Management Thinks Michaels Companies Can Do Better

Arts and crafts retailer Michaels Companies (MIK +0.00%) reported first-quarter results early Thursday morning. The results fell within management's guidance ranges, but some hiccups led to a lower full-year revenue projection. Here's a closer look at Michaels' first quarter.

Michaels Companies' first-quarter results: The raw numbers

Data source: The Michaels Companies.

What happened with Michaels this quarter?

• Comparable store sales declined 2.9% year over year. The average customer ticket increased in value while the number of transactions decreased.
• Michaels opened 17 net new stores over the last four quarters, including four new locations balanced against two store closings in the first quarter alone. Another seven locations were relocated during the reported quarter.
• A selection of "everyday value" products (EDV) was introduced two years ago to much acclaim, and Michaels has been growing the number of items in that program. Notably, the product list was doubled to 4,000 stock-keeping units in the first quarter, up from roughly 2,000 at the end of 2018. That move was a bridge too far, because the EDV products were excluded from Michaels' popular coupon programs and the company heard an abundance of complaints over the shrinking reach of that coupon program. This backlash put pressure on Michaels' top-line sales, and the company has now eliminated the entire EDV program.
• Management is also acutely aware that a recent increase of high-value items in prime in-store real estate, such as the aisle end caps and near the checkout registers, may have boosted the average transaction value but also undercut the public view of Michaels as a value-priced retailer. A larger selection of low-priced items is now back on the shelves in Michaels' end caps and checkout areas.

Michaels is drawing up some new inventory management ideas. Image source: Getty Images.

What management had to say

Interim CEO Mark Cosby took the reins quite recently, and the board of directors is actively looking for his permanent replacement. In the earnings call, Cosby shared this high-level overview of what the first 90 days on the job have been like.

What I've learned in my first 90 days with Michaels has reinforced my belief that we have a significant opportunity to expand our leadership position within the arts and crafts channel and drive stronger growth over the longer term. We are not satisfied with our recent performance, and we are proactively taking steps to improve the results. At the same time, we are pursuing our 2019 priorities and are confident that they will deliver stronger momentum in the second half, and we are working closely with the board to refresh our long-term growth strategy to drive stronger growth in 2020 and beyond.

That strategy shift includes the end of the EDV program, a general reshuffling of the product mix in Michaels' inventories, and a better-managed serialized coupon program that can deliver sales to specific classes of customers. Early efforts in this area have been hit or miss, but the company has an improved coupon management tool in place that should start paying dividends in the upcoming push toward the holiday quarter.

Looking ahead

Comp sales are trending flat to 1.5% lower in the second quarter. Michaels plans to open three new stores, close two, and relocate another two outlets during the current quarter. By way of comparison, the company opened eight net new stores alongside seven relocations in the year-ago reporting period. Adjusted earnings should land near $0.15 per share, down from $0.31 per share in the first quarter and flat compared to the second quarter of 2018.

Management lowered the midpoint of its full-year revenue guidance from $2.40 billion to $2.35 billion, a decrease of approximately 2%. The bottom-line guidance range stretches from $2.29 to $2.41 per share, unchanged from the original full-year outlook provided three months ago.