Arts and crafts retailer Michaels Stores (NYSE:MIK) posted improved third-quarter results after the bell yesterday. Shares are off about 2% today, down from the stock's 52-week high of $50.62 to $46 and change. An analyst likely caused the drop, after downgrading the company because of its tepid same-store sales outlook for the fourth quarter.

Total sales climbed 7% to $755 million, and same-store sales increased by 2%. Net income jumped 18% to $38 million, helped out by a lower tax rate. Earnings per share were up 17% to $0.54. The tax benefit added about $0.05 to that figure. Analysts were projecting $0.48 a share, not including the $0.05 gain from lower taxes.

Michaels operates 798 of its flagship hobbyist stores in 48 states and Canada. The retailer also runs 11 Village Crafts stores, 158 Aaron Brothers locations, two wholesale stores, and two ReCollections stores.

The ReCollections stores are specifically focused on scrapbooking, stocking more than 10,000 items devoted to the hobby. Michaels has seen such success with the concept that it intends to open 10 more ReCollections over the next year.

Michaels also intends to keep adding to its namesake store base, meeting the needs of ever more framers, knitters, decorators, and various do-it-yourselfers in the process. It will open 77 Michaels locations in fiscal 2004, made up of 45 new stores, 30 relocations, and two expansions.

The company believes it can one day have 1,100 to 1,200 Michaels stores in the U.S. and Canada, and will keep building about 45-50 new stores annually to ensure that it's getting the best locations. This pace is slower than the 75-80 stores a year the company was once opening, but management thinks this is a sounder long-term strategy.

Looking ahead, Michaels tempered fourth quarter same-store sales expectations, saying that it now expects Q4 comps of 3%-4%, below its previous 4%-6% projection. It left its earnings estimate alone, though, at $1.28-$1.32 a share, 21% ahead of last year's Q4 earnings per share.

For the full year, Michaels expects earnings growth of around 18%. At its current price then, and off of fiscal earnings projections of $2.45-$2.50, the company looks fairly valued here.

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