The rising number of small entrepreneurs has been a surprising 2020 trend. For example, about 400,000 new active sellers have joined Etsy's e-commerce platform just since the end of 2019. That brings the total on the site up to 3.1 million. And these new sellers are simply chasing the consumer. Etsy's gross merchandise sales for the first half of 2020 have nearly doubled from the comparable period last year.
Trends like these are huge and they haven't gone unnoticed. In late September, arts-and-crafts retailer The Michaels Companies (NASDAQ:MIK) gave a virtual investor day presentation, putting forth management's long-term vision for the company. In the presentation, Michaels management completely redefined the company's strategy and consequently increased its total addressable market. Before, the company was simply an arts-and-crafts retailer. Now, it envisions becoming an all-inclusive ecosystem to support the rise of the small business entrepreneurs creating handmade merchandise.
Investor days are infrequent events worth noting. Sometimes a company will redefine its vision. And if management presents what it expects is a market-beating opportunity, you get the opportunity to buy the stock before the fresh strategy begins bearing fruit.
Is this the case with Michaels? Here are three takeaways that might provide an answer.
Takeaway No. 1: Michaels recognizes a past failure
Early in the presentation, CEO Ashley Buchanan discussed the results of a large survey it conducted of its customers. One standout statement reads, "Makers want to love our brand, unfortunately we've let them down." Consumer complaints include a clunky website, cramped stores, and bad inventory management.
Perhaps these problems are why Michaels stock has been a long-term underperformer, having lost over half its value over the past five years. Consider that in 2014, the company had $4.7 billion in net sales. In 2019, it had $5.1 billion -- up a mere 7% in that five-year span.
Here's the thing -- Michaels is the top dog in the arts-and-crafts space, claiming 14% market share. However, many top specialty retailers claim over 20% market share in their categories. It appears Michaels has failed to get to that next level, and it's likely because of the complaints outlined by the consumers themselves.
While failures are painful to hear, admitting them is the first step to fixing them. Accordingly, Michaels' management has vowed to update the shopping experience, especially focusing on better inventory management going forward.
Takeaway No. 2: The target is bigger now
As already alluded to, part of the evolving strategy for Michaels is to create an all-in-one ecosystem for makers. Right now, Michaels is a top option to buy supplies, but it doesn't offer any other relevant services for its customer. People have to go elsewhere for collaboration, education, and commercialization. Management intends to remedy this oversight; it's going to better serve the professional customer.
Catering to the pro is a good move. According to Michaels' estimates, about 20% of makers are people who actually monetize their creations through selling products or providing a service like a tutorial. However, the top 3% of makers spend more than 40 times as much as a regular hobbyist. Clearly, you want to retain and gain this kind of customer.
Of the 80% of makers not monetizing their crafts, half wish they were. This is important. Imagine if Michaels could provide tools and a platform to make monetization easy. Consider that the company has over 46 million people in its loyalty program. If it could leverage that audience in some way to help aspiring sellers succeed, Michaels could benefit from increased product sales. After all, these new sellers would need more supplies to create inventory. But Michaels could also monetize the platform it provides.
Before, Michaels said its total addressable market (TAM) was $78 billion just selling products and supplies. But between offering an e-commerce platform, creating a place for tutorials, and offering other seller services, the company now places its TAM at $100 billion. For perspective, the current market cap is just $1.4 billion.
Takeaway No. 3: Modest growth forecast
Finally, Michaels' management laid out modest financial goals. It's calling for 1.5% to 2.5% annual revenue growth, and low-double-digit earnings-per-share growth starting in 2022 (using 2019 as the comparison year). Considering the company views itself as the top player in its space, and given its raised TAM, this guidance is surprisingly lackluster.
To be fair, Michaels' management clarified that new initiatives aren't included in forward guidance and would therefore add to the upside.
The overall takeaway?
Personally, I believe trying to become an all-inclusive ecosystem is the right approach for the company moving forward. However, I question how much management believes this strategy can drive growth since it was excluded from projections.
For this reason, I don't believe Michaels presented a market-beating opportunity in its investor presentation. It will be hard to create shareholder value from just arts-and-crafts supply sales. However, it's worth revisiting after the company's expanded ecosystem strategy takes shape.