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Why Michaels Stock Took a Dive Today

By Jeremy Bowman – Sep 3, 2020 at 12:47PM

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Shares of the high-flying retailer fell in spite of a stellar earnings report.

What happened

Shares of arts-and-crafts retailer The Michaels Companies (MIK) were falling today in spite of a strong second-quarter earnings report this morning. The company easily beat expectations on both the top and bottom lines and was actually trading higher in pre-market trading, but began falling shortly after the earnings call began at 9 a.m. EDT, though there was no particular bad news on the call. The broader sell-off in the market, which came on fears that stocks had become overinflated after a recent rally, also seemed to push Michaels shares lower.

As of 11:29 a.m. EDT, the stock was down 23.3%.

A collection of different colors of thread for sale in a store

Image source: Getty Images.

So what

The retailer delivered strong results as it recovered from lockdowns in the first quarter. Comparable-store sales rose 12%, which included e-commerce growth of 353%, and overall revenue increased 11.1% to $1.15 billion, easily beating estimates at $1.01 billion.

The rollout of curbside pickup and other tools like ship-from-store helped support the surge in e-commerce growth, and the company said all of its stores were open by the beginning of July. The effects of the pandemic, which include more time spent at home and fewer social activities, also seemed to boost the company's performance. 

The comparable sales spike drove an increase in operating income, adjusted for the liquidation of its Darice wholesale business, which rose 41% to $105.8 million. Cost controls also helped lower selling, general, and administrative spending slightly, and adjusted earnings per share rose from $0.19 to $0.30, crushing the analyst consensus of a loss of $0.08.

"Michaels' strong second quarter results are a testament to the solid execution of our team in an unprecedented environment," CEO Ashley Buchanan said, in a statement. "We saw strong demand and customer engagement across our stores, and the multiple omnichannel touchpoints we introduced over the past few months."

Now what

Management declined to provide guidance for the current quarter or the full year, though it said performance in August continued to be "very strong."

Given the impressive results, the sell-off is puzzling, but there seems to be one or two reasons to explain the move. First, Michaels stock had rallied 40% this year on hopes for a comeback during the pandemic, and the stock was up more than 1,000% from its March bottom coming into the report. That rally means that strong results were already baked into investor expectations, which can lead to a "buy the rumor/sell the news" phenomenon. Second, investors may have been turned off by the lack of guidance and clarity on the second half of the year, a sign of uncertainty and that its growth rate could slow as the economy normalizes.

Still, Michaels is a unique retailer and a rare opportunity in the retail sector, especially with its current momentum, new CEO, and e-commerce initiatives. Expect to learn more at its Investor Day conference on Sept. 24.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends The Michaels Companies. The Motley Fool has a disclosure policy.

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