What happened
Shares of Michaels Companies (MIK) jumped as much as 27.3% higher on Wednesday morning, powered by a strong second-quarter earnings report. By 12:20 p.m. EDT, the arts and crafts retailer's stock had calmed down to a 7.3% gain.
So what
Michaels' second-quarter sales fell 2% year over year, landing at $1.03 billion. Your average analyst would have settled for $1.02 billion. On the bottom line, adjusted earnings rose 27% to $0.19 per share. Here, analysts had been looking for $0.14 per share, and the midpoint of management's guidance stopped at $0.15 per share.
Furthermore, Michaels posted a 0.3% gain in comparable-store sales. The top end of that metric's guidance range called for flat comps, and management was prepared to report as much as a 1.5% lower trend.
Image source: Getty Images.
Now what
Michaels also provided full-year and third-quarter guidance roughly in line with current Wall Street expectations.
The early gains rested on Michaels' solid performance and upbeat near-term guidance, but the stock ran out of rocket fuel when interim CEO Mark Cosby addressed the Chinese tariff situation on the earnings call. The first three rounds of import tariffs haven't damaged the company's results, but the upcoming List 4 -- scheduled to take effect in mid-December -- could be a different beast.
"Clearly, the situation remains fluid," Cosby said. "And if List 4 China tariffs are fully implemented, we estimate the applicable direct import product costs subject to these duties are between $400 million and $500 million."
These effects wouldn't make an impact on Michaels' results until 2020, because the company can work through its existing inventory before taking the brunt of higher costs on new goods from China. Management is exploring tariff-mitigating options such as sourcing more goods from markets other than China, negotiating better deals with Chinese vendors, and raising customer prices as needed. Still, investors are right to worry about the potential damage consumer discretionary stocks like Michaels could suffer if the List 4 tariffs are allowed to take full effect in December.
