Yesterday, I covered the somewhat dreary state of affairs at the just-a-buck retailers like Dollar Tree Stores (NASDAQ:DLTR) and Family Dollar (NYSE:FDO). If it wasn't for solid same-store sales growth at Dollar General (NYSE:DG), you might need a tissue to swab the tears leaking from your eyes, what with all the whining going on about gasoline prices and their alleged effect on business.
What a contrast it is, then, to cover Michaels Stores (NYSE:MIK), the largest specialty retailer for the hobbyist and do-it-yourself home decorator, and its "Pursuit of the Perfect Store" initiative. Although this initiative is taking place in only 25 of the company's 1,005 stores, it is still a good indication of why the company reported a strong second quarter.
Compared with the year-ago quarter, revenue jumped a healthy 15.2%, and net income followed with a nice 15.8% rise. Same-store sales, the measure of retail sales health for stores open more than a year, rose by a strong 4.2%. The company expects 2005 to be its ninth straight year of record profits.
To get a firm handle on what is working at Michaels, look at operating margins. They increased an impressive 1.4 percentage points to 8.4% at a time when the company is adding employees to improve customer service. Michaels produced better results by selling more products at regular prices and getting better margins on its clearance merchandise. Better service and better prices. Now that's a winning combination!
Helping the company achieve better margins are investments in inventory management systems. While the company didn't suffer a 10.7% decrease in average store inventory as it did last quarter, it did grow inventory by only 6.9% while sales blossomed 15.2%. At the same time, Michaels improved store-level inventory in stock. Said another way, the company had in stock the items the customer wanted while it held less inventory. That's even better!
The good news goes to the balance sheet as well. The company paid off its only long-term debt of $200 million this quarter. Michaels also repurchased 457,900 of its shares and still ended the quarter with $182.9 million in cold, hard cash.
Now the focus is on the "Perfect Store." These will be remodeled stores that focus on better displays of merchandise and that try to establish a stronger brand image. Sound familiar? Big Orange -- better known as Home Depot (NYSE:HD) -- is doing the same thing in its do-it-yourself niche and enjoying strong same-store sales in the process.
The company's guidance for 2005 is for same-store sales to increase 4% to 6% and for earnings to grow by as much as 30%, or $1.90 a share. At that high-end guidance, the stock is currently trading for 20.1 times earnings. That's a very reasonable price (although the stock is up 32% over the past 52 weeks) for this do-it-yourself category killer that analysts expect to grow earnings by 18% for the next five years.
So add it up, and you understand why this company rocked its latest quarter. Year after year, the company has a clear plan for growth -- and it always delivers. Retail is a tough business, but Michaels is clearly on a tear.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
