Make a Move on Mike?

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The market is still jumpy, as investors in many decent firms have found out over the past month. Good earnings and solid guidance have done little to keep stocks from taking their lumps. Michaels Stores' (NYSE: MIK) second-quarter earnings release reveals some slight growing pains -- the kind that the Street has been quick to punish with massive sell-offs.

It'll be an interesting few days for those watching Michaels. Regular Fools know that I've got a thing for specialty retailers that inhabit the second-tier strip malls that usually border my digs. OK, some of that's my skid-row snobbery, but Michaels is also a solid performer, putting up a streak of record earnings and managing the business conservatively enough to pass my modified Benjamin Graham screen.

This quarter, sales were up 11% to $683 million. Comps came in 5% higher, which may not look smoking hot, but compared with some specialty retailers this summer -- let's pick onGap (NYSE: GPS) andBombay (NYSE: BBA) -- that's a healthy uptick.

Earnings came in below analysts' expectations (gasp), at $0.38 per share. The 9% increase over last year's quarter would have been 23%, and $0.43, but for some insurance reserves the firm chose to set aside. As I've mentioned in the past, Michaels is producing free cash flow (FCF) and boasts a decent return on equity (ROE), which is good since the firm is deploying a lot of cash to buy back shares -- more than a million of them in the past four months.

Shares look reasonably valued at today's $56 per stub. But should the Street conduct a fire sale, investors should take a look at this crafty and increasingly powerful performer. Michaels can claim much of the craft and decorator space for its own. Yes, there's the inevitable fear of competition from the big boxes, but the Wal-Marts (NYSE: WMT), Targets (NYSE: TGT), and Kmarts (Nasdaq: KMRT) simply don't offer the same merchandise or service. More direct competitor A.C. Moore Arts and Crafts (Nasdaq: ACMR) is less than one-tenth Michaels' size, and it trades at a higher P/E multiple despite its significantly lower operating margins. It may not be time to make your move on Mike, but keep an eye open.

Seth Jayson spent his youth pinning googly eyes on walnuts, and his mother always pretended to love them. He has no position in any company mentioned. View his Fool profile here.