What happened

Michaels (NASDAQ:MIK) stock continued to dazzle investors today as the arts-and-crafts retailer posted another quarter of strong earnings, buoyed by demand for at-home hobbies during the pandemic and improvements in its e-commerce operations.

As of 12:53 p.m. EDT, the stock was up 13.5%.

Two kids drawing on the floor

Image source: Getty Images.

So what

Comparable sales, the most important metric for discretionary retailers like Michaels, surged again, rising 16.3% in the third quarter. That drove overall revenue up 15.1% to $1.41 billion, just ahead of estimates at $1.39 billion.

What was even more impressive was the company's performance further down the income statement as profits in the quarter surged. Gross margin jumped from 36.1% to 41.4%, showing the company gained leverage on occupancy costs and had fewer markdowns, and adjusted operating income soared 72% to $201.6 million. Adjusted earnings per share more than doubled from $0.40 to $0.86, easily beating estimates at $0.59.

CEO Ashley Buchanan said the strong performance was "driven by robust consumer demand, improved retail execution and continued progress against our strategic initiatives," and added, "our expanded omnichannel capabilities, Maker-centric branding, and increasingly personalized marketing resonated well with customers."

Now what

Michaels declined to give guidance, but the company looks well positioned for the holiday season, given its recent investments strategic initiatives and the rise in coronavirus cases, which is likely to spur demand for arts and crafts as well as gifts related to hobbies.

Michaels has been one of the biggest surprise stories in retail this year, but the company is likely to experience some headwinds when the pandemic ends as Americans will be focused on activities outside of the home like travel, eating out, and live entertainment. Even with that risk, the stock still looks dirt cheap, trading at a price-to-earnings ratio of less than six. If the company can hang on to the new customers it's attracted during the crisis, it should be well positioned for long-term growth.

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