our peak selling season in the third and fourth fiscal quarters. Our most important quarter in terms of sales, profitability and cash flow historically has been the fourth fiscal quarter. If for any reason our fourth fiscal quarter results were substantially below expectations, our operating results for the full year would be materially adversely affected, and we could have substantial excess inventory, especially in seasonal merchandise that is difficult to liquidate.

 

Suppliers from whom our products are sourced may fail us and transitioning to other qualified vendors could materially adversely affect our revenue and profit growth.

 

The products we sell are sourced from a wide variety of domestic and international vendors. Global sourcing has become an increasingly important part of our business, as we have undertaken efforts to increase the amount of product we source directly from overseas manufacturers. Our ability to find qualified vendors who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S. Any issues related to transitioning vendors could adversely affect our revenue and gross profit.

 

Many of our suppliers are small firms that produce a limited number of items. Given their limited resources, these firms are susceptible to cash flow issues, access to capital, production difficulties, quality control issues and problems in delivering agreed‑upon quantities on schedule. We may not be able, if necessary, to return products to these suppliers and obtain refunds of our purchase price or obtain reimbursement or indemnification from them if their products prove defective. These suppliers may also be unable to withstand a downturn in economic conditions. Significant failures on the part of our key suppliers could have a material adverse effect on our results of operations.

 

In addition, many of these suppliers require extensive advance notice of our requirements to supply products in the quantities we desire. This long lead time may limit our ability to respond timely to shifts in demand.

 

Unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our sales, results of operations, cash flow and financial condition.

 

Brand recognition, quality and price have a significant influence on consumers’ choices among competing products and brands. Advertising, promotion, merchandising and the cadence of new product introductions also have a significant impact on consumers’ buying decisions. If we misjudge consumer responses to our existing or future promotional activities, this could have a material adverse impact on our sales, results of operations, cash flow and financial condition.

 

We believe improvements in our merchandise offering help drive sales at our stores. We could be materially adversely affected by poor execution of changes to our merchandise offering or by unexpected consumer responses to changes in our merchandise offering.

 

Our marketing programs, e-commerce initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results of operations.

 

We collect, maintain and use data provided to us through our online activities and other customer interactions in our business. Our current and future marketing programs depend on our ability to collect, maintain and use this information, and our ability to do so is subject to certain contractual restrictions in third‑party contracts as well as evolving international, federal and state laws and enforcement trends. We strive to comply with all applicable laws and other legal obligations

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relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, or may conflict with other rules or may conflict with our practices. If so, we may suffer damage to our reputation and be subject to proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts to defend our practices, distract our management, increase our costs of doing business and result in monetary liability.

 

In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance with such laws. If applicable data privacy and marketing laws become more restrictive at the federal or state level, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e‑commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches may increase.

 

Product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our operations, merchandise offerings, reputation, results of operations, cash flow and financial condition.

 

We are subject to regulations by a variety of federal, state and international regulatory authorities, including the Consumer Product Safety Commission. In fiscal 2016, we purchased merchandise from approximately 620 vendors. Since a majority of our merchandise is manufactured in foreign countries, one or more of our vendors may not adhere to product safety requirements or our quality control standards, and we may not identify the deficiency before merchandise ships to our stores. Any issues of product safety, including but not limited to those manufactured in foreign countries, could cause us to recall some of those products. If our vendors fail to manufacture or import merchandise that adheres to our quality control standards, our reputation and brands could be damaged, potentially leading to increases in customer litigation against us. Furthermore, to the extent we are unable to replace any recalled products, we may have to reduce our merchandise offerings, resulting in a decrease in sales, especially if a recall occurs near or during a seasonal period. If our vendors are unable or unwilling to recall products failing to meet our quality standards, we may be required to recall those products at a substantial cost to us. Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. Long lead times on merchandise ordering cycles increase the difficulty for us to plan and prepare for potential changes to applicable laws. The Consumer Product Safety Improvement Act of 2008 imposes significant requirements on manufacturing, importing, testing and labeling requirements for our products. In the event that we are unable to timely comply with regulatory changes or regulators do not believe we are complying with current regulations applicable to us, significant fines or penalties could result, and could adversely affect our reputation, results of operations, cash flow and financial condition.

 

Changes in regulations or enforcement, or our failure to comply with existing or future regulations, may adversely impact our business.

 

We are subject to federal, state and local regulations with respect to our operations in the U.S. We are further subject to federal, provincial and local regulations internationally, including in Canada and China, each of which are distinct from those in the U.S., and may be subject to greater international regulation as our business expands. There are a number of legislative and regulatory initiatives that could adversely impact our business if they are enacted or enforced. Those initiatives include wage or workforce issues (such as minimum‑wage requirements, overtime and other working conditions and citizenship requirements), collective bargaining matters, environmental regulation, price and promotion regulation, trade regulations and others.

 

Proposed changes in tax regulations may also change our effective tax rate as our business is subject to a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. New accounting pronouncements and interpretations of existing accounting rules and practices have occurred and may occur in the future. A change in accounting standards or practices can have a significant effect on our reported results of operations. Failure to comply with legal requirements could result in, among other things, increased litigation risk that could affect us adversely by subjecting us to significant monetary damages and other remedies or by increasing our litigation expenses, administrative enforcement actions, fines and civil and criminal liability. We are currently subject to various class action

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lawsuits alleging violations of wage and workforce laws and similar matters (see Note 13 to the consolidated financial statements). If such issues become more expensive to address, or if new issues arise, they could increase our expenses, generate negative publicity, or otherwise adversely affect us.

 

Significant increases in inflation or commodity prices, such as petroleum, natural gas, electricity, steel, wood and paper, may adversely affect our costs, including cost of merchandise.

 

Significant future increases in commodity prices or inflation could adversely affect our costs, including cost of merchandise and distribution costs. Furthermore, the transportation industry may experience a shortage or reduction of capacity, which could be exacerbated by higher fuel prices. Our results of operations may be adversely affected if we are unable to secure, or are able to secure only at significantly higher costs, adequate transportation resources to fulfill our receipt of goods or delivery schedules to the stores.

 

We may be subject to information technology system failures or network disruptions, or our information systems may prove inadequate, resulting in damage to our reputation, business operations and financial condition.

 

We depend on our management information systems for many aspects of our business, including our perpetual inventory, automated replenishment and weighted-average cost stock ledger systems which are necessary to properly forecast, manage, analyze and record our inventory. The Company may be subject to information technology system failures and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, denial‑of‑service attacks, computer viruses, physical or electronic break‑ins, or similar events or disruptions. System redundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent access to the Company’s online services and preclude store transactions. System failures and disruptions could also impede the manufacturing and shipping of products, transactions processing and financial reporting. Additionally, we may be materially adversely affected if we are unable to improve, upgrade, maintain, and expand our systems.

 

Improvements to our supply chain may not be fully successful.

 

An important part of our efforts to achieve efficiencies, cost reductions, and sales and cash flow growth is the identification and implementation of improvements to our supply chain, including merchandise ordering, transportation, direct sourcing initiatives and receipt processing. We continue to implement enhancements to our distribution systems and processes, which are designed to improve efficiency throughout the supply chain and at our stores. If we are unable to successfully implement significant changes, this could disrupt our supply chain, which could have a material adverse impact on our results of operations.

 

Our total assets include intangible assets, goodwill and substantial amounts of property and equipment. Changes in estimates or projections used to assess the fair value of these assets, or operating results that are lower than our current estimates at certain store locations, may cause us to incur impairment charges that could adversely affect our results of operation.

 

Our total assets include intangible assets, goodwill and substantial amounts of property and equipment. We make certain estimates and projections in connection with impairment analyses for these long lived assets, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 360, "Property, Plant and Equipment" ("ASC 360"), and ASC 350, "Intangibles—Goodwill and Other" ("ASC 350"). We also review the carrying value of these assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with ASC 360 or ASC 350. We will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. These calculations require us to make a number of estimates and projections of future results. If these estimates or projections change, we may be required to record additional impairment charges on certain of these assets. If these impairment charges are significant, our results of operations would be adversely affected.

 

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Changes in newspaper subscription rates may result in reduced exposure to our circular advertisements.

 

A substantial portion of our promotional activities utilize circular advertisements in local newspapers. A continued decline in consumer subscriptions of these newspapers could reduce the frequency with which consumers receive our circular advertisements, thereby negatively affecting sales, results of operations and cash flow.

 

Disruptions in the capital markets could increase our costs of doing business.

 

Any disruption in the capital markets could make it difficult for us to raise additional capital when needed, or to eventually refinance our existing indebtedness on acceptable terms or at all. Similarly, if our suppliers face challenges in obtaining credit when needed, or otherwise face difficult business conditions, they may become unable to offer us the merchandise we use in our business thereby causing reductions in our revenues, or they may demand more favorable payment terms, all of which could adversely affect our results of operations, cash flows and financial condition.

 

Our real estate leases generally obligate us for long periods, which subject us to various financial risks.

 

We lease virtually all of our store, distribution center and administrative locations, generally for long terms. While we have the right to terminate some of our leases under specified conditions by making specified payments, we may not be able to terminate a particular lease if or when we would like to do so. If we decide to close stores, we are generally required to continue paying rent and operating expenses for the balance of the lease term, or pay to exercise rights to terminate, and the performance of any of these obligations may be expensive. When we assign or sublease vacated locations, we may remain liable on the lease obligations if the assignee or sublessee does not perform. In addition, when leases for the stores in our ongoing operations expire, we may be unable to negotiate renewals, either on commercially acceptable terms, or at all, which could cause us to close stores. Accordingly, we are subject to the risks associated with leasing real estate, which can have a material adverse effect on our results.

 

We have co-sourced certain of our information technology, accounts payable, payroll, accounting and human resources functions and may co-source other administrative functions, which makes us more dependent upon third parties.

 

We place significant reliance on third‑party providers for the co‑sourcing of certain of our information technology (“IT”), accounts payable, payroll, accounting and human resources functions. This co‑sourcing initiative is a component of our ongoing strategy to increase efficiencies, increase our IT capabilities, manage our costs and seek additional cost savings. These functions are generally performed in offshore locations. As a result, we rely on third parties to ensure that certain functional needs are sufficiently met. This reliance subjects us to risks arising from the loss of control over these processes, changes in pricing that may affect our operating results, and potentially, termination of provision of these services by our suppliers. If our service providers fail to perform, we may have difficulty arranging for an alternate supplier or rebuilding our own internal resources, and we could incur significant costs, all of which may have a significant adverse effect on our business. We may co‑source other administrative functions in the future, which would further increase our reliance on third parties. Further, the use of offshore service providers may expose us to risks related to local political, economic, social or environmental conditions (including acts of terrorism, the outbreak of war, or the occurrence of natural disaster), restrictive actions by foreign governments or changes in U.S. laws and regulations.

 

We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries.

 

Our Canadian operating subsidiaries purchase inventory in U.S. dollars, which is sold in Canadian dollars and exposes us to foreign exchange rate fluctuations. In addition, our customers at border locations can be sensitive to cross‑border price differences. Substantial foreign currency fluctuations could adversely affect our business. In fiscal 2016, exchange rates had a positive impact on our consolidated operating results due to a 7% increase in the Canadian exchange rate.

 

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We are dependent upon the services of our senior management team.

 

We are dependent on the services, abilities and experience of our executive officers, including Carl S. Rubin, our Chief Executive Officer, and Denise A. Paulonis, our Chief Financial Officer. The permanent loss of the services of either of these senior executives and any change in the composition of our senior management team could have a negative impact on our ability to execute on our business and operating strategies.

 

Failure to attract and retain quality sales, distribution center and other team members in appropriate numbers as well as experienced buying and management personnel could adversely affect our performance.

 

Our performance depends on recruiting, developing, training and retaining quality sales, distribution center and other team members in large numbers as well as experienced buying and management personnel. Many of our store level team members are in entry level or part‑time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling labor costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, changing demographics, health and other insurance costs and governmental labor and employment requirements. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our earnings to decrease. The market for retail management is highly competitive and, similar to other retailers, we face challenges in securing sufficient management talent. If we do not continue to attract, train and retain quality team members, our performance could be adversely affected.

 

Our results may be adversely affected by serious disruptions or catastrophic events, including geo-political events and weather.

 

Unforeseen public health issues, such as pandemics and epidemics, and geo‑political events, such as civil unrest in a country in which our suppliers are located or terrorist or military activities disrupting transportation, communication or utility systems, as well as natural disasters such as hurricanes, tornadoes, floods, earthquakes and other adverse weather and climate conditions, whether occurring in the U.S. or abroad, particularly during peak seasonal periods, could disrupt our operations or the operations of one or more of our vendors or could severely damage or destroy one or more of our stores or distribution facilities located in the affected areas. For example, day‑to‑day operations, particularly our ability to receive products from our vendors or transport products to our stores, could be adversely affected, or we could be required to close stores or distribution centers in the affected areas or in areas served by the affected distribution center. These factors could also cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and global financial markets and economy. Such occurrences could significantly impact our operating results and financial performance. For example, during fiscal 2015, one of our stores was damaged by weather related to Hurricane Joaquin, resulting in closure and lost sales. Had the hurricane impacted a larger geographic area, it is possible that we would have suffered a substantial negative impact to our sales for a prolonged period.

 

Any difficulty executing or integrating an acquisition, a business combination or a major business initiative could adversely affect our business or results of operations.

 

Any difficulty in executing or integrating an acquisition, a business combination or a major business initiative, including the recent acquisition of Lamrite, may result in our inability to achieve anticipated benefits from these transactions in the time frame that we anticipate, or at all, which could adversely affect our business or results of operations. Such transactions may also disrupt the operation of our current activities and divert management's attention from other business matters. In addition, the Company’s current credit agreements place certain limited constraints on our ability to make an acquisition or enter into a business combination, and future borrowing agreements could place tighter constraints on such actions.

 

Substantial changes to fiscal and tax policies may adversely affect our business.

 

Legislative actions, including changes in fiscal and tax policies, may adversely affect our business.  For example, any restrictions or limitations on trade with China and other countries or the imposition of a tariff or border tax on all foreign imports could negatively impact our business. A majority of the products currently sold in Michaels stores are

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manufactured in Asia. Therefore, any such restrictions or tariffs imposed on products that we or our suppliers import for sale in the U.S. would adversely and directly impact our tax liability and cost of goods sold. Further, such a policy change may require us to raise our prices, which could result in the loss of customers and harm our business.

 

Our holding company structure makes us, and certain of our direct and indirect subsidiaries, dependent on the operations of our, and their, subsidiaries to meet our financial obligations.

 

We, and certain of our direct and indirect subsidiaries, have no significant assets other than the interest in direct and indirect subsidiaries, including MSI. As a result, we, and certain of our direct and indirect subsidiaries, rely exclusively upon payments, dividends and distributions from direct and indirect subsidiaries’ cash flows. Our ability to pay dividends, if any are declared, to our shareholders is dependent on the ability of our subsidiaries to generate sufficient net income and cash flows to pay upstream dividends and make loans or loan repayments.

 

We are subject to certain phase-in provisions of The NASDAQ Stock Market and, as a result, we are not currently subject to certain corporate governance requirements. Until the expiration of the phase-in period on December 16, 2017, you will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.

 

Following the December 2016 secondary offering, our significant stockholders, affiliates of or funds advised by Bain Capital Partners, LLC and The Blackstone Group L.P. (the “Sponsors”) ceased to indirectly beneficially own a majority controlling interest in us. As a result, we are no longer a “controlled company” within the meaning of the corporate governance standards of The NASDAQ Stock Market. However, we continue to rely on a phase-in provision for the requirement that we have a Compensation Committee that is composed entirely of independent directors. Accordingly, for up to one year from the expiration of the phase-in period, which will occur on December 16, 2017, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of The NASDAQ Stock Market.

 

The Sponsors continue to have significant influence over us and their interest may conflict with yours and those of our Company.

 

Although we are no longer a “controlled company”, the Sponsors continue to beneficially own approximately 38% of our outstanding common stock as of January 28, 2017. For so long as the Sponsors continue to hold a significant portion of our outstanding common stock, the Sponsors may continue to be able to strongly influence or effectively control our decisions.

 

Our stock price could be extremely volatile and may decline and, as a result, you may not be able to resell your shares at or above the price you paid for them.

Since listing our common stock on The NASDAQ Global Select Market in June 2014 in connection with our IPO, the price of our common stock has ranged from a low of $14.51 on August 1, 2014 to a high of $31.37 on June 6, 2016. In addition, the stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this filing and others such as:

·

variations in our operating performance and the performance of our competitors;

·

actual or anticipated fluctuations in our quarterly or annual operating results;

·

publication of research reports by securities analysts about us or our competitors or our industry;

·

our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

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·

additions and departures of key personnel;

·

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin‑offs, joint ventures, strategic investments or changes in business strategy;

·

the passage of legislation or other regulatory developments affecting us or our industry;

·

speculation in the press or investment community;

·

adverse publicity;

·

changes in accounting principles;

·

terrorist acts, acts of war or periods of widespread civil unrest;

·

natural disasters and other calamities; and

·

changes in general market and economic conditions.

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

Provisions in our charter documents and Delaware law may deter takeover efforts that may be beneficial to stockholder value.

Delaware law and provisions in our certificate of incorporation and bylaws could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include limitations on our stockholders’ ability to act by written consent. In addition, our Board has the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquirer. Our certificate of incorporation imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock other than the Sponsors, who own approximately 38% of our outstanding common stock as of January 28, 2017. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures and efforts by stockholders to change the direction or management of the Company may be unsuccessful.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or the bylaws or (iv) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

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Because our executive officers hold or may hold restricted shares or option awards that will vest upon a change of control, these officers may have interests in us that conflict with yours.

Our executive officers hold or may hold restricted shares and options to purchase shares that would automatically vest upon a change of control. As a result, these officers may view certain change of control transactions more favorably than an investor due to the vesting opportunities available to them and, as a result, may have an economic incentive to support a transaction that you may not believe to be favorable to stockholders.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than you paid.

We plan to retain future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our Senior Secured Credit Facilities. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than you paid.

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

 

Not applicable.

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ITEM 2.  PROPERTIES

 

We lease substantially all of the sites for our Michaels, Aaron Brothers and Pat Catan’s stores, with the majority of our stores having initial lease terms of approximately 10 years. The leases are generally renewable, with increases in lease rental rates. Lessors have made leasehold improvements to prepare our stores for opening under a majority of our existing leases. As of January 28, 2017, in connection with stores that we plan to open or relocate in future fiscal years, we had signed approximately 37 leases for Michaels stores. Management believes our facilities are suitable and adequate for our business as presently conducted.

As of January 28, 2017, we leased the following non-store facilities:

 

 

 

 

Locations

 

Square Footage

 

Distribution centers:

 

 

 

Hazleton, Pennsylvania

 

692,000

 

Jacksonville, Florida

 

506,000

 

Lancaster, California

 

763,000

 

Centralia, Washington

 

718,000

 

New Lenox, Illinois

 

693,000

 

Haslet, Texas

 

433,000

 

City of Commerce, California (Aaron Brothers)

 

174,000

 

Strongsville, Ohio (Darice warehouse)

 

217,000

 

 

 

4,196,000

 

Artistree:

 

 

 

DFW Airport, Texas (regional processing and fulfillment operations center)

 

271,000

 

Kernersville, North Carolina (manufacturing plant and regional processing center)

 

156,000

 

City of Industry, California (regional processing center)

 

90,000

 

Mississauga, Ontario (regional processing center)

 

62,000

 

 

 

579,000

 

Office space:

 

 

 

Irving, Texas (corporate office support center)

 

296,000

 

Strongsville, Ohio (Lamrite office support center)

 

505,000

 

Atlanta, Georgia (Darice showroom)

 

6,000

 

Mississauga, Ontario (Canadian regional office)

 

3,000

 

Kowloon Bay, Hong Kong

 

4,000

 

Ningbo, China

 

17,000

 

 

 

831,000

 

 

 

 

 

Coppell, Texas (new store staging warehouse)

 

82,000

 

 

 

5,688,000

 

 

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The following table indicates the number of our retail stores located in each state or province as of January 28, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Stores

 

State/Province

 

Michaels

 

Aaron Brothers

 

Pat Catan's

 

Total

 

Alabama

 

12

 

 

 

 

 

12

 

Alaska

 

3

 

 

 

 

 

3

 

Alberta

 

23

 

 

 

 

 

23

 

Arizona

 

27

 

4

 

 

 

31

 

Arkansas

 

5

 

 

 

 

 

5

 

British Columbia

 

17

 

 

 

 

 

17

 

California

 

136

 

70

 

 

 

206

 

Colorado

 

22

 

2

 

 

 

24

 

Connecticut

 

20

 

 

 

 

 

20

 

Delaware

 

5

 

 

 

 

 

5

 

District of Columbia

 

1

 

 

 

 

 

1

 

Florida

 

82

 

 

 

 

 

82

 

Georgia

 

35

 

1

 

 

 

36

 

Idaho

 

7

 

1

 

 

 

8

 

Illinois

 

41

 

 

 

 

 

41

 

Indiana

 

18

 

 

 

1

 

19

 

Iowa

 

8

 

 

 

 

 

8

 

Kansas

 

8

 

 

 

 

 

8

 

Kentucky

 

12

 

 

 

 

 

12

 

Louisiana

 

15

 

 

 

 

 

15

 

Maine

 

3

 

 

 

 

 

3

 

Manitoba

 

4

 

 

 

 

 

4

 

Maryland

 

25

 

 

 

 

 

25

 

Massachusetts

 

32

 

 

 

 

 

32

 

Michigan

 

35

 

 

 

1

 

36

 

Minnesota

 

23

 

 

 

 

 

23

 

Mississippi

 

7

 

 

 

 

 

7

 

Missouri

 

21

 

 

 

 

 

21

 

Montana

 

5

 

 

 

 

 

5

 

Nebraska

 

6

 

 

 

 

 

6

 

Nevada

 

10

 

3

 

 

 

13

 

New Brunswick

 

3

 

 

 

 

 

3

 

New Hampshire

 

9

 

 

 

 

 

9

 

New Jersey

 

31

 

 

 

 

 

31

 

New Mexico

 

4

 

 

 

 

 

4

 

New York

 

62

 

 

 

 

 

62

 

Newfoundland and Labrador

 

1

 

 

 

 

 

1

 

North Carolina

 

36

 

 

 

 

 

36

 

North Dakota

 

3

 

 

 

 

 

3

 

Nova Scotia

 

7

 

 

 

 

 

7

 

Ohio

 

32

 

 

 

26

 

58

 

Oklahoma

 

7

 

 

 

 

 

7

 

Ontario

 

58

 

 

 

 

 

58

 

Oregon

 

15

 

2

 

 

 

17

 

Pennsylvania

 

48

 

 

 

6

 

54

 

Prince Edward Island

 

1

 

 

 

 

 

1

 

Quebec

 

16

 

 

 

 

 

16

 

Rhode Island

 

4

 

 

 

 

 

4

 

Saskatchewan

 

3

 

 

 

 

 

3

 

South Carolina

 

15

 

 

 

 

 

15

 

South Dakota

 

2

 

 

 

 

 

2

 

Tennessee

 

17

 

 

 

 

 

17

 

Texas

 

83

 

19

 

 

 

102

 

Utah

 

13

 

 

 

 

 

13

 

Vermont

 

2

 

 

 

 

 

2

 

Virginia

 

37

 

 

 

 

 

37

 

Washington

 

23

 

7

 

 

 

30

 

West Virginia

 

5

 

 

 

1

 

6

 

Wisconsin

 

17

 

 

 

 

 

17

 

Wyoming

 

1

 

 

 

 

 

1

 

Total

 

1,223

 

109

 

35

 

1,367

 

 

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ITEM 3.  LEGAL PROCEEDINGS.

 

Information regarding legal proceedings is incorporated by reference from Note 13 to the consolidated financial statements.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common stock is listed on The NASDAQ Global Select Market under the symbol “MIK”. As of January 28, 2017, there were approximately 375 holders of record of our common stock. The following table sets forth the high and low sales price per share for the periods indicated of our common stock on The NASDAQ Global Select Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

2016

 

2015

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

29.56

 

$

20.25

 

$

30.00

 

$

25.77

 

Second Quarter

 

$

31.37

 

$

25.52

 

$

28.49

 

$

24.60

 

Third Quarter

 

$

26.57

 

$

22.11

 

$

26.84

 

$

21.78

 

Fourth Quarter

 

$

25.57

 

$

19.25

 

$

24.05

 

$

19.46

 

 

Dividends

 

The Company does not anticipate paying any cash dividends in the near future. We anticipate that all of our earnings for the foreseeable future will be used to repay debt, to repurchase outstanding shares, for working capital, to support our operations and to finance the growth and development of our business. Any future determination to pay dividends will be at the discretion of our Board, subject to compliance with applicable law and any contractual provisions, including under agreements for indebtedness, that restrict or limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, earnings, capital requirements and other factors that our Board may deem relevant. For additional information concerning restrictions relating to agreements for indebtedness, see Note 7 to the consolidated financial statements.

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Performance Graph

 

The following graph shows a comparison of cumulative total return to holders of The Michaels Companies, Inc.’s common shares against the cumulative total return of the S&P 500 Index and S&P 500 Retail Index from June 27, 2014 (the date the Company’s stock commenced trading on the NASDAQ Global Select Market) through January 28, 2017. The comparison of the cumulative total returns for each investment assumes that $100 was invested in The Michaels Companies, Inc. common shares and the respective indices on June 27, 2014 through January 28, 2017 including reinvestment of any dividends. Historical share price performance should not be relied upon as an indication of future share price performance.

 

Picture 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

6/27/2014

 

1/31/2015

 

1/30/2016

 

1/28/2017

 

The Michaels Companies, Inc.

 

$

100.00

 

$

151.76

 

$

128.24

 

$

115.06

 

S&P 500 Index

 

 

100.00

 

 

103.10

 

 

102.41

 

 

123.78

 

S&P 500 Retail Index

 

 

100.00

 

 

108.50

 

 

97.18

 

 

102.61

 

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ITEM 6.  SELECTED FINANCIAL DATA.

 

The following financial information for the five most recent fiscal years has been derived from our consolidated financial statements. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere herein.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year(1)

 

 

 

2016(2)

  

2015

  

2014

  

2013

  

2012

    

 

 

(in thousands, except earnings per share, other operating and store count data)

 

Results of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

  

$

5,197,292

 

$

4,912,782

 

$

4,738,144

 

$

4,569,792

 

$

4,407,545

 

Operating income (3)

 

 

715,280

 

 

720,604

 

 

626,529

 

 

610,402

 

 

592,050

 

Interest expense

 

 

126,270

 

 

139,405

 

 

198,409

 

 

214,497

 

 

245,466

 

Losses on early extinguishments of debt and refinancing costs

 

 

7,292

 

 

8,485

 

 

74,312

 

 

14,420

 

 

32,551

 

Net income

 

 

378,159

 

 

362,912

 

 

217,395

 

 

243,430

 

 

199,734

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.84

 

$

1.75

 

$

1.07

 

$

1.39

 

$

1.14

 

Diluted

 

$

1.82

 

$

1.72

 

$

1.05

 

$

1.36

 

$

1.12

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

204,735

 

 

206,845

 

 

203,229

 

 

174,797

 

 

174,715

 

Diluted

 

 

206,354

 

 

209,346

 

 

207,101

 

 

178,628

 

 

178,068

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

298,813

 

$

409,391

 

$

378,295

 

$

238,864

 

$

55,961

 

Merchandise inventories

 

 

1,127,777

 

 

1,002,607

 

 

958,171

 

 

901,308

 

 

862,478

 

Total current assets

 

 

1,542,805

 

 

1,507,723

 

 

1,423,778

 

 

1,237,336

 

 

1,007,479

 

Total assets

 

 

2,147,640

 

 

2,031,287

 

 

1,961,108

 

 

1,767,132

 

 

1,519,510

 

Total current liabilities

 

 

1,024,224

 

 

912,860

 

 

889,632

 

 

825,556

 

 

851,618

 

Current portion of long-term debt

 

 

31,125

 

 

24,900

 

 

24,900

 

 

16,400

 

 

150,514

 

Long-term debt

 

 

2,723,187

 

 

2,744,942

 

 

3,089,781

 

 

3,633,279

 

 

2,855,834

 

Total liabilities

 

 

3,846,066

 

 

3,755,382

 

 

4,072,633

 

 

4,549,414

 

 

3,823,471

 

Stockholders’ deficit

 

 

(1,698,426)

 

 

(1,724,095)

 

 

(2,111,525)

 

 

(2,782,282)

 

 

(2,303,961)

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average net sales per selling square foot (4)

 

$

223

 

$

223

 

$

220

 

$

218

 

$

215

 

Comparable store sales

 

 

(0.5)

%  

 

1.8

%  

 

1.7

%  

 

2.9

%  

 

1.5

%

Comparable store sales, at constant currency

 

 

(0.4)

%  

 

3.2

%  

 

2.4

%  

 

3.4

%  

 

1.5

%

Total selling square footage (in thousands)

 

 

23,539

 

 

22,068

 

 

21,605

 

 

21,108

 

 

20,588

 

Stores Open at End of Year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michaels

 

 

1,223

 

 

1,196

 

 

1,168

 

 

1,136

 

 

1,099

 

Aaron Brothers

 

 

109

 

 

117

 

 

120

 

 

121

 

 

125

 

Pat Catan's

 

 

35

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total stores open at end of year

 

 

1,367

 

 

1,313

 

 

1,288

 

 

1,257

 

 

1,224

 


(1)

Fiscal 2012 consisted of 53 weeks while all other periods presented consisted of 52 weeks.

(2)

Fiscal 2016 results of operations and balance sheet data includes the impact of the acquisition of Lamrite on February 2, 2016, including non-recurring purchase accounting adjustment and integrations costs of $11.4 million. Lamrite’s net sales totaled $232.3 million in fiscal 2016. 

(3)

Fiscal 2014 operating income includes a $32.3 million charge associated with the IPO primarily related to a $30.2 million fee paid to certain related parties to terminate our management agreement.

(4)

The calculation of average net sales per selling square foot includes only Michaels comparable stores. Aaron Brothers, which is a smaller store model, and Pat Catan’s, which is a larger store model, are excluded from the calculation.

 

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal 2016” relate to the 52 weeks ended January 28, 2017, references to “fiscal 2015” relate to the 52 weeks ended January 30, 2016 and references to “fiscal 2014” relate to the 52 weeks ended January 31, 2015.

 

Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state of Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The Michaels Companies, Inc. (the “Company”) was incorporated in Delaware in connection with the reorganization. In July 2014, we completed an initial public offering (“IPO”) of 27.8 million shares of common stock at a public offering price of $17.00 per share, resulting in net proceeds of $445.7 million.

 

Fiscal 2016 Overview

 

With $5,197.3 million in net sales in fiscal 2016, we are the largest arts and crafts specialty retailer in North America (based on store count) providing materials, project ideas and education for creative activities, under the retail brands of Michaels, Aaron Brothers and Pat Catan’s. We also operate an international wholesale business under the Darice brand name (“Darice”) and a market-leading vertically-integrated custom framing business under the Artistree brand name. At January 28, 2017, we operated 1,223 Michaels stores, 109 Aaron Brothers stores and 35 Pat Catan’s stores.

 

Financial highlights for fiscal 2016 include the following:

 

·

Net sales increased to $5,197.3 million, a 5.8% improvement over last year, primarily driven by the acquisition of Lamrite West, Inc. (“Lamrite”) and the opening of 19 additional stores (net of closures).

 

·

Comparable store sales decreased 0.5%, or 0.4%, at constant exchange rates.

 

·

Our Michaels retail stores’ private brand merchandise drove approximately 57% of net sales in fiscal 2016 compared to 54% of net sales in fiscal 2015.

 

·

We reported operating income of $715.3 million, a decrease of 0.7% from the prior year, including $11.4 million of purchase accounting adjustments and integration costs.

 

·

We reported net income of $378.2 million, an increase of 4.2% from the prior year.

 

·

Adjusted EBITDA, a non-GAAP measure that is a required calculation in our debt agreements, improved by 0.8%, from $866.2 million in fiscal 2015 to $872.7 million in fiscal 2016 (see “Management Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures”).

 

·

We refinanced our term loan credit facility and our revolving credit facility during fiscal 2016. 

 

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In fiscal 2016, we made significant progress implementing our strategic initiatives, including:

 

·

the acquisition of Lamrite, which enhanced our private brand development capabilities, accelerated our direct sourcing initiatives and strengthened our business-to-business capabilities through an international wholesale business under the Darice brand name;

 

·

the introduction of our fully-integrated “Make” brand campaign through television, radio, social media and in-store events intended to leverage the growing customer trends of “do-it-yourself” and “personalization” while also positioning Michaels in a more contemporary light;

 

·

creating flexible merchandising space in our stores to highlight newness and present stronger, more cohesive seasonal product statements to customers;

 

·

the launch of our Michaels Rewards program, which allows us to differentiate our business from others in our channel while providing us with valuable data to help tailor customer communications more effectively;

 

·

the improvement of our in-store and online education programs, including the addition of more free classes for children and adults;

 

·

improving our in-store presentation and raising operational standards to deliver a better shopping experience;

 

·

delivering trend-right merchandise to our customers; and

 

·

the authorization from our Board of Directors to purchase up to $500.0 million of the Company’s common stock on the open market.

 

Fiscal 2017 Outlook

 

In fiscal 2017, we intend to continue to expand our industry leadership through innovation and strategic initiatives such as:

 

·

making our stores more inviting to a broader set of customers, including those new to do-it-yourself projects and more experienced crafters;

 

·

continuing to enhance our in-store shopping experience by creating a more visually appealing environment and making it easier for our customers to shop;

 

·

broadening our merchandising and sourcing capabilities to better identify and source new trends, merchandise and categories that enhance our portfolio of exclusive brands and products;

 

·

strengthening our connections with customers and reaching new customers through an expanded marketing program, including print, digital, direct mail, broadcast and community events;

 

·

expanding our omni-channel offering of merchandise, promotional and marketing events; and

 

·

strengthening our business-to-business operations.

 

Comparable Store Sales

 

Comparable store sales represents the change in net sales for stores open the same number of months in the comparable period of the previous year, including stores that were relocated or expanded during either period, as well as e-commerce sales. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than two weeks is not considered comparable during the month

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it is closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes comparable in its 14th month of operation after its reopening. Pat Catan’s stores will not be included in comparable store sales until the beginning of fiscal 2017, the 13th month after the acquisition.

 

Results of Operations

 

The following table sets forth the percentage relationship to net sales of line items of our consolidated statements of comprehensive income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes.