Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31, 2015

 

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. (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).

 

The Michaels Companies, Inc. is a non-accelerated filer.

 

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

 

As of November 25, 2015, 208,962,744 shares of The Michaels Companies, Inc.’s common stock were outstanding.

 

 

 

 

 

 

 


 

Table of Contents

 

 

 

 

 

THE MICHAELS COMPANIES, INC.

 

TABLE OF CONTENTS

 

 

 

 

Part I—FINANCIAL INFORMATION 

 

 

 

Page

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

Consolidated Statements of Comprehensive Income for the 13 and 39 weeks ended October 31, 2015 and November 1, 2014 (unaudited)

3

 

 

 

 

Consolidated Balance Sheets as of October 31, 2015, January 31, 2015 and November 1, 2014 (unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows for the 39 weeks ended October 31, 2015 and November 1, 2014 (unaudited)

5

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

Item 4. 

Controls and Procedures

25

 

 

 

Part IIOTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

26

 

 

 

Item 1A. 

Risk Factors

26

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 5. 

Other Information

26

 

 

 

Item 6. 

Exhibits

27

 

 

 

Signatures 

 

28

 

 

 

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Part IFINANCIAL INFORMATION

 

Item 1. Financial Statements

 

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

October 31,

 

November 1,

 

 

 

2015

    

2014

 

2015

    

2014

 

Net sales

    

$

1,168,423

    

$

1,130,195

    

$

3,230,293

    

$

3,130,393

 

Cost of sales and occupancy expense

 

 

702,825

 

 

678,012

 

 

1,949,577

 

 

1,892,270

 

Gross profit

 

 

465,598

 

 

452,183

 

 

1,280,716

 

 

1,238,123

 

Selling, general and administrative

 

 

308,704

 

 

307,537

 

 

879,974

 

 

865,408

 

Related party expenses

 

 

 —

 

 

 —

 

 

 —

 

 

35,682

 

Store pre-opening costs

 

 

1,042

 

 

2,167

 

 

4,326

 

 

4,462

 

Operating income

 

 

155,852

 

 

142,479

 

 

396,416

 

 

332,571

 

Interest expense

 

 

33,840

 

 

41,457

 

 

105,967

 

 

159,183

 

Losses on early extinguishment of debt and refinancing costs

 

 

 —

 

 

 —

 

 

6,072

 

 

67,980

 

Other expense, net

 

 

112

 

 

797

 

 

171

 

 

587

 

Income before income taxes

 

 

121,900

 

 

100,225

 

 

284,206

 

 

104,821

 

Provision for income taxes

 

 

45,103

 

 

36,161

 

 

104,960

 

 

43,986

 

Net income

 

$

76,797

 

$

64,064

 

$

179,246

 

$

60,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment and other

 

 

88

 

 

(2,520)

 

 

(2,819)

 

 

(1,843)

 

Comprehensive income

 

$

76,885

 

$

61,544

 

$

176,427

 

$

58,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

$

0.31

 

$

0.86

 

$

0.32

 

Diluted

 

$

0.37

 

$

0.31

 

$

0.85

 

$

0.32

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

207,323

 

 

203,269

 

 

206,629

 

 

187,784

 

Diluted

 

 

209,753

 

 

207,215

 

 

209,595

 

 

191,602

 

 

See accompanying notes to consolidated financial statements.

 

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THE MICHAELS COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

 

 

 

October 31,

 

January 31,

 

November 1,

 

ASSETS

 

2015

 

2015

 

2014

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

114,746

 

$

378,295

 

$

193,798

 

Merchandise inventories

 

 

1,277,053

 

 

958,171

 

 

1,115,813

 

Prepaid expenses and other

 

 

95,046

 

 

84,894

 

 

99,623

 

Deferred income taxes

 

 

38,474

 

 

38,345

 

 

37,019

 

Income tax receivables

 

 

19,566

 

 

2,418

 

 

41,574

 

Total current assets

 

 

1,544,885

 

 

1,462,123

 

 

1,487,827

 

Property and equipment, at cost

 

 

1,645,328

 

 

1,579,446

 

 

1,546,321

 

Less accumulated depreciation and amortization

 

 

(1,259,921)

 

 

(1,193,074)

 

 

(1,169,534)

 

Property and equipment, net

 

 

385,407

 

 

386,372

 

 

376,787

 

Goodwill

 

 

94,290

 

 

94,290

 

 

94,290

 

Debt issuance costs, net

 

 

31,711

 

 

40,613

 

 

45,725

 

Deferred income taxes

 

 

20,205

 

 

20,245

 

 

23,587

 

Other assets

 

 

6,641

 

 

1,638

 

 

1,648

 

Total assets

 

$

2,083,139

 

$

2,005,281

 

$

2,029,864

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

557,170

 

$

447,165

 

$

504,176

 

Accrued liabilities and other

 

 

370,671

 

 

391,997

 

 

369,319

 

Current portion of long-term debt

 

 

24,900

 

 

24,900

 

 

204,900

 

Income taxes payable

 

 

6,285

 

 

25,570

 

 

634

 

Total current liabilities

 

 

959,026

 

 

889,632

 

 

1,079,029

 

Long-term debt

 

 

2,924,751

 

 

3,124,374

 

 

3,130,631

 

Deferred income taxes

 

 

17,222

 

 

9,580

 

 

1,193

 

Other liabilities

 

 

92,065

 

 

93,220

 

 

87,561

 

Total liabilities

 

 

3,993,064

 

 

4,116,806

 

 

4,298,414

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficit:

 

 

 

 

 

 

 

 

 

 

Common stock, $0.06775 par value, 350,000 shares authorized; 208,922 shares issued and outstanding at October 31, 2015; 205,803 shares issued and outstanding at January 31, 2015; and 204,242 shares issued and outstanding at November 1, 2014

 

 

13,970

 

 

13,799

 

 

13,774

 

Additional paid-in-capital

 

 

582,833

 

 

557,831

 

 

549,807

 

Accumulated deficit

 

 

(2,492,104)

 

 

(2,671,350)

 

 

(2,830,486)

 

Accumulated other comprehensive loss

 

 

(14,624)

 

 

(11,805)

 

 

(1,645)

 

Total stockholders’ deficit

 

 

(1,909,925)

 

 

(2,111,525)

 

 

(2,268,550)

 

Total liabilities and stockholders’ deficit

 

$

2,083,139

 

$

2,005,281

 

$

2,029,864

 

 

See accompanying notes to consolidated financial statements.

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THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

179,246

 

$

60,835

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

85,382

 

 

82,266

 

Share-based compensation

 

 

9,483

 

 

14,599

 

Debt issuance costs amortization

 

 

6,455

 

 

7,984

 

Accretion of long-term debt, net

 

 

(98)

 

 

(483)

 

Deferred income taxes

 

 

7,553

 

 

4,989

 

Losses on early extinguishment of debt and refinancing costs

 

 

6,072

 

 

67,980

 

Excess tax benefits from share-based compensation

 

 

(14,039)

 

 

(546)

 

Other

 

 

 —

 

 

1,223

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Merchandise inventories

 

 

(318,365)

 

 

(217,049)

 

Prepaid expenses and other

 

 

(10,169)

 

 

(4,049)

 

Other assets

 

 

(43)

 

 

(1,728)

 

Accounts payable

 

 

122,709

 

 

137,922

 

Accrued interest

 

 

5,345

 

 

(30,964)

 

Accrued liabilities and other

 

 

(34,540)

 

 

(17,453)

 

Income taxes

 

 

(36,433)

 

 

(69,091)

 

Other liabilities

 

 

(1,065)

 

 

67

 

Net cash provided by operating activities

 

 

7,493

 

 

36,502

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(89,726)

 

 

(104,274)

 

Purchase of long-term investment

 

 

(5,000)

 

 

 —

 

Net cash used in investing activities

 

 

(94,726)

 

 

(104,274)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of PIK notes

 

 

(184,467)

 

 

(443,542)

 

Borrowings on restated revolving credit facility

 

 

45,040

 

 

23,000

 

Payments on restated revolving credit facility

 

 

(45,040)

 

 

(23,000)

 

Borrowings on restated term loan credit facility

 

 

 —

 

 

845,750

 

Payments on restated term loan credit facility

 

 

(18,675)

 

 

(14,425)

 

Payment of 2018 senior notes

 

 

 —

 

 

(1,057,208)

 

Issuance of 2020 senior subordinated notes

 

 

 —

 

 

255,000

 

Issuance of common stock

 

 

 —

 

 

445,660

 

Payment of debt issuance costs

 

 

 —

 

 

(11,078)

 

Payment of dividends

 

 

(492)

 

 

(530)

 

Change in cash overdraft

 

 

(1,713)

 

 

4,424

 

Proceeds from stock options exercised

 

 

35,420

 

 

7,628

 

Common stock repurchased

 

 

(20,428)

 

 

(9,519)

 

Excess tax benefits from share-based compensation

 

 

14,039

 

 

546

 

Net cash (used in) provided by financing activities

 

 

(176,316)

 

 

22,706

 

 

 

 

 

 

 

 

 

Net change in cash and equivalents

 

 

(263,549)

 

 

(45,066)

 

Cash and equivalents at beginning of period

 

 

378,295

 

 

238,864

 

Cash and equivalents at end of period

 

$

114,746

 

$

193,798

 

 

See accompanying notes to consolidated financial statements.

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THE MICHAELS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BASIS OF PRESENTATION

 

All expressions of the “Company”, “us”, “we”, “our”, and all similar expressions are references to The Michaels Companies, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires. Our consolidated financial statements include the accounts of The Michaels Companies, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our annual report on Form 10-K for the fiscal year ended January 31, 2015 filed with the Securities and Exchange Commission (“SEC”) pursuant to section 13 or 15(d) under the Securities Exchange Act of 1934. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

 

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 2015” relate to the 52 weeks ended January 30, 2016 and references to “fiscal 2014” relate to the 52 weeks ended January 31, 2015. In addition, all references to “the third quarter of fiscal 2015” relate to the 13 weeks ended October 31, 2015 and all references to “the third quarter of fiscal 2014” relate to the 13 weeks ended November 1, 2014. Finally, all references to “the nine months ended October 31, 2015” relate to the 39 weeks ended October 31, 2015 and all references to “the nine months ended November 1, 2014” relate to the 39 weeks ended November 1, 2014. Because of the seasonal nature of our business, the results of operations for the 13 and 39 weeks ended October 31, 2015 are not indicative of the results to be expected for the entire year. 

 

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”).  ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Amortization of the costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU 2015-15 “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements”, which clarifies that the guidance in ASU 2015-03 does not apply to line-of-credit arrangements. Given the absence of the authoritative guidance in ASU 2015-03, the SEC will not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period and is to be applied retrospectively, with early application permitted.  As of October 31, 2015, the reduction to our long-term assets and debt would be approximately $27 million.  We are currently evaluating the requirements of the standard to determine when we will adopt and implement its provisions.

 

In April 2015, the FASB issued ASU 2015-05, “Intangibles — Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”).  ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license.  If a

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cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The new guidance does not change the accounting for a customer’s accounting for service contracts.  ASU 2015-05 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. We are currently evaluating the impact, if any, of the adoption of this new standard on our consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”).  ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. ASU 2014-09 is therefore now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard is to be applied retrospectively, with early application permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  We are evaluating the new standard, but do not anticipate a material impact to the consolidated financial statements once implemented.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”).  ASU 2015-11 provides guidance for the subsequent measurement of inventory and requires that inventory that is measured using average cost be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. When evidence exists that the net realizable value of inventory is lower than its cost, the difference will be recognized as a loss in earnings in the period in which it occurs. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied prospectively, with early application permitted. We do not believe the implementation of this standard will result in a material impact to the consolidated financial statements.

 

2. FAIR VALUE MEASUREMENTS

 

As defined in Accounting Standards Codification (“ASC”) 820, Fair Value Measurements (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

 

·

Level 1—Quoted prices for identical instruments in active markets;

 

·

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

 

·

Level 3—Instruments with significant unobservable inputs.

 

The table below provides the carrying and fair values of our senior secured term loan facility (“Restated Term Loan Credit Facility”) and our 5.875% senior subordinated notes maturing in 2020 (“2020 Senior Subordinated Notes”) 

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as of October 31, 2015. The fair values of our Restated Term Loan Credit Facility and our 2020 Senior Subordinated Notes were determined based on quoted market prices which are considered Level 2 inputs within the fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

    

Carrying

    

Fair

 

 

 

Value

 

Value

 

 

 

(in thousands)

 

Restated term loan credit facility

 

$

2,435,587

 

$

2,446,569

 

Senior subordinated notes

 

 

514,064

 

 

540,090

 

 

 

 

 

 

 

 

 

 

3. DEBT

 

Long-term debt consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31,

 

November 1,

 

 

Interest Rate

 

2015

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated term loan credit facility

Variable

 

$

2,435,587

 

$

2,453,770

 

$

2,459,831

 

Senior subordinated notes

5.875

%

 

514,064

 

 

514,654

 

 

514,850

 

PIK notes

7.50 % / 8.25

%

 

 —

 

 

180,850

 

 

360,850

 

Total debt

 

 

 

2,949,651

 

 

3,149,274

 

 

3,335,531

 

Less current portion

 

 

 

(24,900)

 

 

(24,900)

 

 

(204,900)

 

Long-term debt

 

 

$

2,924,751

 

$

3,124,374

 

$

3,130,631

 

 

Cash paid for interest totaled $94.5 million and $182.9 million for the 39 weeks ended October 31, 2015 and November 1, 2014, respectively.

 

7.50%/8.25% PIK Toggle Notes

 

On April 6, 2015, an irrevocable notice of redemption was delivered to the holders of the 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”). Pursuant to the notice, the remaining $180.9 million in principal of the PIK Notes was redeemed on May 6, 2015.  During the nine months ended October 31, 2015, the Company recorded $6.1 million of debt extinguishment costs, which consists of a 2% redemption premium and $2.5 million of unamortized debt issuance costs. This final payment retired the PIK Notes and discharged the obligations under the indenture governing the PIK Notes.

 

Restated Revolving Credit Facility

 

As of October 31, 2015, the borrowing base of our senior secured asset-based revolving credit facility (“Restated Revolving Credit Facility”) was $650.0 million, of which Michaels Stores, Inc. (“MSI”) had $586.7 million of unused borrowing capacity. Outstanding standby letters of credit, which reduce our borrowing base, totaled $63.3 million as of October 31, 2015. There were no outstanding borrowings under the Restated Revolving Credit Facility as of October 31, 2015.

 

Debt Issuance Costs

 

Accumulated amortization of debt issuance costs was $59.7 million, $54.6 million, and $53.2 million as of October 31, 2015, January 31, 2015 and November 1, 2014, respectively. 

 

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4. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table includes detail regarding changes in the composition of accumulated other comprehensive loss (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

October 31,

 

November 1,

 

 

    

2015

    

2014

    

2015

    

2014

    

Beginning of period

  

$

(14,712)

 

$

875

  

$

(11,805)

 

$

198

  

Foreign currency translation adjustment and other

 

 

88

 

 

(2,520)

 

 

(2,819)

 

 

(1,843)

 

End of period

 

$

(14,624)

 

$

(1,645)

 

$

(14,624)

 

$

(1,645)

 

 

 

 

5.  INCOME TAXES

 

 Income tax expense totaled $45.1 million in the third quarter of fiscal 2015 compared to $36.2 million in the third quarter of fiscal 2014.  Income tax expense for the nine months ended October 31, 2015 was $105.0 million compared to $44.0 million in the same period in the prior year.  The increase in income tax expense in both periods was due to higher pre-tax income as compared to the same periods in the prior year.  The current year income tax expense was partially offset by our assertion to indefinitely reinvest fiscal 2015 earnings of our Canadian subsidiary into our operations outside the U.S.  Accordingly, we have not provided for U.S. federal income taxes or foreign withholding taxes on fiscal 2015 earnings of our Canadian subsidiaries' undistributed earnings. However, if any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings.  We currently estimate our annualized effective tax rate for fiscal 2015 to be approximately 36.9%.

 

Cash paid for income taxes totaled $119.7 million and $106.7 million for the 39 weeks ended October 31, 2015 and November 1, 2014, respectively.

 

6.   EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing income available to common stockholders by the weighted-average shares outstanding plus the potential dilutive impact from the exercise of stock options and restricted shares. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.  There were 0.9 million anti-dilutive shares during the third quarters of fiscal 2015 and fiscal 2014.  There were 0.5 million and 3.4 million anti-dilutive shares during the nine months ended October 31, 2015 and November 1, 2014, respectively.

 

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The following table presents a reconciliation of the diluted weighted-average shares (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

October 31,

 

November 1,

 

 

 

2015

    

2014

 

2015

    

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

  

$

76,797

  

$

64,064

  

$

179,246

  

$

60,835

 

Income related to unvested restricted shares

 

 

237

 

 

293

 

 

661

 

 

249

 

Income available to common stockholders

 

$

76,560

 

$

63,771

 

$

178,585

 

$

60,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares

 

 

207,323

 

 

203,269

 

 

206,629

 

 

187,784

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

2,187

 

 

3,723

 

 

2,695

 

 

3,656

 

Restricted shares

 

 

243

 

 

223

 

 

271

 

 

162

 

Dilutive weighted-average shares

 

 

209,753

 

 

207,215

 

 

209,595

 

 

191,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.37

 

$

0.31

 

$

0.86

 

$

0.32

 

Diluted earnings per common share

 

$

0.37

 

$

0.31

 

$

0.85

 

$

0.32

 

 

 

 

 

7. SEGMENTS AND GEOGRAPHIC INFORMATION

 

We consider our Michaels-U.S., Michaels-Canada and Aaron Brothers to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting (“ASC 280”). We determined that each of our operating segments have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine our operating segments into one reporting segment.

 

Our net sales by country are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

October 31,

 

November 1,

 

 

    

2015

    

2014

    

2015

    

2014

 

United States

 

$

1,064,855

 

$

1,018,679

 

$

2,944,119

 

$

2,829,021

 

Canada

 

 

103,568

 

 

111,516

 

 

286,174

 

 

301,372

 

Total

 

$

1,168,423

 

$

1,130,195

 

$

3,230,293

 

$

3,130,393

 

 

Our chief operating decision makers evaluate historical operating performance and forecast future periods’ operating performance based on operating income and earnings before interest, income taxes, depreciation, amortization and losses on early extinguishment of debt and refinancing costs (“EBITDA (excluding losses on early extinguishment of debt and refinancing costs)”). We believe these metrics more closely reflect the operating effectiveness of factors over

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which management has control. A reconciliation of EBITDA (excluding losses on early extinguishment of debt and refinancing costs) to net income is presented below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,

    

November 1,

 

October 31,

    

November 1,

 

 

    

2015

    

2014

    

2015

    

2014

 

Net income

 

$

76,797

 

$

64,064

 

$

179,246

 

$

60,835

 

Interest expense

 

 

33,840

 

 

41,457

 

 

105,967

 

 

159,183

 

Losses on early extinguishment of debt and refinancing costs

 

 

 —

 

 

 —

 

 

6,072

 

 

67,980

 

Provision for income taxes

 

 

45,103

 

 

36,161

 

 

104,960

 

 

43,986

 

Depreciation and amortization

 

 

29,433

 

 

29,093

 

 

85,382

 

 

82,266

 

Other

 

 

(46)

 

 

(58)

 

 

(226)

 

 

(227)

 

EBITDA (excluding losses on early extinguishment of debt and refinancing costs)

 

$

185,127

 

$

170,717

 

$

481,401

 

$

414,023

 

 

 

 

8. CONTINGENCIES

 

Rea Claim

 

On September 15, 2011, MSI was served with a lawsuit filed in the California Superior Court in and for the County of Orange (“Superior Court”) by four former store managers as a class action proceeding on behalf of themselves and certain former and current store managers employed by MSI in California. The lawsuit alleges that MSI improperly classified its store managers as exempt employees and as such failed to pay all wages, overtime, waiting time penalties and failed to provide accurate wage statements. The lawsuit also alleges that the foregoing conduct was in breach of various laws, including California’s unfair competition law. On December 3, 2013, the Superior Court entered an order certifying a class of approximately 200 members.  MSI successfully removed the case to the United States District Court for the Central District of California and on May 8, 2014, the class was decertified.  As a result of the decertification, we have 38 individual claims pending as well as a separate representative action pending in the California Superior Court in and for the County of San Diego brought on behalf of store managers throughout the state. We believe we have meritorious defenses and intend to defend the lawsuits vigorously. We do not believe the resolution of the lawsuits will have a material effect on our consolidated financial statements.  

Fair Credit Reporting Claim

On December 11, 2014, MSI was served with a lawsuit, Christina Graham v. Michaels Stores, Inc., filed in the U.S. District Court for the District of New Jersey by a former associate.  The lawsuit is a purported class action, bringing plaintiff’s individual claims, as well as claims on behalf of a putative class of applicants who applied for employment with Michaels through an online application, and on whom a background check for employment was procured. The lawsuit alleges that MSI violated the Fair Credit Reporting Act (“FCRA”) and the New Jersey Fair Credit Reporting Act by failing to provide the proper disclosure and obtain the proper authorization to conduct background checks.  Since the initial filing, another named plaintiff joined the lawsuit, which was amended in February 2015, Christina Graham and Gary Anderson v. Michaels Stores, Inc., with substantially similar allegations.  The plaintiffs seek statutory and punitive damages as well as attorneys’ fees and costs. 

Following the filing of the Graham case in New Jersey, five additional purported class action lawsuits with six plaintiffs were filed, Michele Castro and Janice Bercut v. Michaels Stores, Inc., in the U.S. District Court for the  Northern District of Texas, Michelle Bercut v. Michaels Stores, Inc. in the Superior Court of California for Sonoma County, Raini Burnside v. Michaels Stores, Inc., pending in the U.S. District Court for the Western District of Missouri, Sue Gettings v. Michaels Stores, Inc., in the U.S. District Court for the Southern District of New York, and Barbara Horton v. Michaels Stores, Inc., in the U.S. District Court for the Central District of California. All of the plaintiffs alleged violations of the FCRA.  In addition, the Castro, Horton and Janice Bercut lawsuits also alleged violations of California’s unfair competition law.  The Burnside, Horton and Gettings lawsuits have been dismissed and an offer of judgment has been

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accepted in the Castro lawsuit and will be dismissed. The Graham, Janice Bercut and Michelle Bercut lawsuits were transferred for centralized pretrial proceedings to the District of New Jersey.

The Company intends to defend the remaining lawsuits vigorously. We cannot reasonably estimate the potential loss, or range of loss, related to the lawsuits, if any.

Data Security Incident

 

Five putative class actions were filed against MSI relating to the January 2014 data breach.  The plaintiffs generally alleged that MSI failed to secure and safeguard customers’ private information including credit and debit card information, and as such, breached an implied contract, and violated the Illinois Consumer Fraud Act (and other states’ similar laws) and are seeking damages including declaratory relief, actual damages, punitive damages, statutory damages, attorneys’ fees, litigation costs, remedial action, pre and post judgment interest, and other relief as available.  The cases are as follows: Christina Moyer v. Michaels Stores, Inc., was filed on January 27, 2014; Michael and Jessica Gouwens v. Michaels Stores, Inc., was filed on January 29, 2014; Nancy Maize and Jessica Gordon v. Michaels Stores, Inc., was filed on February 21, 2014; and Daniel Ripes v. Michaels Stores, Inc., was filed on March 14, 2014. These four cases were filed in the United States District Court for the Northern District of Illinois, Eastern Division.  On March 18, 2014, an additional putative class action was filed in the United States District Court for the Eastern District of New York, Mary Jane Whalen v. Michaels Stores, Inc., but was voluntarily dismissed by the plaintiff on April 11, 2014 without prejudice to her right to re‑file a complaint. On April 16, 2014, an order was entered consolidating the Illinois actions. On July 14, 2014, the Company’s motion to dismiss the consolidated complaint was granted.

 

On December 2, 2014, Whalen filed a new lawsuit against MSI related to the data breach in the United States District Court for the Eastern District of New York, Mary Jane Whalen v. Michaels Stores, Inc., seeking damages including declaratory relief, monetary damages, statutory damages, punitive damages, attorneys’ fees and costs, injunctive relief, pre and post judgment interest, and other relief as available. The Company filed a motion to dismiss and is awaiting a decision from the Court. 

The Company intends to defend this lawsuit vigorously. We cannot reasonably estimate the potential loss, or range of loss, related to the lawsuits, if any.

In connection with the breach, payment card companies and associations have sought to require us to reimburse them for unauthorized card charges and costs to replace cards and may also seek fines or penalties in connection with the data breach, and enforcement authorities may also impose fines or other remedies against us. We have also incurred other costs associated with the data breach, including legal fees, investigative fees, costs of communications with customers and credit monitoring services provided to our customers. In addition, various states’ attorneys general investigated events related to the data breach, including how it occurred, its consequences and our responses. We fully cooperated in these investigations and we do not expect any further action. We cannot reasonably estimate the potential loss or range of loss related to any reimbursement costs, fines or penalties that may be assessed. Such amounts incurred to date are immaterial to the consolidated financial statements. 

Consumer Product Safety Commission Claim

 

On April 21, 2015, the United States Department of Justice, on behalf of the Consumer Product Safety Commission (the “CPSC”), filed a complaint against MSI and Michaels Stores Procurement Company, Inc. (“MSPC”) in the U.S. District Court for the Northern District of Texas.   The complaint seeks civil penalties for an alleged failure to timely report a potential product safety hazard to the CPSC related to the breakage of certain glass vases. The complaint also alleges the report contained a material misrepresentation and seeks injunctive relief requiring MSI and MSPC to, among other things, establish internal recordkeeping and compliance monitoring systems. The Company filed a partial motion to dismiss on June 18, 2015 seeking dismissal of the CPSC’s claims for money damages, and is awaiting a decision from the Court. We believe we have meritorious defenses and intend to defend the lawsuit vigorously. We do not believe the resolution of the lawsuit will have a material effect on our consolidated financial statements.

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General

In addition to the litigation discussed above, we are now, and may be in the future, involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources.

For some of the matters disclosed above, as well as other matters previously disclosed in the Company’s filings with the SEC, the Company is able to estimate a range of losses in excess of the amounts recorded, if any, in the accompanying consolidated financial statements.  As of October 31, 2015, the aggregate estimated loss is approximately $15 million, which includes amounts recorded by the Company.

 

9. RELATED PARTY TRANSACTIONS

 

Affiliates of, or funds advised by, Bain Capital Partners, LLC (“Bain Capital”) and The Blackstone Group L.P. (“The Blackstone Group”, together with Bain Capital and their applicable affiliates, the “Sponsors”) own approximately 63% of our outstanding common stock as of October 31, 2015. Prior to our initial public offering (“IPO”) on July 2, 2014, the Sponsors and another common stockholder, Highfields Capital Management LP (“Highfields”), received annual management fees of $12.0 million and $1.0 million, respectively. In connection with the IPO, the management agreement was terminated and the Company paid the Sponsors and Highfields an aggregate $30.2 million termination fee. We recognized management fees and reimbursement of out-of pocket expenses of $35.7 million during the nine months ended November 1, 2014. These expenses are included in related party expenses in the consolidated statements of comprehensive income. No related party expenses were incurred in fiscal 2015 or in the third quarter of fiscal 2014.

 

The Blackstone Group owns a majority equity position in RGIS, an external vendor we utilize to count our store inventory. Payments associated with this vendor during the third quarters of fiscal 2015 and fiscal 2014 were $2.3 million and $2.2 million, respectively. Payments made during the nine months ended October 31, 2015 and November 1, 2014 were $5.7 million and $5.8 million, respectively. These expenses are included in selling, general and administrative (“SG&A”) in the consolidated statements of comprehensive income.

 

The Blackstone Group owns a majority equity position in Vistar, an external vendor we utilize for all of the candy-type items in our stores. Payments associated with this vendor during each of the third quarters of fiscal 2015 and fiscal 2014 were $5.1 million and $4.2 million, respectively. Payments made during the nine months ended October 31, 2015 and November 1, 2014 were $18.0 million and $15.5 million, respectively. These expenses are recognized in cost of sales as the sales are incurred.

 

The Blackstone Group owns an equity position in Brixmor Properties Group, a vendor we utilize to lease certain properties. Payments associated with this vendor during the third quarters of fiscal 2015 and fiscal 2014 were $0.5 million and $0.8 million, respectively. Payments made during the nine months ended October 31, 2015 and November 1, 2014 were $1.8 million and $2.5 million, respectively. These expenses are included in cost of sales and occupancy expense in the consolidated statements of comprehensive income.

 

The Blackstone Group owns an equity position in Hilton Hotels, an external vendor we utilize for hospitality services.  Payments associated with this vendor during the nine months ended October 31, 2015 were $0.4 million.  Payments made during the third quarter of fiscal 2014 and the nine months ended November 1, 2014 totaled $1.4 million. These expenses are included in SG&A in the consolidated statements of comprehensive income.

 

Five of our current directors, Joshua Bekenstein, Nadim El Gabbani, Lewis S. Klessel, Matthew S. Levin and Peter F. Wallace, are affiliates of Bain Capital or The Blackstone Group. As such, some or all of such directors may have an indirect material interest in payments with respect to debt securities of the Company that have been purchased by

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affiliates of Bain Capital and The Blackstone Group. As of October 31, 2015, affiliates of The Blackstone Group held $47.3 million of our Restated Term Loan Credit Facility.

 

10. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

Our debt covenants restrict MSI, and certain subsidiaries of MSI, from various activities including the incurrence of additional debt, payment of dividends and the repurchase of MSI’s capital stock (subject to certain exceptions), among other things.  The following condensed consolidated financial information represents the financial information of MSI and its wholly-owned subsidiaries subject to these restrictions.  The information is presented in accordance with the requirements of Rule 12-04 under the SEC’s Regulation S-X.

 

Michaels Stores, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31,

 

November 1,

 

ASSETS

    

2015

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

110,007

 

$

373,559

 

$

189,029

 

Merchandise inventories

 

 

1,277,053

 

 

958,171

 

 

1,115,813

 

Prepaid expenses and other current assets

 

 

153,002

 

 

125,374

 

 

147,539

 

Total current assets

 

 

1,540,062

 

 

1,457,104

 

 

1,452,381

 

Property and equipment, net

 

 

385,407

 

 

386,372

 

 

376,787

 

Goodwill

 

 

94,290

 

 

94,290

 

 

94,290

 

Other assets

 

 

64,472

 

 

64,305

 

 

73,507

 

Total assets

 

$

2,084,231

 

$

2,002,071

 

$

1,996,965

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

557,170

 

$

447,016

 

$

504,176

 

Accrued liabilities and other

 

 

369,183

 

 

388,785

 

 

359,116

 

Current portion of long-term debt

 

 

24,900

 

 

24,900

 

 

24,900

 

Other current liabilities

 

 

44,525

 

 

59,885

 

 

524

 

Total current liabilities

 

 

995,778

 

 

920,586

 

 

888,716

 

Long-term debt

 

 

2,924,751

 

 

2,943,524

 

 

2,949,781

 

Other liabilities

 

 

109,400

 

 

102,913

 

 

89,273

 

Total stockholders’ deficit

 

 

(1,945,698)

 

 

(1,964,952)

 

 

(1,930,805)

 

Total liabilities and stockholders’ deficit

 

$

2,084,231

 

$

2,002,071

 

$

1,996,965

 

 

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Michaels Stores, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

October 31,

 

November 1,

 

 

    

2015

    

2014

    

2015

    

2014

 

Net sales

 

$

1,168,423

 

$

1,130,195

 

$

3,230,293

 

$

3,130,393

 

Cost of sales and occupancy expense

 

 

702,825

 

 

678,012

 

 

1,949,577

 

 

1,892,270

 

Gross profit

 

 

465,598

 

 

452,183

 

 

1,280,716

 

 

1,238,123

 

Selling, general and administrative

 

 

308,467

 

 

307,538

 

 

879,196

 

 

863,019

 

Other operating expense

 

 

1,042

 

 

2,167

 

 

4,326

 

 

40,144

 

Operating income

 

 

156,089

 

 

142,478

 

 

397,194

 

 

334,960

 

Interest and other expense

 

 

33,978

 

 

35,501

 

 

102,393

 

 

177,335

 

Income before income taxes

 

 

122,111

 

 

106,977

 

 

294,801

 

 

157,625

 

Provision for income taxes

 

 

45,181

 

 

38,682

 

 

108,886

 

 

63,136

 

Net income

 

$

76,930

 

$

68,295

 

$

185,915

 

$

94,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment and other

 

 

88

 

 

(2,520)

 

 

(2,819)

 

 

(1,843)

 

Comprehensive income

 

$

77,018

 

$

65,775

 

$

183,096

 

$

92,646

 

 

Michaels Stores, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

 

 

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

11,550

 

$

101,936

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(89,726)

 

 

(104,274)

 

Purchase of long-term investment

 

 

(5,000)

 

 

 —

 

Net cash used in investing activities

 

 

(94,726)

 

 

(104,274)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net repayments of debt

 

 

(63,715)

 

 

(1,094,633)

 

Net borrowings of debt

 

 

45,040

 

 

1,123,750

 

Payment of dividend to Michaels Funding, Inc.

 

 

(188,046)

 

 

(60,333)

 

Other financing activities

 

 

26,345

 

 

(11,577)

 

Net cash used in financing activities

 

 

(180,376)

 

 

(42,793)

 

 

 

 

 

 

 

 

 

Net change in cash and equivalents

 

 

(263,552)

 

 

(45,131)

 

Cash and equivalents at beginning of period

 

 

373,559

 

 

234,160

 

Cash and equivalents at end of period

 

$

110,007

 

$

189,029

 

 

 

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company (and the related notes thereto included elsewhere in this quarterly report), and the audited consolidated financial statements of the Company (and the related notes thereto) and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Act of 1934 on March 19, 2015.

 

All of the “Company”, “us”, “we”, “our”, and similar expressions are references to The Michaels Companies, Inc. (“Michaels”) and our consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

 

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 2015” relate to the 52 weeks ended January 30, 2016 and references to “fiscal 2014” relate to the 52 weeks ended January 31, 2015.  In addition, all references to “the third quarter of fiscal 2015” relate to the 13 weeks ended October 31, 2015 and all references to “the third quarter of fiscal 2014” relate to the 13 weeks ended November 1, 2014. Finally, all references to “the nine months ended October 31, 2015” relate to the 39 weeks ended October 31, 2015 and all references to “the nine months ended November 1, 2014” relate to the 39 weeks ended November 1, 2014. Because of the seasonal nature of our business, the results of operations for the 13 and 39 weeks ended October 31, 2015 are not indicative of the results to be expected for the entire year. 

 

Overview

 

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 and Aaron Brothers.  We also operate a market-leading vertically-integrated custom framing business.  At October 31, 2015,  we operated 1,196 Michaels stores and 118 Aaron Brothers stores.

 

Net sales for the third quarter of fiscal 2015  increased 3.4% compared to the same period in the prior year.  The increase in net sales was due to the opening of 27 additional stores (net of closures) since November 1, 2014.  Comparable stores sales increased 1.5% during the third quarter of fiscal 2015, or 3.1% at constant exchange rates.  Gross profit as a percent of sales decreased 20 basis points to 39.8% during the third quarter of fiscal 2015 primarily due to an increase in promotional activity as a result of the continued competitive retail environment, the negative impact of foreign exchange rates and a shift in sales mix due primarily to the success of our lower margin coloring books.  The decline was partially offset by an increase in retail prices and sourcing efficiencies. Operating income increased $13.4 million to $155.9 million during the third quarter of fiscal 2015.  The increase was due primarily to the increase in net sales.

 

On April 6, 2015, an irrevocable notice of redemption was delivered to the holders of the 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”). Pursuant to the notice, the remaining $180.9 million in principal of the PIK Notes was redeemed on May 6, 2015.  During the nine months ended October 31, 2015, the Company recorded $6.1 million of debt extinguishment costs, which consists of a 2% redemption premium and $2.5 million of unamortized debt issuance costs.  This final payment retired the PIK Notes and discharged the obligations under the indenture governing the PIK Notes.

 

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Table of Contents

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 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.

 

Operating Information

 

The following table sets forth certain operating data: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended