The Michaels Companies (MIK) Q2 2020 Earnings Call Transcript

The Michaels Companies (MIK)
Q2 2020 Earnings Call
Sep 03, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, we'd like to welcome everyone to the Michaels Companies second-quarter 2020 earnings conference call. [Operator instructions] Please note, this event is being recorded.

Thank you. And now I'd like to turn the call over to your host, Jim Mathias, director of investor relations. Mr. Mathias, you may begin the conference.

Jim Mathias -- Director of Investor Relations

I'd like to welcome you to our fiscal 2020 second-quarter financial results conference call. Presenting on this morning's call are our CEO, Ashley Buchannan; Jennifer Robinson, our SVP, finance and treasury. Also in the room with us today is Mike Diamond, our chief financial officer, and Jim Sullivan, our SVP and chief accounting officer. 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 made 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, as well as in our other SEC filings. These forward-looking statements are only as of today, September 3, 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 supplemental slides. I'd now like to turn the call over to our CEO, Ashley.

Ashley Buchanan -- Chief Executive Officer

Thank you for joining us this morning. We delivered strong second-quarter results and are effectively positioning Michaels for the future -- as our stores reopened during the quarter, we saw an immediate and sustained recovery in demand that largely kept pace with what we had initially seen in May. Our entire store base has been open since the beginning of July, now I'll discuss in a moment, we'll continue to prioritize the safety of our team members and our customers as they return to shop at our physical locations. We were extremely pleased by the demand and sales trends in our stores and with how well our team members executed.

I want to extend my gratitude to our entire team and to our makers for their ongoing commitment and support in this unprecedented environment. I also want to take a moment and welcome Mike Diamond, our CFO, who joined us officially just a few days ago. I look forward to working closely with Mike and his experience will be valuable in supporting our ongoing efforts to position Michaels for long-term success. Is here in the room with us today, and he'll introduce himself later on the call.

I'm sure many of you will have an opportunity to speak with Mike and get to know him over the coming months. Back to our results. We believe that COVID-19 is providing some strong tailwinds for our business resulting from lifestyle changes such as more time at home and the need for creative outlets, as well as the same broader macro trends impacting the rest of the market. Additionally, factors including federal stimulus, are difficult to predict and may introduce some variability as we move forward.

I want to start today by briefly providing an update on the three key focus areas that I outlined last quarter. First, as I mentioned, we remain focused on the health and safety of our team members and customers. The protocols we implemented across our stores earlier this year are still in place. This includes social distancing, increased cleaning and sanitation measures, plexiglass shield at checkout, mask requirements and more.

Creating a safer environment inside our stores, so our team members and customers can work and shop with confidence remain a key priority for our team. Second, we have solidified and improved our financial position. Based on the strong trajectory of our business in the second quarter, we repaid the remaining $300 million outstanding on our revolving credit facility. With this undrawn and fully available credit facility and a strong free cash flow of over $300 million generated during the second quarter, we ended the period with $1.3 billion of liquidity.

I'm very pleased to report with this strong cash generation, our total liquidity has increased by approximately $100 million since the beginning of the fiscal year. And third, we have continued to expand and improve our digital and omnichannel capabilities to provide makers with a more seamless shopping experience. By taking an agile approach to developing and deploying new capabilities quickly, we are capturing sales, delivering a high level of customer satisfaction and building on our earlier progress. During the second quarter, we enhanced curbside to provide an even smoother contactless pick-up experience, we optimized our shipment store network.

We introduced product bundling for e-commerce orders to make customer purchasing easier. And additionally, initial results from our internal testing of the shop in scan are encouraging. We expect our contactless in-store shopping experience powered by the Michaels app to be a huge differentiator for us as customers increasingly prioritize convenience and safety. And finally, in August, we launched Michaels Pro, as a critical extension of our assortment.

This offering allows makers to purchase competitively priced bulk supplies, which customer feedback is indicated to be an essential need. This is part of our omnichannel strategy to attract new makers and gain a larger share of wallet. Overall, I'm very pleased with this quarter's progress in reducing friction points in the shopping experience. Importantly, we have significant runway, and we'll continue to iterate and innovate in the coming quarters.

Next, I want to provide an update on the pillars that underpin our maker strategy, which include: One, strengthening our retail foundation; two, modernizing the omnichannel experience; and three, establishing our position as the expert for makers. Importantly, as we work on these pillars, we are prioritizing opportunities to expand our value proposition to better serve our maker customers. We are listening to them. We are executing on their feedback.

And as a result, we are meeting more of their expectations. First, with regard to our foundation, we are improving execution across our retail business. Goal here is very simple, provide the right product at the right price, where and how the customer is expected. In these efforts, we have begun to optimize the flow of merchandise from truck to shelf to ensure inventory availability and limit out of stocks.

To enhance our in-store shopping experience, we are improving our visual merchandising, product placement and sight lines. Our customers also want to engage with team members. We are simplifying in-store task to increase the efficiency by our team members and free up labor hours that can be redeployed to more customer-facing activities. In addition to this foundational retail work, we plan to open our acquired AC Moore stores as Michaels stores in 2021 and capitalize on the resulting sales transfer opportunity.

Hand-in-hand with improving retail execution, we are rapidly modernizing and evolving our omnichannel capabilities to provide an increasingly frictionless customer experience. This evolution is happening far faster than expected, and combined with strong demand across our 1,270 physical locations is creating positive tangible results for our business. And finally, we are working to position Michaels as the expert brand fire maker in order to deepen our customer relationships and foster long-term value and engagement. Our recently introduced marketing campaign Made by You, featuring real makers and their creative works have been well received by our customers.

We are doing more to provide ideas, inspiration and instruction that encourage creativity and connect the making community to our brand. A significant offering of virtual classes and other interactive content is an important element in extending the impact of our branding. With little to no travel this summer and in an absence of in-person summer camps and other activities for children, our customers spent increased amounts of time at home and looked to Michaels for positive and inspiring outlets for self-expression or simply just to fill up the day. We offered an online kids club camp creativity, featuring 21 days of free crafting for our mini makers.

Our online class content has been very well received, and we are increasing that content available, offering up to 25 weekly classes in September, up from only four in April. Viewership of these classes is growing between parents and kids. Over only a four-month time frame, we recorded over 200,000 sign-ups for online classes. To further foster and drive interest in the cohesive maker community, we're also continuing to increase our use of personalized emails, reaching the 70% milestone in July, up from only 20% at the end of 2019.

Additionally, in early August, we launched our revamped Michaels rewards loyalty program, which is designed to create long-term engagement with our program members and help strengthen our relationship across the maker community. We remain committed to looking for ways to enhance this program, to better serve and engage with our members. And while it's still very early, we're pleased with initial results. Now, I'll hand the call over to Jennifer Robinson to review our second-quarter financial results in greater detail.

Jennifer Robinson -- Senior Vice President, Finance

Thanks, Ashley. Michaels continues to make great progress against our key initiatives, which enabled us to capture strong customer demand in the quarter. Our second-quarter results were impacted by several tailwinds, including impacts from government stimulus and the fact that our customers are spending more time at home. Our second-quarter revenue was negatively impacted by not having all our stores open until the beginning of July, as well as broader macro uncertainty.

For these reasons, forecasting remains difficult, but we are encouraged by our second-quarter performance and note that the overall third-quarter sales trends observed through today's call remain strong. We will continue to monitor developments across our business closely as we move through the coming weeks and months. For the quarter, sales totaled $1.1 billion, an increase of 11% on a year-over-year basis. Comp store sales grew 12% year over year.

The 12% quarterly comp was driven by a combination of existing customers with higher basket size, an increase in new customers and continued strength in e-commerce results, even as our stores reopened to strong demand and improving foot traffic. We are particularly encouraged by the new customer additions, which were up more than 15% year over year. And we are working to retain and engage with these new customers. Moving down the income statement.

Costs related to COVID-19 totaled $9 million and were primarily SG&A related with the majority driven by hazard pay and other employee safety-related costs. Gross profit for the quarter was $343 million. The year-over-year decline was primarily due to the charges related to the closure of our wholesale business, as well as a higher mix of e-commerce sales and the impact of tariffs. We will begin to lap the tariff impacts in the second half of 2020.

Occupancy cost leverage as a result of higher sales, as well as benefits from our ongoing pricing and sourcing initiatives offset this decline. Excluding the costs related to our wholesale business, gross profit would have been approximately $388 million, representing a year-over-year increase of $21 million or 6%. Rent for the quarter totaled approximately $100 million. SG&A for the quarter was 25.2% of sales and down slightly in absolute dollars year over year.

SG&A this quarter benefited from the actions we have taken to rationalize spending across the company. Operating income for the quarter was $53 million, which was ahead of our expectations and driven by strong customer demand. On an adjusted basis, excluding the impact of our wholesale business, operating income was approximately $106 million, up over 40% from 2019. Moving to tax.

The increase in tax expense in the quarter was due primarily to a change in the estimated impact of the CARES Act and a tax benefit associated with a tax income settlement in the second quarter of 2019. On an adjusted basis, EPS in the quarter was $0.30, up almost 58% versus prior year. Cash flow was strong in the quarter. We generated positive free cash flow of $331 million and ended the quarter with approximately $1.3 billion in total liquidity, comprised of a cash balance of $650 million and full availability on our revolving bank facility.

We will continue to manage our cash and liquidity while we invest in our omnichannel capabilities to meet the growing customer demand. During the first half of the year, we significantly changed the working capital profile of our business, and we're seeing the benefits of a shorter cash conversion cycle in these results. Please note that we will still see some volatility in our cash flow generation during the year, driven by the underlying seasonality of our business. Importantly, with more liquidity now versus at the beginning of our fiscal year, we are very confident in our ability to invest for growth, satisfy all debt obligations and generate significant excess cash, which gives us additional flexibility.

We'll talk more about our plans here during our upcoming investor day. Finally, from an inventory perspective, we feel good about our current position as we head into the back half of the year. Now, I'll turn the call back over to Ashley.

Ashley Buchanan -- Chief Executive Officer

Thanks, Jennifer. As we sit here today, a month into the third quarter, I'm encouraged by our progress against a backdrop of considerable uncertainty. Our focus remains on executing against our maker strategy, and gaining market share as we attract and retain new customers and deepen our connection with the existing customers through focused merchandising, marketing and omnichannel initiatives. The significant strides we have made in a short period of time demonstrate that we have the right strategic vision with the right talent and executional capabilities to deliver.

We will go into much greater detail on our strategic plans and progress at our virtual investor day on September 24. On behalf of Michaels' executive team, I want to invite you to join us as we discuss our addressable market, go-forward strategy, future omnichannel plans, as well as merchandising priorities. We will provide a longer-term financial algorithm for Michaels and discuss our capital allocation priorities. There will also be an opportunity for you to engage with our management team during a live Q&A session.

Please visit the Michaels' investor relations website for a register. But before we move to the Q&A portion of the call, I want to take a moment to thank Jennifer Robinson, Jim Sullivan and the whole finance team for doing a fantastic job during what was a very challenging time for the company. Thanks to your leadership and hard work. We haven't missed a beat and made considerable progress over the last eight months.

Now, I'd like to invite our new CFO, Mike Diamond, to briefly introduce himself. Mike?

Mike Diamond -- Chief Financial Officer

Thank you, Ashley. It's really a pleasure to be here this morning, and I am very excited to be joining the Michaels team as the new CFO. I'm looking forward to working with Ashley and the team to further expand on the company's success. Importantly, I look forward to meeting and getting to know many of you over the coming months.

I firmly believe that Michaels is an exceptional company that is well positioned to win in a rapidly evolving specialty retail industry, and I can't wait to get started. I look forward to seeing everyone in a couple of weeks at our investor day. Ashley?

Ashley Buchanan -- Chief Executive Officer

Thanks, Mike. It's great to have you on board. Operator, let's turn to the Q&A portion of the call.

Questions & Answers:

Operator

[Operator instructions] And our first question will come from Christopher Horvers of JP Morgan. Please go ahead.

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

Thanks. Good morning, everybody. Can you talk about the cadence of the quarter, including [Inaudible] basis, how did store only comps play out over the quarter, given that you -- it looks like you have a good percentage of your stores closed during the quarter. And then related to that, you mentioned strong sales quarter to date.

Given what many are reporting as moderation in August on back-to-school, can you talk about what you're seeing thus far relative to what you saw during July?

Ashley Buchanan -- Chief Executive Officer

Sure. Our comp improved throughout the quarter as the store has reopened. We end up with a 12% overall. We began June with roughly 1,000 stores open.

And we're fully opened by the beginning of July, and that 12% comp was inclusive of the 353% increase in e-com. We're not going to provide a month-to-month analysis just like we did last time. But for the second quarter, our open store comp, including e-com was north of 20%. And to your question on how we're quarter to date.

August demand remained very strong as we exited Q2 into Q3. In the longer term, I believe the foundational structural changes we've made will continue to better position Michaels as we go forward to gain share. And on your back-to-school question, back-to-school for us is mainly an August event. And like I said, we're really pleased with the way August is shaping up so far.

It's remained strong. And we'll see. But right now, we're very pleased with the way we ended the Q2 and the way we're going into Q3.

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

Understood. And just as a follow-up, can you share some thoughts on the gross margin rate outlook going forward? How large was the tariff headwind in the second quarter? And as you look at the back half, you have some pretty significant markdowns, a negative mix, you'll have promotions. If you post a positive comp in the back half, could you see gross margin actually expand on a rate basis year over year?

Jennifer Robinson -- Senior Vice President, Finance

Yeah. So, first, we'll address the questions related to Q2 gross margin. As a reminder, the gross margin in Q2 includes $45 million in costs associated with the closure of the wholesale business. So, after that, we'd be at the $388 million.

From a rate perspective, we did see headwinds on rate related to the tariffs, as we've indicated would be the case. And that subsides significantly as we go into the back half of the year and begin to lap it compared to the first half of the year. Our focus will continue to be on maximizing gross margin dollars. So, as e-commerce is a larger percentage of our sales, we do have dilution there, but the company is definitely focused on maximizing dollars, and we were profitable across all of our nodes in Q2.

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

Thank you.

Operator

Our next question comes from Seth Sigman of Credit Suisse. Please go ahead.

Seth Sigman -- Credit Suisse -- Analyst

Hey, guys. Thanks for taking the question. Nice quarter. I wanted to talk a little bit more about how you're planning the second quarter in this sort of uncertain environment? It sounds like things are healthy right now.

I think there was a comment that you feel good about your inventory position as you head into the second half of the year. It does look like inventory is down about 19%. So, my question is, is that by design? Is that an effort to clean up the inventory and optimize it, or are you facing some limitations? How are you planning for that, and how should we be thinking about it?

Ashley Buchanan -- Chief Executive Officer

Yeah. It's a good question. We're down 19%. But if you take out the Darice wholesale business, which we exited, is down 15% and a couple of things.

So, we do feel really good about our inventory position. As we go into the back half of the year, a couple of reasons around that. One, a lot of our sales is broad-based across all the categories, but a lot of it is our functional business, which has a shorter lead time. The second part is the mix shifts a bit in Q3 to Q4 in seasonal, and we didn't really buy down our seasonal business in Q3, Q4, very much.

And so -- and then, we did use this demand period to clean up a lot of the clearance as we got actually less promotional, so it mixed out well for us. So, it's a combination of -- we cleaned up some clearance, Darice, it was a portion of it, a mix shift and shorter lead times. So, we feel good about our inventory positions going into the back half.

Seth Sigman -- Credit Suisse -- Analyst

OK. All right. That's helpful. And then, a follow-up question on e-commerce growth.

It's interesting that it accelerated in the second quarter even as your stores opened. I'm curious, did you see that elevated growth continue in the latter part of the quarter when stores were fully opened and running again? And just any more color on the behavior that you are seeing, the influence of rolling out curbside and ship from store and whether that's accounting for a big portion of the growth? And how does that tie into profitability as well?

Ashley Buchanan -- Chief Executive Officer

Well, we were really pleased with our e-com business. It was over 350%. It was strong throughout the quarter. Obviously, I mean, it decelerated just slightly as all the stores reopened, and you would expect as you got 1,270 stores right back open.

But customers engage with us in a lot of ways this time, whether it was buying online, pick up in store, whether that was curbside, which was we made improvements on. We did ship from store, but then we also had same-day delivery. And our app, obviously, had a lot more activity as we did as we expanded that ability to make commerce through the app. So, it's clear that our customers are interacting with us in multiple ways, and we're really pleased with that because our goal has been the same since I started, which is I want to meet the customer wherever they want to be met.

And we're agnostic on which channel they go through. Like I said, we're profitable in all nodes, but we want to meet more they want to be at. And we're very pleased with the way that business is trending.

Seth Sigman -- Credit Suisse -- Analyst

OK, great. Thanks very much.

Operator

Our next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks, everyone. My first question to follow-up on e-com and the gross margin pressure. Are you able to isolate the impact from that pressure in the second quarter? And then how to think about it for the rest of the year?

Jennifer Robinson -- Senior Vice President, Finance

Yeah. So, e-com as a result of the fulfillment and shipping cost is dilutive to our gross margin rate. However, as we've indicated, is definitely gross margin dollar positive for us. The significant amount of sales going through curbside and BOPIS definitely offset those -- that dilution, along with the incremental shipping nodes that we opened up with ship from store during the quarter.

So, those things help mitigate the dilution of our e-commerce to gross margin.

Ashley Buchanan -- Chief Executive Officer

And I'll add to that a little bit. Yeah, our mix and the way we sell and fulfill e-com between curbside, same-day delivery and buy online, pick up in store, obviously, is a more profitable node than the direct-to-home business. And even with the direct-to-home business, we are making significant progress on our costs, reducing splits, the topper product, AUR and the margin structure we're selling through that channel. So, we feel we're making more progress across all the fulfillment channels and nodes that we're using in our e-com business.

Mike Diamond -- Chief Financial Officer

One other item to note in Q2 that was a bit of a headwind is tariffs, as Jennifer mentioned earlier, and that headwind will subside as we get into the back half of the year.

Simeon Gutman -- Morgan Stanley -- Analyst

And then, I guess, at investor day, will you quantify the e-com mix and then how BOPIS or curbside mixes out was inside of that? And then my follow-up question, unrelated, is, you went back to high-low pricing. I don't know how prevalent or representative that could be during the last quarter to the extent consumers were more price taking than bringing coupons, but can you talk about the pricing strategy? And did you see the percentage of customers, let's say, shopping on coupon decline and how that's trending as stores reopened?

Ashley Buchanan -- Chief Executive Officer

Well, I guess, just to address the first part, which was well, we've always been a high-low retailer. We never went to EDLP at any time, pre-COVID or during COVID or whatever you want to call we're out right now in the middle of COVID. We were less promotional during the quarter by design. And I talked about that last quarter, which is we wanted to go from a branding perspective to provide more inspiration, more creativity with discounts versus just a discounting brand.

Our customers responded to that greatly with the content we've put out and the inspiration we've created through our marketing. And so, we were less promotional during that time frame. What the future holds, we're not giving any future forecast. There's too much variability in it.

But during Q2, we were less promotional.

Simeon Gutman -- Morgan Stanley -- Analyst

And the mix of e-com, I guess that that will be held until investor day?

Ashley Buchanan -- Chief Executive Officer

Yeah. We will not be breaking out the rate mix of e-com even in the investor day piece.

Simeon Gutman -- Morgan Stanley -- Analyst

Got it. OK. Definitely a nice quarter.

Ashley Buchanan -- Chief Executive Officer

Sure. Thank you.

Operator

[Operator instructions] And our next question will come from Steve Forbes of Guggenheim. Please go ahead.

Steve Kovalsky -- Guggenheim Partners -- Analyst

Good morning. This is actually Steve Kovalsky on for Steve Forbes. I'll just start with, given your strength in e-commerce, can you speak to your fulfillment plans for the holiday, and if you see any capacity issues there?

Ashley Buchanan -- Chief Executive Officer

We don't foresee any capacity issues in Q4. Like I said, we have multiple ways of fulfilling that product, particularly with our 1,270 stores is using as many fulfillment centers along with our fulfillment -- e-com fulfillment centers. And we've actually converted our regional distribution center to ship e-com as well, particularly on our Mic Pro, Michaels Pro platform. So, we don't see any capacity issues into Q3 or Q4.

Steve Kovalsky -- Guggenheim Partners -- Analyst

Great. Thank you.

Operator

Our next question will come from Cristina Fernandez of Telsey Advisory Group. Please go ahead.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Hi. Good morning, and congratulations on a good quarter. I wanted to ask about SG&A. We saw dollars down this quarter with stores -- all stores reopen, how does that look for the second half of the year? Is this sustainable, or should we see SG&A trend back higher year over year?

Jennifer Robinson -- Senior Vice President, Finance

Is from a -- to your point, from an SG&A perspective, we did have favorability in the quarter due to the stores being closed. And with the significant increase in sales. So, somewhat of an anomaly in Q2 that we expect to be back more normalized, if you will, in the back half of the year. In addition to that, we do have headwinds on SG&A related to performance-based compensation, which we had indicated at the beginning of the year would be a headwind for us in 2020, and we do expect to see that in the back half of the year as well.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

And then as my follow-up, you roll out two initiatives here in August. I wanted to see if you could share any more color around the revamp? Michaels Rewards program, what you're seeing there and any more color on the test market -- or that's been in place for a couple of months? And on the Michaels Pro initiative, what customer are you targeting? And maybe talk about any expectations, what expectations you have for that program.

Ashley Buchanan -- Chief Executive Officer

Sure. We had a loyalty rewards program in the past. So, we enhanced it. It didn't really provide, I would say, any actual rewards associated with this.

So, we did test it in two markets last year. We were pleased with the results. So, we rolled out the --- that loyalty program, and we did that at the timing, when we were able to probably engage with them in a better way. So, when we rolled out the loyalty program, enhanced version this time, we're able to communicate with them more effectively with personalized emails, with our Made by You marketing campaign with the content that we're rolling out for that customer.

And along with the digital capabilities we rolled out, we felt that was the time to roll out the loyalty program. And we're very pleased with the initial response. And then your second question was on Michael's Pro. It's clear to us that there's a subset of customers that want to buy bulk product from us as they have either a side business or a side hobby business or it's a full-time business for them.

They wanted really competitive pricing on bulk products, and we view that as a necessary extension to our offering for that customer. They've told us about what they wanted, and we delivered. And we'll probably go into much greater detail -- and we will go into much greater detail during our investor day around that initiative.

Operator

Our next question will come from Carla Casella of JP Morgan. Please go ahead.

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

Hi. My first question is on Darice. And can you give us a sense for how much that contributed to the number -- the year ago numbers, either revenue, gross profit or EBITDA?

Ashley Buchanan -- Chief Executive Officer

So Darice, generally, they didn't contribute a whole lot to the bottom line. It was a very low-margin business, which is part of the reason why we're getting out of it. We try to make it work. Just the business has gotten tougher and tougher, which is why we decided to liquidate the business.

But incrementally, it didn't generate much to the bottom line.

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

OK. Great. And then, as you've been buying third and fourth-quarter inventory, are there any disruptions related to COVID in terms of just getting the inventory supply? You mentioned inventories are clean, but I guess, I'm wondering, is it the products that you want at the margin you want, if there's any cost or disruption built in?

Ashley Buchanan -- Chief Executive Officer

Well, like I said, we feel really good about our inventory position. We've placed seasonal orders back roughly in March. We did not buy that seasonal business down that much. We haven't had any disruptions to date.

That product is actually flowing in as scheduled. We have a large supplier base globally. That's very diverse. So, we feel good about our ability to fulfill those orders during the seasonal time frame coming up.

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

OK. Great. Thank you.

Operator

Our next question comes from Kate McShane of Goldman Sachs. Please go ahead.

Kate McShane -- Goldman Sachs -- Analyst

Hi, thanks. Good morning. Thanks for taking my question. I just had a quick real estate question in terms of how you might be thinking about possibly relocating stores, just given the likely disruption that's coming from the pandemic in real estate? Is that an opportunity that you see going forward, especially as you think about remodeling and merchandising your stores?

Ashley Buchanan -- Chief Executive Officer

Well, like I said, I think in previous calls, there's only a very small handful of our stores that are cash flow negative. And that hasn't actually changed through the pandemic. Secondly, using our network as many fulfillment centers on our ship-from-store basis has just enhanced that assessment. So, we have really no change in our real estate strategy going forward for the foreseeable future.

Mike Diamond -- Chief Financial Officer

The one impact the pandemic did have is we did aggressively negotiate with our landlords. And through Q2, we were able to realize about $12 million in rent abatements in cash received or cash we will receive that gets amortized over the term of the leases. That's not a credit in Q2. It will be spread out over a number of years, but we certainly have worked very hard to get the best terms we can in this environment.

Kate McShane -- Goldman Sachs -- Analyst

Thank you.

Operator

Our next question comes from Laura Champine of Loop Capital. Please go ahead.

Laura Champine -- Loop Capital -- Analyst

Thanks for taking my question this morning. It's on the debt level. So, obviously, you repaid the revolver and liquidity is at all-time high. I think all out.

But where does debt pay down stand on your priority list for cash flows over the next few years?

Ashley Buchanan -- Chief Executive Officer

We will address our capital allocation strategy on our investor day on the 24th. But we recognize our leverage is not optimal just like I had said in previous calls and look forward to laying that out in later September for you all.

Laura Champine -- Loop Capital -- Analyst

Understood. Then a second question. So, we've got the percent of stores that were open, basically at the end of May. And obviously, at the end of June.

But at the end of April, what percent of Michaels stores were open, just so we can get a sense of how rapid the bounce back was?

Ashley Buchanan -- Chief Executive Officer

While that seems like a long time ago, I actually have to go back and get that number at this point. I don't even remember what we were at the end of April. But at the end of April, we were pretty much at the trough of the pandemic. So, I honestly don't remember.

I think it was right at 900 stores that were closed at the time. So, we had -- we did have a bounce back, obviously, coming out at the end of April, roughly 900 and it slowly started opening up May and then I have talked about June and July.

Mike Diamond -- Chief Financial Officer

And remember, even with the store closed -- the stores closed at the peak of the closures, a lot of our stores, we were doing business through curbside pickup and BOPIS. So, there was revenue being generated even from most of those closed stores.

Laura Champine -- Loop Capital -- Analyst

Understood. Thank you.

Operator

Our next question comes from William Reuter of Bank of America. Please go ahead.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Good morning. So, it's obvious you guys did a lot of initiatives to drive traffic. You've got the online classes for kids. You've got loyalty programs, better personalized emails.

I guess, when you talk to your vendors, how do you expect that the industry performed as a whole? And do you think you took share? I guess I'm just wondering how your growth compared to industry growth?

Ashley Buchanan -- Chief Executive Officer

Yeah. It's a good question. I think I'll address it. It's a large industry, but it's really hard to tell where share is.

I mean, we're the only basically publicly created arts and craft retailer. What we do feel and believe, based on the foundation we've put in place, we believe with our digital capabilities, our Mic Pro, our retail foundational work we're doing within the stores that we've set the foundation for consistent growth over time and our ability to continue to gain share. How much share? Is really difficult to tell. Like I said, it's an industry.

It's a large industry, but share data is not that forthcoming.

William Reuter -- Bank of America Merrill Lynch -- Analyst

OK. And then, just as a follow-up to me, historically, your fourth-quarter gross margins are higher than your third-quarter ones, which I expect will probably continue. However, given that shipping costs are probably going to be elevated during the fourth quarter, should the spread between the two of those compress as we're thinking about our model?

Jennifer Robinson -- Senior Vice President, Finance

Yeah. We are not giving any guidance for Q3 or Q4, obviously, due to all of the uncertainty, it's very difficult at this point in time to predict how the back half of the year will play out.

William Reuter -- Bank of America Merrill Lynch -- Analyst

OK. Thank you very much.

Operator

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

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

Thanks very much. Just from a merchandising standpoint, what are your expectations for holiday this year? And do you think you need to prep the stores for an earlier start to the season? And how could that impact the cadence of your sales, which is usually pretty heavily skewed to 4Q? I know you're not giving specific guidance, but just thinking about holiday specifically and how this year could be different from previous years?

Ashley Buchanan -- Chief Executive Officer

Yeah. Like I said, we're not providing any guidance for Q3 or Q4. I would say, historically, arts and crafts people tend to buy different times of the year based on whether they're making something or decorating or gifting things. Our Q4 has already started to land existing.

But we're not providing any guidance on Q3 or Q4 on how that mix may play out or how the shopping season may change.

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

And just as a follow-up, I mean, are you seeing any -- an extension of the back-to-school season or just more demand for categories like supplies and organization, just given how many students are starting off their school year remote or hybrid. So, parents are providing more of the back-to-school supplies. Is that extending the back-to-school period for you guys from August into September?

Ashley Buchanan -- Chief Executive Officer

Well, like I said, ending Q2 and the starting Q3, it's been a broad-based demand across pretty much all our categories. So, it's been a broad-based purchasing cycle across pretty much every category at Michaels, including back-to-school or any other category we have. So, we feel very good about the end of Q2 and going into Q3.

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

Great. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ashley Buchanan for any closing remarks.

Ashley Buchanan -- Chief Executive Officer

I want to thank all of you for attending this morning. We really appreciate it, and look forward to talking to you on our investor day. Thank you.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Jim Mathias -- Director of Investor Relations

Ashley Buchanan -- Chief Executive Officer

Jennifer Robinson -- Senior Vice President, Finance

Mike Diamond -- Chief Financial Officer

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

Seth Sigman -- Credit Suisse -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Steve Kovalsky -- Guggenheim Partners -- Analyst

Cristina Fernandez -- Telsey Advisory Group -- Analyst

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

Kate McShane -- Goldman Sachs -- Analyst

Laura Champine -- Loop Capital -- Analyst

William Reuter -- Bank of America Merrill Lynch -- Analyst

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

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