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The Michaels Companies Inc (NASDAQ:MIK)
Q4 2019 Earnings Call
Mar 17, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to The Michaels Companies Fourth Quarter and Full Year Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Jim Mathias, Investor Relations for Michaels. Please go ahead.

Jim Mathias -- Director, Investor Relations

Thank you, and good morning, everyone. I'd like to welcome you to our fiscal 2019 fourth quarter and full year financial results conference call. Presenting on this morning's call are Mark Cosby, our CEO; and Ashley Buchanan, our CEO designate. Also on the call and available for the Q&A portion is Jennifer Robinson, our SVP, Finance; and Jim Sullivan, our SVP and Chief Accounting Officer. [Technical Issues] note, for today's call. The supplemental slide deck available on our Investor Relations website contains additional financial content to support today's discussion.

Before we begin our discussion, let me remind you that the comments made on this call as well as supplemental information provided on our website may constitute forward-looking statements and are pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and the risk factors in our latest annual report on Form 10-K filed with the SEC, which we plan to file today, as well as in our other SEC filings. These forward-looking statements are only as of today, March 17, 2020, and the Company assumes no obligation to update these statements, except as required by law. Investors are cautioned not to place undue reliance on these forward-looking statements.

Also, please note that we will reference non-GAAP financial measures on today's call. A reconciliation of these measures to the corresponding GAAP measures are detailed in today's earnings release, as well as the supplemental slides.

I'd now like to turn the call over to our CEO, Mark Cosby. Mark?

Mark Cosby -- Chief Executive Officer and Director

Good morning. Before I get into a discussion of our quarterly and full year 2019 results, I want to start the call by addressing what the Michaels team is doing as it relates to the coronavirus outbreak. This continues to be a very fluid situation with new information and headlines appearing hourly. As a management team, we are following these developments closely, and our team is fully engaged and focused on navigating through this challenging time. Ashley is leading our crisis team, and they are in frequent contact as we live through what are uncertain and unpredictable times.

At Michaels, our primary concern is the health and safety of our employees, their families and our customers. Our teams are working hard to ensure that our stores and offices have adequate supplies of sanitizer and cleaning supplies. We have increased the frequency and intensity of our cleaning for high traffic areas and restrooms, are making sure that the team members who do not feel well are staying home and focusing on feeling better. We are reviewing inventory levels and supplier production daily and do not anticipate any material impact on our first quarter from supply chain disruptions at this time. We are also working to minimize supply chain impacts to our second quarter and beyond and are encouraged to see many suppliers at various stages of restarting and ramping up production in China. We will continue to monitor and adjust our plans in real time.

On the customer demand side, we are closely monitoring potential impacts to store traffic and sales. February and the first 10 days of March were roughly in line with our expectations. However, over the past few days, we have seen some evidence of slowing sales in a few specific categories in our retail stores. We have also seen signs of a small uptick in customer conversion in our e-commerce business. These are admittedly early observations, and given the current environment, we cannot extrapolate the potential impact on our outlook. We continue to monitor these developments closely and will have more information as events unfold.

From a business continuity standpoint, we have been actively working and implementing various contingency plans. Ashley will share a summary of the actions we are taking later on the call, but we fully believe that despite this current uncertainty, we have ample liquidity and financial flexibility to weather this situation and effectively position Michaels to succeed in the future.

Before we dive in, I want to take a moment to welcome Ashley Buchanan, who will assume the CEO role on April 1. Ashley and I have been working closely together with our entire leadership team over the past several weeks to ensure a smooth transition. In his short time at Michaels, in addition to leading our crisis team, Ashley has also demonstrated a strong willingness to challenge the status quo. He is keenly focused on helping Michaels improve execution and enhance the customer experience. The Board and I are confident that Ashley will provide the leadership and vision needed to address the challenges we face in the near term, while positioning Michaels for sustainable long-term growth. I look forward to continuing my support of Michaels as a Board member.

With that, let's get into our business update. This morning, I will provide a summary of our fiscal fourth quarter and full year results and an update on our operational and strategic progress before talking about our outlook. Then Ashley will share his early observations from his first couple of months with us. Then we will take your questions.

Our fourth quarter results were in line with the outlook we provided on our third quarter call. We posted quarterly sales of $1.723 billion and a comparable store decline of 2.4%. Importantly, we saw positive sales comps in December and January, driven by benefits of timing, improved execution and the early success of some of our strategic initiatives. Fourth quarter adjusted operating income of $279 million came in at the high end of our guidance, as did our adjusted diluted earnings per share at $1.26.

We had clear action plans in place to address the challenges that impacted our third quarter results, which included mixed performance from events, seasonal transitions and certain underperforming product categories. I am pleased to report that our progress in these areas has been very good. During the fourth quarter, we effectively deployed all of our key marketing assets to maximize the impact of planned events, utilizing digital, social media, PR and our store teams. We saw solid results with major events, including Black Friday, Cyber Week and the last 10 days before Christmas. We also had a strong post holiday clearance event from a marketing and operational perspective.

With respect to seasonal transitions, we effectively utilized weekly scripts during the quarter to markedly improve our distribution center to shelf process, while laying the foundation for smoother transitions throughout 2020 and beyond. Finally, we also made nice progress on our category action plans, as evidenced in the fourth quarter by strong growth in technology, craft storage and fine art.

Overall, our work to improve execution benefited our quarterly results, and I expect it to be a positive contributor going forward. However, as expected, our Q4 sales performance was negatively impacted by the shorter selling season. We also saw pressure on margins from aggressive seasonal product pricing during the winter clearance events due to higher inventory levels.

Now, let's review our results for the year. Fiscal year 2019 sales were $5.072 billion and comparable store sales declined 1.9%. The decline was due to the closure of our Pat Catan's and Aaron Brothers stores during fiscal 2018. The decline in comparable store sales is driven in part to a shorter holiday selling season and a decrease in wholesale revenue. The decrease was partially offset by sales from an additional 16 net Michael stores opened since February 2, 2019.

Fiscal year 2019 adjusted operating income was $573 million and adjusted diluted earnings per share were $2.11. The decline in adjusted operating income was due primarily to lower sales volumes, increased promotional activity, the impact of higher tariffs and the deleveraging of occupancy costs, partially offset by ongoing pricing and sourcing initiatives, as well as a decline in performance-based compensation.

We ended the year with $410 million of cash on the balance sheet and generated $373 million in free cash flow, representing a free cash flow conversion rate of 1.2 times adjusted net income.

Overall, 2019 was a challenging year from a results perspective. But we finalized and began executing our Maker growth strategy, which provides a clear road map for future growth. Importantly, as we closed out 2019 and started 2020, we began to see some signs of stabilization across parts of the business compared to earlier in 2019. Let me share just a few examples of these early successes.

E-commerce continued to deliver strong growth in 2019 and is becoming a larger part of our business. Revenue from e-commerce increased approximately 30% on a year-over-year basis, totaling $271 million or just over 5% of our sales versus 4% of our sales last year. We continue to invest for growth across this channel by optimizing our digital spending, enhancing our web capabilities and personalizing our website. In addition to our progress on driving growth in e-commerce sales, we also made strides in improving the profitability of this business.

Our e-commerce business generated a profit in 2019 after losing money in prior years. A large part of this improvement is due to our Buy Online, Pick Up in Store offering, or BOPIS. In the fourth quarter, BOPIS accounted for 45% of online sales. BOPIS has attractive economics, drives traffic to our stores and allows us to leverage our store footprint to provide a true omni-channel experience for our customers. We also launched e-commerce in Canada during the third quarter. And while the overall numbers are still small, the results and customer satisfaction are strong. Our sales results have improved virtually every week since the launch with the vast majority of these sales attributable to BOPIS.

We made solid progress on our CRM initiative in 2019, as we work to increase customer engagement through personalization of our customer messaging. We are on our way to reaching an email personalization rate of approximately 50% in 2020 and will extend this initiative into other areas such as website personalization.

During Q4, we also tested an enhanced rewards program that garnered positive customer feedback and drove low-single digit sales improvement in two test markets. We plan to roll out this program nationally in April.

We also made strong progress on our category action plans, as we work to align our assortment closely with the needs of our maker customers, while delivering continued newness. During Q4, this resulted in strong growth for technology, craft storage and fine art. Looking ahead to 2020, we'll use data and analytics to optimize additional product categories across our stores and online. We are building rigorous plans now for many priority categories that will be executed in the second half of this year, including fine art, technology, yarn, jewelry, kids and ready-made frames.

Finally, I am excited to announce that last week, we opened our first maker prototype store here in McKinney, Texas, just outside of Dallas. Designed to create an enhanced shopping experience for our maker customer, this store features a curated assortment, improved layout and signage, enhanced services, and a full complement of omni-channel capabilities. We will plan to open a few of these stores during 2020 to help us identify and expand best practices across our system in a cost-effective way.

So, we continue to feel good about the progress we are making against the key initiatives that are at the heart of our Maker strategy. We expect the benefit of these initiatives to build over the coming quarters and believe that we will continue to see positive momentum as we move through 2020 and beyond.

I want to spend a few minutes discussing our outlook. In light of the rapidly changing conditions arising from the coronavirus outbreak, Michaels is not providing a formal full-year outlook for fiscal year 2020 at this time. We are, however, providing a baseline outlook for the first quarter that excludes any potential impact from the coronavirus outbreak. We are also highlighting some financial and operational factors that we think are important to keep in mind as we progress through fiscal 2020. All of these comments exclude any potential impact from the coronavirus outbreak.

For the first quarter, we expect net sales in the range of $1.08 billion and $1.1 billion and negative comp sales in the range of minus 1.5% to flat. We also anticipate adjusted operating income in the range of $74 million to $82 million. As I mentioned, we do not expect to see any significant supply chain disruption or shortages due to the coronavirus outbreak, but it is now likely that we will see some negative impact from slowing customer demand, although we are not able to forecast that impact at this time.

We'd also like to provide some additional clarity on the underlying dynamics we see for the second quarter, again, before any coronavirus impacts. The Company currently expects that second quarter adjusted operating income could be down as much as 50% while compared to adjusted operating income in the second quarter of 2019. The anticipated decline when compared to the prior-year period is primarily due to the benefit from higher margins ahead of the impact of tariffs that occurred in 2019.

Moving ahead on to some cost headwinds that we expect in 2020, first, we will see a full year's impact from tariffs versus a partial year impact seen in 2019. This represents a $45 million year-over-year headwind. Through 2019, we worked to mitigate the impact of tariffs by sourcing product from other geographies, by asking our suppliers to share the cost burden and by selectively increasing prices where possible. We will continue to work on mitigating the impact of tariffs over time. We will be fully lapping the full year-over-year impact of tariffs as we move into the second half of 2020. The second anticipated headwind is an increase in SG&A, driven primarily by a normalization of performance-based compensation in 2020. This represents a $44 million year-over-year headwind.

Now, I'll provide a brief update on our A.C. Moore transaction, which we expect to contribute to full year results, particularly in the back half of the year. Late last year, A.C. Moore announced the closure of its retail location and liquidation of its inventory. In connection with our negotiated transaction with A.C. Moore, we leased a distribution facility in New Jersey, as well as 19 store locations. The majority of these locations will be reopened under the Michaels brand name during the fiscal second quarter and will include the relocation of certain existing Michaels stores.

We had a comprehensive marketing program under way to ensure that we successfully capture sales transfer from all closed A.C. Moore stores. There is a significant level of store overlap. Over 80% of closing stores are within 5 miles of one of our Michaels stores. So we are confident in our ability to manage the sales transfer effectively. We expect the vast majority of the inventory liquidation activity to wrap up by the end of our first quarter. From that point, we believe we will begin to see a positive impact from the A.C. Moore transaction on our results.

As we look to our second half of fiscal 2020, we expect the completion of the A.C. Moore transition and the anniversary of the year-over-year impact of tariffs to benefit year-over-year comparisons. During this time, we also expect the initiatives that support our Maker strategy to continue to build and take hold. As a result, we currently expect the second half of fiscal 2020 to be stronger than the first. These expectations do not take into account any coronavirus-related impact.

In summary, across the entire organization, we are united behind the goal of returning Michaels to a path of sustainable long-term growth. It will take some time to get there and the way forward will likely not be linear. But our strategy is gaining traction. Our liquidity is strong and is being actively managed. And I am excited for the future potential of Michaels.

With that, I'll turn the call over to Ashley for his comments.

Ashley Buchanan -- President, Chief Executive Officer Designate and Director

Thank you, Mark. I appreciate the leadership you have provided during what was a challenging year and look forward to working with you in your role as a member of our Board.

Thank you all for being here this morning. It's great to be part of the team here at Michaels. And before I share my early thoughts on the business, I'd like to add a few comments to Mark's on the coronavirus outbreak status.

As Mark mentioned, I've been leading our cross-functional crisis team as we review the situation and plan actions in response. We're meeting multiple times each day, given the rapidly changing news and environment. In addition to the store-level actions we've taken to protect the safety of our associates and our customers, we've taken aggressive steps to conserve liquidity over the past several weeks, including reducing and delaying discretionary spending and capital expenditures, while closely managing our working capital. Our balance sheet is strong with more than $400 million in excess cash on hand at year-end and a full access to our undrawn ABL. This provides us with ample liquidity and financial flexibility to weather this situation, and it gives us confidence that we are able to effectively position Michaels to succeed in the future despite the current uncertainty.

Now, I'll transition to my early thoughts on Michaels. I've been asked about what attracted me in the Company and this role. I had to point to three things. First, Michaels has a strong and loyal customer base. Our brand is truly loved by our customers, and they want us to win. And that's an important differentiator versus many others in the retail landscape today. And second, our customers, especially our core makers, enjoy engagement and interaction with our brand, and they've told us they want even more of it. And third, the Company enjoys a solid free cash flow profile, a strong balance sheet, and we have ample financial flexibility to support our growth plans.

Over the past 2.5 months, across all levels of the organization, I've met with and spoken to many members of the Michaels team as well as many of our maker customers, hearing directly from them what we're doing well and what we still have to work on. Looking forward, I intend to implement the various elements of Maker strategy, while putting my own mark on our future path as we position Michaels for growth ahead. I plan to harvest the strong talent we have here Michaels, but also plan on bringing selected new talent and capabilities were necessary.

Now, let me share a few of my initial observations. First of all, I believe this is a low-single digit growth industry that provides us with the opportunity to consistently grow our business over the long term. Given all our strengths, Michaels should be in a position to gain, or at minimum, hold share. This will take time and some investment, but I am confident it will be done. And there are already some encouraging signs that our Maker strategy is starting to work.

But also I believe we need to provide a seamless omni-channel experience to our customers. Michaels was late to the e-commerce game. And while we're moving in the right direction, there's much more that need to be done in this area. And as we're making key investments in growing our online presence, we have to build a frictionless experience across every touch point of the customer journey; in-store, online, mobile, pickup and curbside. It takes time to reset level, but we're committed to making it happen.

In addition to having a strong technology backbone for a true omni-channel business, I know firsthand the importance of providing a SKU selection that customers respond to you, both in-store and online. To support this, though, we need to focus on buying better. We've got to make data-driven decisions around all our SKU selections.

Michaels also need to provide a relevant customer assortment curated around our core maker, clear pricing, effective sourcing and more timely replenishment. These are all fundamental ingredients of our retail business, but they are critical also [Phonetic], and they got to work in unison for all to succeed.

At the store level, we need to make sure our shelves are stocked and our associates are engaged and available for customers to engage with and talk to. I have not seen this consistently in most of our visits across country, and it is a near-term priority that I intend to address immediately. Michaels is working to foster and encourage a stronger customer engagement in-store and online. We need to [Phonetic] lean into this initiative. This goes hand in hand with the key theme of our Maker strategy, building relationship with our customers and making Michaels their go-to place to create. As a company, we can do more to find [Phonetic] ideas and inspiration that will nurture and encourage the creativity of our customers across our stores, online and through our marketing.

We think in time, there's opportunity to build a strong cohesive maker community within the Michaels customer base. In fact, we're uniquely positioned to build and serve this passionate community due to brand and a large store footprint, which is also being complemented by our growing online business. I continue to dig deep into every aspect of our business, and we'll be working to refine our strategy and ensure we are executing at the level we need to in order to achieve long-term success.

As we move through the first two quarters of fiscal 2020, we will be, one, executing on our key Maker initiatives that will drive progress in 2020. This includes, improving our customer experience in our stores and across omni-channel, improving our merchandise selection, our pricing and our sourcing. Two, we'll be investing in areas to drive longer-term growth. And in some cases, this will include reviewing our cost structure, identifying efficiencies and reallocating those resources into our highest growth areas. And three, we'll be developing a long-term financial construct that we can deliver on consistently quarter-over-quarter, year-over-year.

We'll also be adding key executive talent to ensure we have the right team for the journey ahead. This includes a comprehensive CFO search, which is currently under way. And finally, I plan on meeting with key stakeholders to hear their thoughts and views and ensure we fully understand their concerns and expectations for Michaels.

Later this year, we plan on hosting an Investor Day. At that time, we'll be in a position to introduce our leadership team and update you on the progress we've made in refining and executing our strategy. We also look to provide benchmarks and metrics that allow you to -- investors to track our progress as we move forward. As the potential impacts from coronavirus outbreak become clear and we better understand the scope and impact of our actions and the resulting financial outlook, we expect to update you. It's not clear at this time when those will be, though.

In summary, we have a great foundation at Michaels. We're supported by strong brand, a passionate customer base, a national store footprint and a rapidly growing online business. We also have solid profitability and cash flow with financial flexibility to invest for growth. There's a great deal of work still need to be done, though. We're on the right path. We're facing some uncertainty and some short-term challenges related to the coronavirus outbreak, but I remain optimistic about the future long term prospects of Michaels. I look forward to updating you on our continued progress through 2020.

With that, let's move to take a few of your questions. As Jim said upfront, we've provided a more comprehensive supplemental deck that includes expanding content on the detailed fourth quarter and 2019 financials, plus key data to help you with your modeling. In the room, we have Jennifer Robinson, our SVP of Finance; and Jim Sullivan, our SVP and Chief Accounting Officer.

Operator, with that, we'll move to the question, please.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Steven Forbes with Guggenheim Securities. Please go ahead.

Steven Forbes -- Guggenheim Securities -- Analyst

Good morning. I wanted to start with the A.C. Moore liquidation and the planned asset transfer. So you provided some color on the stores. But can you give us an update on the DC lease that was acquired? And if you can, can you also comment on how the inventory liquidation process impacted the fourth quarter performance, both comps and gross margin, inclusive of maybe the first quarter outlook as well?

Mark Cosby -- Chief Executive Officer and Director

Thank you. This is Mark. And I'll just give you a little color. First, stepping back on the overall reason that we did A.C. Moore, we had several benefits that we believed that were important coming from it. First big benefit was the fact that we picked up 19 stores from the transition, 16 of which are net new stores, three of which were relocations of existing stores. Those stores will be clearing out, to your question, through the first quarter of this year and will open throughout the second quarter of this year.

The second big benefit was the distribution center, which we picked up in the Northeast, specifically in New Jersey, that will help us in a number of ways, both in handling our stores and seasonal transition, as well as potentially for our e-commerce business. And then, a big benefit that we pulled out of it, certainly not the least, is the sales transfer. One of the big things that we pulled out of the acquisition -- or actually the transaction was the fact that we've got the customer list, so we could market directly to those customers in order to transfer the sales into our stores. As you know, 80% of their stores are within 5 miles of an existing Michaels stores. So it's a big sales opportunity for us as we transfer the sales in. And we're tracking very well against the sales transfer goals that we expected. So this will be something that will benefit us a little bit in the first quarter, second quarter, but more as we get into the second half of the year.

You had a part of your question in which you asked how much of an impact was it on the fourth quarter. It was a little bit of an impact, but not as significant as we had expected. So we feel good about this. It's a boost really, particularly as we move into the second half of 2020.

Steven Forbes -- Guggenheim Securities -- Analyst

And then, maybe just as a quick follow-up, you mentioned $400 million of cash on hand. Can you just provide us with your most recent thoughts on the Company's financial leverage ratios? Do you still want to target or manage the business to the 2.5 to 3.0 target ratio as you work your way through 2020, especially given all the uncertainty that's transpiring today?

Mark Cosby -- Chief Executive Officer and Director

We can talk a little bit about cash. I'm sure you'll get -- there will be some questions on that later. We have not really changed our liquidity position. We're in a position now where we are monitoring our cash flow, keeping flexibility for the future and moving forward against that criteria.

If you want to add anything, Jennifer, that would be great.

Jennifer Robinson -- Senior Vice President of Finance

Yeah. So, we're continuing on a daily basis to evaluate our liquidity and be fluid with all of the uncertainty around the coronavirus. So, that's something that we are closely monitoring and managing every day.

Mark Cosby -- Chief Executive Officer and Director

Haven't changed our ratio positions, though.

Jennifer Robinson -- Senior Vice President of Finance

No.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you.

Operator

And the next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, Good morning, everyone. Hi, Ashley. How are you doing? And my first question, can you provide a little more detail on the experience over the last maybe 7 to 10 days? You mentioned some color. I'm curious about store traffic in general. And are you seeing a mix shift toward e-comm? And have you contemplated shutting stores? Or that's not part of the realm at this point?

Ashley Buchanan -- President, Chief Executive Officer Designate and Director

Well, thanks for the question. It's a fluid situation, obviously, and we're running multiple scenarios from all range of the aspects of what could happen. But as far as you look at traffic within the stores, particularly in the last, call it, four to seven days, we've actually seen an interesting mix shift among our categories where we've seen a demand constraint within our, call it, seasonal home decor business. But if you look at our core maker categories, we've actually seen a very nice uptrend on the positive side, as people are staying home, looking for things to create with theirselves [Phonetic] or the kids. So overall, we've seen a good trend in probably, I'd say, our core maker categories.

As far as store closures go, given the trends that we're seeing within the demand of what people need when they're staying at the house, we're following all local, state and federal regulations of closures. But right now, we have no plans to do a national closure, given what we're seeing from a demand standpoint.

Simeon Gutman -- Morgan Stanley -- Analyst

And that's very helpful. And this is personal anecdote, I never usually do this. But yeah, we ordered online, product came quick from Michaels, but we didn't go to the store. But curious if there's enough business coming either vis-a-vis online or store for your run rate to have improved. And then how do you think about that? Should that surge if there is a surge continue, or does it does it fade as the next couple of weeks go by? And I don't know, these are all tricky modeling, anyway, but curious what you're seeing on that.

Ashley Buchanan -- President, Chief Executive Officer Designate and Director

It is actually really hard to determine with any certainty the long-term or mid-term kind of demand structure is, as people get more settled in. But as far as the e-commerce business goes, yes, we've seen a significant uptrend in the online business, not only just from home, but also our Buy Online, Pick Up in Store. We're actually rolling out the test this week, Buy Online, Pick Up Curbside. We'll deliver to back of your trunk, which we hope to roll out more effectively next week as we work through some of the processes. But we've seen an uptick in not only the demand for the category I described, but also in e-comm and Buy Online, Pick Up in Store.

Simeon Gutman -- Morgan Stanley -- Analyst

Got it. Okay. My follow-up is on the year and EBIT growth. So it looks like first quarter, it's going to be down something like almost 20%, based on the guide. Second quarter, you gave us a pretty simple range around down 50%. So it looks like for the rest of the year, hinge [Phonetic] is on the back half, and that's when you expect comps to get better. And so, what gives you confidence in the back half of the year, assuming a normal year not interrupted by what's going on now? But what gives you confidence? Actually, can you comment on the Maker strategy, your own thoughts as far as things to tweak? Because, I guess, you inherit a sales strategy, but I imagine you're going to make some changes to it as well.

Mark Cosby -- Chief Executive Officer and Director

I'll do the 2020 and then I'll hand it over to Ashley and he will kind of go through his perspective on the Maker strategy. But you hit the highlights. The first and second quarter will be more challenged for us for the reasons that we listed on the call. We do feel good about the second half of the year for a number of reasons. First, the tariff overhang that we've been dealing with for the last year goes away. That will be fully in our run rate. So that's not a barrier as we go into the second half of the year. And second, as we talked about in the third quarter call, we had a number of execution things that we've been working to address, things like seasonal transitions and how the product moves to the shelf. We did a nice job of that in the fourth quarter in that we expect that to continue into this next year. We have done a nice job and will continue to do a nice job planning events, which will have a big impact in the third and 4th quarter of next year. And then, a lot of the work we've done on the categories to improve those will play in the second half.

I think the second big factor -- third big factor is, the strategy work will really come into play. As I mentioned on the call, we've had a number of proof points to tell us that we're making significant progress around e-comm, our CRM initiatives, the loyalty launch, a lot of work on category management, listening to the voice of the customer, rolling out upgrades, which we have not done enough of, to different product categories. Those will come in a big way in the second half of next year. So, all the Maker strategy pieces that we've been working on over the course of that last nine months will be in full implementation mode by the second half of the year.

And then the last factor that gives us confidence in the second half is around the A.C. Moore transition. So, as I mentioned earlier, that's a big win for us on a number of fronts, and all of those fronts will come into play, particularly the sales transfer, in the second half of the year. So, we have some challenges that we'll face in the front half of the year that we talked about, but we do feel good about the strategy and how it will play out, particularly in the second half of the year's results.

So, Ashley, your color on the strategy?

Ashley Buchanan -- President, Chief Executive Officer Designate and Director

Yeah. I'm fully aligned with the core Maker strategy. If you think about it, focus on your core customer is always a -- obviously a key thing in retail. And if you look at what we've done, particularly in the category management process, the categories we've touched are all showing positive improvement. So it's showing that refresh in a special retailer on core assortment and curated assortment around what your core maker and your core customer want is working. And more broadly, though, we need to bring a more kind of frictionless experience from an omni-channel perspective across it. We need to meet our customer where they want to be met. And what you're seeing is, we're going to continue to double down the Maker strategy, while we also bring an omni version of the world where we can meet them where they want to be met and they can like shop how they want to shop and how they want to be fulfilled. And I think, when you bring the store base that we have with the loyal customer base that we have, with the omni-channel experience is really a powerful combination, and you can see it. And in the short term, better in-stocks, more customer engagement from our associates, I think all of those in the short term mid-term and long term have a really positive impact on the Michaels' trajectory over time.

Simeon Gutman -- Morgan Stanley -- Analyst

Thank you, both.

Operator

Our next question will come from Elizabeth Suzuki with Bank of America. Please go ahead.

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

Thank you. Given that people are basically being told to stay at home except to get necessities, how are you adjusting your store staffing and the strategy for making sure that you can fulfill online demand as consumer behavior starts to shift?

Mark Cosby -- Chief Executive Officer and Director

So, I'll give a little color, and then Ashley can add into it because he is really leading the work that we're doing around this coronavirus transition. But again, this is one that's spectacularly fluid. If you go back a week ago, we were worried about volume being lower and how we would handle that. And as we've -- as it's trickled down over the last few days, volume has picked up, particularly in the areas that Ashley spoke around in the e-comm world. So we are adjusting our staffing daily based on the needs that we're seeing. That's true both in the distribution centers as well as in our stores. And it's also varying significantly by market. We have markets that are up significantly. We have markets that are down. We have markets where we have stores that are potentially closed by the government. At the same time, we have markets that are surging. So we are -- we have meetings every morning to go through the results. We talk about it every single day, and we are adjusting as we move through it. So, so far we've been able to handle the volume and flex as needed to adjust.

Ashley Buchanan -- President, Chief Executive Officer Designate and Director

Yeah. We look at it daily store by store and actually hour by hour on the demand, and we have different scenarios in place for -- if demand picks up. We have different scenarios in place if demand slows down. And we have staffing levels appropriate for each one of those scenarios. As we -- we've been preparing for this for the last several weeks, not only with staffing, but what we're doing with inventory, what we're doing with non-discretionary -- or discretionary spending and capital. We've been preparing for this for several weeks, and that's why we have multiple scenarios and multiple plans in place, depending on how the market and the customer moves.

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

And overall, can you talk about how flexible your cost structure is? What percentage of your store associates are hourly versus salaried and how much are part-time?

Mark Cosby -- Chief Executive Officer and Director

Well, I won't get into the specifics because it really varies based on the store. And as you would assume, we do have a mix of both. But I think Ashley alluded to it a little earlier. We have made -- taken a lot of actions over the last week to really adjust our cost structure. So we've got everything from cut any expense that's not needed short term. We've adjusted our inventory flow to preserve cash flow. We've cut back on capital projects to preserve cash flow. So we're doing everything we possibly can to make sure that we're in a strong position coming out of this virus. To include store staffing where it makes sense, we have a lot of flexibility in terms of how we staff our stores. We don't have as many full-time associates as a lot of other retailers will have. So, that does give us more flexibility than some other places might have.

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

And in the event you do need to close any stores -- I know that's not currently in your thinking, but we've seen it from a number of retailers. If you did need to close stores, can you still fulfill all of your online orders effectively? Are those orders mostly being fulfilled from store? And then, just what happens if you can no longer utilize your stores as distribution hubs?

Mark Cosby -- Chief Executive Officer and Director

Well, we do have a central distribution center, as you know, that we can do most of the volume, and then, we do ship from store as well. In fact, we had a number of stores that weren't set up to do it. And we're just at the process of setting up the capabilities so that they can do it. So, we feel like if stores are closed, we have flexibility for stores around them to ship. And then, potentially even -- depends on what the government does, if they are on a close situation, we may be in a position where we can ship from that closed store but not have customers within the store. So we are -- as Ashley and I both said earlier, we are game-planning every possible scenario so that we're ready to handle whatever is thrown at us.

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] The next question comes from Carla Casella with J.P. Morgan. Please go ahead.

Carla Casella -- J.P. Morgan -- Analyst

Hi, I have one clarification and then some business questions. The clarification is on the -- you mentioned you saw 50% potential decline in adjusted EBIT for 2Q. And I just missed, was that just because of the tariff -- the headwinds you discussed? Or was that a COVID -- also COVID impact?

Mark Cosby -- Chief Executive Officer and Director

Not COVID at all. It's driven by the tariffs. It's driven by the fact that our second quarter last year was a stronger quarter, so we're overlapping better volume there. And it's the fact -- and partially due -- we did price starting in the second quarter of next year a little bit ahead of the tariffs, which helped our results. So it's just -- it's a rollover issue, in combination with the tariff pressure that we're feeling this year. And I think the thing to keep in mind, as you probably know, that's a very low profit quarter for us. So, some of it's just the law of numbers.

Carla Casella -- J.P. Morgan -- Analyst

Right. The SG&A impact you talked about, the $44 million, is that a true-up in fourth quarter? Or is that throughout the year?

Mark Cosby -- Chief Executive Officer and Director

Throughout the year.

Carla Casella -- J.P. Morgan -- Analyst

Okay. And then, just understanding this time -- I know you can't give much update on COVID, but two things. One, how many stores have you had to close? I know Pennsylvania last night went to a non-essential business closure; San Francisco. And so, I'm wondering how many stores are closed today? And then also, if we look at a normal February, March, April, this time of year, where -- when is most of your kind of Easter and crafting buying? What are your key months? I'm assuming we're going into a slower time of the year as we get into the summer. But the spring, I think there's still some important business. I'm just wondering, what are the most important months to you through the spring?

Mark Cosby -- Chief Executive Officer and Director

I'll do the spring thing first and we can come to the closed stores thing in a second. But we're three weeks away from Easter. So that's one that really accelerates as you get closer to Easter. And our inventory levels are in decent shape in that front, although that is an area that's been hurt through this virus. And it's a mix. We have some big days coming up. We have lowest price of the season coming up in a week, and we have some bigger weeks. But none of the weeks are like what you would see in the third and fourth quarter, which are the significant time of the year for us.

In terms of closed stores, we did have one store closed in Pennsylvania a couple of days ago. And we did see the orders that came through the government for both Pennsylvania and California, and we're working through that as we speak.

Carla Casella -- J.P. Morgan -- Analyst

Great, thanks.

Operator

And our last question today will come from Christopher Horvers with J.P. Morgan. Please go ahead.

Christopher Horvers -- J.P. Morgan -- Analyst

Thanks very much. So my first question is the pressure from the tariffs that you're referring to. What exactly was that in 2019? Was it a top line issue because you took pricing, competitors didn't, and so there were some share issues? And then on the second quarter, you talked about one of the reasons 2Q being down -- EBIT down 50% is tariff pressure, I think, on margin lapse. So looking back to last year's call, there was really no mention of any gross margin benefit from tariffs. So just trying to understand exactly what you're referring to in terms of the broader -- how tariffs impacted the top line last year and also the gross margin.

Mark Cosby -- Chief Executive Officer and Director

Yeah. The tariffs didn't impact the top line. It was a margin pressure issue. As we addressed the tariffs, we pulled a lot of different levers that included moving product out of China into other areas. It included negotiating with our supply network to get the cost to a better place. One of the last levers that we did review was pricing where it made sense, and most of that happened in the second quarter last year, which is what I referred to. But the pressure that we talk about when we talk about that number, the $45 million that we have in 2020, for example, is all margin cost pressure, not related to top line.

Christopher Horvers -- J.P. Morgan -- Analyst

So, you essentially took price ahead of actually buying the inventory, so you had a short-term benefit to gross margin ahead of that next inventory turn. So that's the comparison?

Mark Cosby -- Chief Executive Officer and Director

Right. Because our -- when we -- the cost works through our inventory and it takes time. The pricing actions, when we take it, is an immediate impact. So -- and a few weeks in that makes a difference, and we did have that in an overlap in the second quarter of last year.

Christopher Horvers -- J.P. Morgan -- Analyst

Okay, understood. And then, taking it -- just thinking about the capital structure, the Company continues to prefer share repurchase over debt pay down. But yet, the market over the past year has really punished your stock, given the overall debt levels and even more so given these uncertain times. You're also cutting back capex to conserve cash. So my question is twofold. So will you suspend this -- are you -- and I jumped on a little late, so I might have missed this. But we will use to spend the share repurchase program in the interim? And the second part is, why not listen to the market's desire to deleverage the balance sheet and have a more balanced capital return program? Is there something with covenants? Is there -- are there premiums that you would have to pay on the debt and that's why you're not doing it? Or is it simply the same logic that you've had, which is the stock's valuation is just too cheap versus paying down the debt?

Mark Cosby -- Chief Executive Officer and Director

Yeah. In the mode we're in right now, we're not doing anything other than preserve cash. So there would be no capital allocation change. We are saving money at this point. Now, going forward, we will assess all of our options. We'll look at all the things that makes sense, whether that's debt pay-down or share buybacks. We're not really in a position now where we're even contemplating anything on that front. And Ashley?

Ashley Buchanan -- President, Chief Executive Officer Designate and Director

Yeah. I would say, in the current situation, we like the optionality of the cash on the balance sheet until we get through kind of the COVID piece. As far as the capital allocation strategy, we're going to address that in the Investor Day later in the summer, early fall where we can talk about investment in the business, the debt and share repurchase. But we're not going to get into it today. But we do just like the optionality of cash over the next few months or quarters, given the situation with the COVID.

Christopher Horvers -- J.P. Morgan -- Analyst

Understood. Best of luck and stay safe.

Mark Cosby -- Chief Executive Officer and Director

Thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Jim Mathias -- Director, Investor Relations

Mark Cosby -- Chief Executive Officer and Director

Ashley Buchanan -- President, Chief Executive Officer Designate and Director

Jennifer Robinson -- Senior Vice President of Finance

Steven Forbes -- Guggenheim Securities -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

Carla Casella -- J.P. Morgan -- Analyst

Christopher Horvers -- J.P. Morgan -- Analyst

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