“We are moving ahead on bringing our customer-centric, core ‘Maker’ strategy to life, and we are encouraged by the early operational progress being made. Combining this with the sales gains from our recent opportunistic transaction tied to A.C. Moore exiting their retail business, we believe we are on the path to improved, consistent, financial performance over time,” said Mark Cosby, Chief Executive Officer.
“Our third-quarter results did not meet our expectations and were impacted by specific factors which we are addressing. As we implement the initiatives that support our ‘Maker’ strategy, we believe we will improve the trajectory of our business over time. Our strong balance sheet and substantial free cash flow generation provide a solid foundation from which we can reposition Michaels to drive long-term shareholder value,” Cosby added.
The quarterly decrease was partially offset from sales related to 18 additional Michaels stores (net of closures) since the end of the third quarter of fiscal 2018. During the third quarter, the company opened 13 new Michaels stores, 11 of which were former Pat Catan’s stores converted to the Michaels brand, closed one Michaels store, and relocated five Michaels stores. At the end of the third quarter of fiscal 2019, the company operated 1,274 Michaels stores.
Gross profit was 36.1% of net sales in the third quarter of fiscal 2019 compared to 37.6% in the third quarter of fiscal 2018. The 150 basis point decrease was primarily due to a decrease in merchandise margin and the deleveraging of occupancy and distribution-related costs, partially offset by a decrease in inventory reserves, the company said. The decrease in merchandise margin reflects the impacts of higher promotional activity, higher tariffs on inventory we purchase from China, and a change in sales mix, partially offset by benefits from our ongoing pricing and sourcing initiatives.
Operating income was $76.0 million compared to $137.2 million in the third quarter of fiscal 2018. Excluding restructure and impairment charges, adjusted operating income for the third quarter of fiscal 2019 was $117.4 million. Net income was $28.7 million in the third quarter of fiscal 2019, compared to $83.8 million in the third quarter of fiscal 2018. Excluding restructure and impairment charges, losses on early extinguishments of debt and refinancing costs and related tax adjustments, adjusted net income for the third quarter of fiscal 2019 was $60.1 million, compared to adjusted net income for the third quarter of fiscal 2018 of $79.8 million, which excludes the inventory write-down of $3.1 million (net of taxes) described above and the adjustments related to the Tax Act, the company said.
As previously announced, subsequent to the end of our fiscal third quarter, Nicole Crafts announced the closure of its A.C. Moore retail operations. As part of this closure, Michaels entered into an asset purchase agreement with A.C. Moore Incorporated and certain of its affiliates to acquire intellectual property and the right to lease up to 40 store locations for $58 million, subject to certain purchase price adjustments. In connection with the acquisition, the company also leased a distribution facility in New Jersey. The store locations are expected to be reopened under the Michaels brand name in fiscal 2020 and will include the relocation of certain existing Michaels stores.
For fiscal 2019, the company expects:
- net sales to be between $5.06 billion and $5.08 billion;
- comparable store sales to be down approximately 2%;
- to open net 16 new Michaels stores, inclusive of 12 Pat Catan’s stores the company plans to rebrand and reopen, and relocate 13 Michaels stores.