Arts and crafts retailer The Michaels Companies (NASDAQ:MIK) reported second-quarter results early Thursday morning. The company beat its bottom-line guidance and raised full-year earnings targets, despite soft comparable store sales and a revenue-clogging store remodeling program.

Michaels' second-quarter results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$1.05 billion

$1.07 billion

(1.8%)

Net Income

$27.5 million

$35.6 million

(23%)

GAAP Earnings per share (diluted)

$0.15

$0.19

(21%)

Data source: The Michaels Companies.

What happened with Michaels this quarter?

  • The closing of 94 stand-alone Aaron Brothers framing stores in the first quarter weighed heavy on year-over-year revenue comparisons. The last three Aaron Brothers locations closed in the second quarter. $2.6 million of store closing costs put pressure on the quarterly earnings.
  • At the same time, Michaels opened nine new locations under its core brand in this period and cut the opening-day ribbons on seven relocated stores while closing only one store for good. The company operated 1,251 Michaels stores at the end of the quarter, along with 36 Pat Catan's stores in and around Ohio.
  • An ambitious store remodeling program also reduced foot traffic in Michaels' stores, reducing comp sales by 0.4%. Michaels spent $3.2 million on store remodeling during the second quarter, up from $515 million in the first quarter and $855 million in the year-ago period.
  • Several product categories delivered positive year-over-year volume improvements, led by segments such as technology, custom framing, decor, and crafts storage supplies. "More traditional" arts and crafts products like bakeware and jewelry saw sharply declining sales trends.

What management had to say

In a conference call with analysts, Michaels chairman and CEO Chuck Rubin said that the arts and crafts sector as a whole is struggling to produce sales growth at the moment. He wants to break this trend by addressing a broader customer base in new ways:

Today, all the arts and crafts big-box players go to market in a similar way with almost a singular focus on product and price. And yet, we know that consumers in general are demanding more of a solution-based approach.

We have done well with the enthusiast maker, and the investments that we have made in omnichannel, CRM, and our store labs have given us more capabilities and a stronger foundation for growth.

However, our success with the more casual customer has not been as robust and consistent, and we recognize that this customer may want a solution that is more of a "do it for me" or "do it partially for me" instead of our historical focus on a "do it yourself" offering.

Don't expect Michaels to revamp its entire business model in the hunt for casual customers, but Rubin does plan to challenge this market segment via a different mix of products in store inventories and a fine-tuned marketing message. This includes a Michaels Kids store-within-a-store concept with an expanded range of pre-made toys and prepared crafting projects, just in time for the 2018 holiday season.

A smiling young girl hard at work with plasticine and other crafting supplies.

Image source: Getty Images.

Looking ahead

Remodeled stores are outperforming their old-style cousins. Michaels is simplifying its remodeling templates in order to minimize the impact on customer access and speed up the conversion process.

In the third quarter, Michaels plans to open five new and five relocated stores, net of permanent location closures. Comparable store sales are trending toward an increase between 1.5% and 3%, leading up to adjusted earnings of roughly $0.43 per share -- a flattish trend compared to non-GAAP earnings of $0.44 per share in the same period of 2017.

Based on these results and near-term trends, Michaels held its full-year revenue guidance steady at approximately $5.26 billion. However, the bottom-line guidance range was boosted by 4%, now centered around $2.36 per share.

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