What happened

Shares of Michaels Companies (NASDAQ:MIK) slid 35.7% in the first half of 2019, according to data provided by S&P Global Market Intelligence.

The arts and crafts store experienced a deceleration in comparable-store sales in recent years, which has been a problem for several companies in the retail industry. To mitigate the problem, Michaels has closed its Aaron Brothers and Pat Catan's stores to focus on the core chain. It's also had to deal with the headwind of tariffs, since the company relies on manufacturing in China for its products. 

A store aisle with various supplies for arts, crafts, and the office.


After reporting a comp sales increase of just 0.8% in 2018, Michaels saw a decline of 2.9% in the first quarter. With consumer spending still growing across the broader economy, it's a notable weakness for a retailer to be showing a drop in comp sales, which is why the stock is down.

So what

Michaels welcomed a new CEO earlies this year in Mark Cosby, and he is facing a difficult task to turn things around. It starts with figuring out ways to improve traffic to stores and get sales growing again. Earlier this year, he spent time visiting stores and evaluating areas to improve, and his main takeaway was that Michaels needs to be more customer-centric. 

In the near term, the plan is to improve customer support, adjusting promotion planning and marketing, and focusing on delivering better value. It won't be easy, because management has found, for example, that addressing issues in how the company handles promotions and discounts has created additional customer complaints, which adversely impacted sales in the last quarter. 

Now what

During the first-quarter conference call, Cosby commented that fixing these issues will take time: 

The erosion of our value perception didn't happen overnight, and we know it will take time to win back the confidence of our customers. But we are confident that the steps we are taking to stabilize and improve our value perception will contribute to better performance in Q2 and the second half of 2019.

Management's full-year guidance calls for net sales to be slightly down from total sales of $5.27 billion in 2018. Comp sales are expected to be in the range of flat to +1%, and adjusted earnings per share should be between $2.29 to $2.41 -- roughly flat compared to last year's adjusted profit of $2.35 per share. 

The stock is currently in the bargain basement, with a trailing price-to-earnings multiple of just four times. Obviously, if Michaels can keep current sales and earnings stable where they are, the stock could prove to be a real bargain. But given the deep problems the company is facing, it's probably best to steer clear of the stock until there is more evidence that sales are trending in a positive direction.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.