Arts-and-crafts retailer Michaels counts heavily on holiday shoppers to drive earnings growth, so investors used to little but good news from the company reacted strongly to today's second-half warning.
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Cautious guidance for the second half of fiscal 2001 upset investors who expected better than the new projections: The company is looking for third-quarter same-store sales growth of no more than 2% and earnings of $0.40 per share. "Recently we have seen significantly softer sales trends which we attribute to general economic conditions and uncertainties," said CEO Michael Rouleau in a statement. "We are well prepared for the fourth quarter; however, if there is a continuation of these trends our fourth quarter earnings will be negatively impacted."
The company redirected investors toward Q4 same-store sales of between 3% and 5% and full-year EPS of $2.40. Wall Street was looking for EPS of $0.43 for Q3 and $2.58 for the year. (Michaels counts heavily on DIY decorators looking for cheap Thanksgiving and Christmas cheer to drive earnings growth.)
Specialty retailers come under fire all the time, and virtually any investor considering such a company needs to be either the world's greatest market timer or the bearer of a stern constitution if they are to weather the occasional storm. Mix in a jittery stock market and consistently high oil prices and that job becomes doubly difficult if it wasn't impossible already.
Experienced retail market watchers will be the first to tell you that momentum plays are as likely to arise in this sector as in "technology." While good companies are good companies, piling on to specialty chains expecting never-ending good tidings can be a stressful way to invest.
That said, Michaels dominates its sector and should continue to do so for as long as it cares to. The company is already looking forward to 1,000 stores in the U.S. in the next four years or so -- it's currently nearing 800. There's little question Michaels still has room to grow domestically, even as economic slowdowns temporarily trim demand.
And so if you're confident about the company's ability to deliver long-term growth, the biggest question might be how sensitive to economic slowdowns the company's stock really ought to be. Arts-and-crafts stores are chock full of small-ticket items geared toward the pennywise, so one might think Michaels would be better insulated than most. Assessing that could help in determining how "fair" today's share price erosion was.
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