Following a segment in which Fool analyst Nick Sciple and Fool.com contributor Asit Sharma present an overview of The Michaels Companies (NASDAQ:MIK) and walk through financial ratios and leverage, our Industry Focus: Consumer Goods podcast team looks at recent management changes and positive developments in the company's operations. To learn more about Michaels' attempts to revive sales and boost earnings, click below.
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This video was recorded on Oct. 1, 2019.
Nick Sciple: I think we should talk a little bit about some of the tactics and strategies the company is using to try to stabilize the business and maybe get to some growth over time. This year so far, sales are down about 4% through two quarters. However, we see net profit up due to some tighter SG&A control and a little bit [fewer] restructuring costs. We've also seen new management come in place this year. Kind of strange circumstances. The CEO who had been in place up to February of this year, Chuck Rubin, resigned somewhat abruptly. Had mutually agreed with the company to step down. Had been in the position since 2015. However, Mr. Rubin has been replaced, at least on an interim basis, by board member Mark Cosby, who has 30 years of retail experience at Office Depot and other retailers. He has put in place some tactical and strategic initiatives to try to stabilize the company, and possibly return to growth. Can you give us an overview of what management is trying to do, and maybe your thoughts on whether that can sustain its current performance, at least, going forward?
Asit Sharma: Mark Cosby is retail veteran. He's had about 30 years of experience in the industry. He's put a fresh set of eyes on the company. One of the things that Cosby has done with the management team is to eliminate the company's everyday value program. Of course, Walmart is the company that popularized the notion of everyday value. That means, you walk into the store, you're not looking for big signs that say, "Huge Sale!" or "Red Tag Sale!" Everything on the shelves should be at a lower price than you'd find elsewhere. This is a tricky initiative for a company which has traditionally brought in its customers through a lot of discounting and coupon offers and specials. Customers actually perceived a little bit loss of value when this everyday value program was put forward. They stopped seeing as much of their promotions. It backfired. Cosby went in and said, "Look, let's just can this program for now and go back to what was working in terms of our regular promotional cycle."
He's also moved higher-price-point items away from the front of the store. Now, that seems like a very basic thing to implement, but it's one of these things [where] simple is genius. When you walk into a Michaels store, and you're one of these core customers -- a crafter, or, as they like to term it, a maker. Their definition of "maker" is a little bit narrower, maybe, than some of ours. We're not talking about Arduino circuit boards and robotics instruments; we're talking about craft makers, who do pasteboarding, who do scrapbooking, things of that nature. But, he decided that this emphasis on trying to sell higher-ticket items, which existed just before he came on board, was actually turning customers away. So, they've moved those higher-price items back to the back of the store, and they put more emphasis on the end caps, to put the items that core crafters want on these end-of-aisle end caps.
They've also mined their customer database. One of the things which has been extremely successful for companies with a forward tech focus is targeted offers to loyal customers. Michaels is getting into this game. They've really only scratched the surface on their capability. They've got such a fanatic cadre of customers who come there on a weekly basis, and they've got a ton of data which, if utilized properly, is going to lead to a higher lifetime value for customers. I like that.
Last thing that I'll say about the tactical things they're doing is, this emphasis on private label brands. In this industry in general -- Nick, as you pointed out to me earlier -- there's not a lot of huge name brands. Michaels tactically is doubling down on its private label brands because those have a higher profit margin than stuff it merely resells.
Sciple: That focus on private label also colors the extent to which they could possibly be disrupted or gone after by third-party companies. When most of these brands are undifferentiated or basic -- so, a paintbrush, or something like that -- it's hard for a lot of these things to get moved online. On the other side of that, you could say these are products that the folks don't care that much whether they get Brand X or Brand Y. But, it allows Michaels to have a higher margin, more control of its inventory, that sort of thing.
Focusing on its core customer obviously makes sense. You want to control those high-value customers and have them come to Michaels versus other places. On the everyday value issue, this is an issue that even other retailers have seen. I was reading about how Bed Bath & Beyond tried to push into this issue, and also had a revolt from its customers. When you have people that have been extreme couponing and have gotten used to that behavior as part of their shopping habits, when you take that sort of thing away, it can actually backfire on you. It's surprising; you would think lowering prices across the board might bring folks in. But it's one of those things that can be counterintuitive. But, I like the push from the company. To my eyes, I can see how this could at least bring stability to the company and keep those cash flows stable over time, which would color the narrative that this company could be a potentially attractive value.