Arts and crafts retailer The Michaels Companies (NASDAQ:MIK) reported first-quarter results in the early-morning hours of Thursday. The company met Wall Street's targets and confirmed that its full-year guidance targets are on track, but the stock still crashed due to an unimpressive slate of second-quarter guidance goals.

Michaels' first quarter by the numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$1.16 billion

$1.16 billion

0%

GAAP net income

$26.9 million

$72.2 million

(63%)

Adjusted earnings per diluted share

$0.39

$0.38

2.6%

Data source: The Michaels Companies.

We're looking at adjusted earnings here in order to iron out some decidedly unique accounting charges against this quarter's results. Michaels saw costs of $0.20 per share related to the restructuring of its Aaron Brothers framing operations and another $0.04 charge per share related to the Trump administration's tax system changes.

These items did not affect the year-ago period and they're not coming back in a comparable way, so let's back them out of any analysis to be performed on Michaels' earnings. To get a sense of the straight-up GAAP profits, including the effects of all these one-time charges, take a look at GAAP net income sliding 63% lower instead.

"Please excuse the mess while we improve our stores"

The ongoing suite of business improvements may be painful in the short term, but they have already started to produce some significant results. For example, comparable-store sales increased 0.4% in the first quarter, powered by growth in the evolving e-commerce channel and "a nice positive comp" in the custom framing business.

Again, Michaels is bending over backward to make the framing operations work, shutting down Aaron Brothers as a stand-alone store format and replacing it with store-within-a-store displays inside existing Michaels outlets. That's a big part of the soft GAAP profits in this quarter, but the positive effects on comp sales are already materializing.

Moving forward, Michaels is now working to bring its e-commerce operations closer to the vest with in-house rather than outsourced fulfillment services. Converting another 235 stores to the new layout with Aaron Brothers framing sections and other improvements is also high on the to-do list. Management also wants to reap the benefits of more intense data analytics, essentially baking artificial intelligence into its marketing, supply chain, and store management operations.

Smiling woman points at a store window.

Image source: Getty Images.

What's next?

Michaels shares closed 14% lower on Thursday as investors largely ignored these solid results to focus on modest guidance targets for the second quarter. There, the company aims for flat comp sales and adjusted earnings of roughly $0.13 per share, below the Street's expectations of $0.19 per share.

But something tells me that this is a temporary trough, because Michaels' management also held the full-year revenue and profit targets steady. In other words, the company will miss its overarching annual goals unless things pick up in the second half. It seems foolhardy to set yourself up for failure on a grand scale, so I have to believe that Michaels is headed for a decent holiday season.

Make no mistake: Any trimming of the full-year goals should be met with arched eyebrows and a quick-draw finger over the "sell" button. My bullish conclusion here assumes that Michaels is being run by a competent and trustworthy leadership team. If that's true, Mr. Market just gave us a wide-open buy-in window on Michaels shares this week. Anything else would cast serious doubt over the management quality and investment thesis here.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.