What happened
Shares of The Michaels Companies (MIK) fell as much as 10.6% in Thursday's early trading, following the release of solid fourth-quarter results and soft forward guidance. As of 2:30 p.m. EDT, the arts and crafts supplies retailer's stock had recovered to a 6.8% loss.
So what
In the fourth quarter, Michaels grew its net sales 8% year over year to $1.89 billion. Adjusted earnings rose 16%, landing at $1.19 per diluted share. This figure includes a $0.09 benefit per share from an extra calendar week in last year's fourth quarter, balanced out against a $0.08 tax charge per share to account for new tax rules.
Holiday sales were solid, but Michaels' stock fell for other reasons. Image source: Getty Images.
Looking ahead, Michaels' management set its first-quarter and full-year revenue targets well below current Street estimates. Michaels intends to invest some of the upcoming windfalls from lower corporate tax rates into remodeled stores and other back-end business improvements. Because of that margin pressure, along with modest revenue targets, Michaels also expects to miss Wall Street's earnings targets in 2018.
Investors weren't pleased with these lower-than-expected guidance targets, and the share price plunged.
Now what
Michaels' guidance pointed to negative top-line growth in the current quarter and in 2018, breaking a streak of at least break-even growth going all the way back to the company's initial public offering, in 2014. So it's easy to see why investors are punishing the stock for this gloomy forecast.
On the other hand, it's also a classic knee-jerk overreaction to what really should be seen as good news. Michaels isn't just throwing money away here but rather taking this opportunity to build a stronger business platform for the long haul. If you want to treat this moment as a buy-in opportunity, that's probably the right idea.
