What happened

Shares of Michaels Companies (NASDAQ:MIK) fell as much as 10% on Friday morning, hamstrung by a negative analyst report. By 10:20 a.m. EST, the arts and crafts retailer's stock had recovered slightly to an 8.4% drop.

Rendering of a red charting arrow, pointing downward.

Image source: Getty Images.

So what

Morgan Stanley downgraded Michaels to underweight in a report sent to investing clients, lowering the one-year price target from $7 to $5 per share. Analyst Simeon Gutman cited declining same-store sales, increasing competition from online stores, and the recent buyout of bankrupt rival chain A.C. Moore, which will add significant costs for converting roughly 40 A.C. Moore locations to Michaels stores over the next few quarters.

Now what

I agree that Michaels' 2.2% lower same-store sales in the third quarter were disappointing, but the company is addressing that issue with a fresh lineup of in-store events and a successful hybrid sales program where customers purchase items online and pick them up in a local Michaels store. The real test will come in the holiday-season fourth quarter, currently underway, and Morgan Stanley might end up with some egg on its face if the company's recent marketing efforts manage to connect with shoppers.