The Michaels Companies announces first quarter 2018 results

GaryPageau

  • Comparable store sales increased 0.4%

  • Diluted EPS of $0.15; adjusted diluted EPS of $0.39, excluding $0.24 per diluted share related to one-time restructuring charges and tax reform

  • Reaffirms FY18 Guidance

IRVING, Texas–(BUSINESS WIRE)–Jun. 14, 2018– The Michaels Companies, Inc. (NASDAQ: MIK) today reported diluted earnings per share for the first quarter of fiscal 2018 of $0.15, or $0.39 per diluted share excluding approximately $0.20 per diluted share related to a one-time charge associated with the restructuring of the Aaron Brothers division and approximately $0.04 per diluted share from provisional adjustments related to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). This compares to diluted earnings per share for the first quarter of fiscal 2017 of $0.38. A reconciliation of non-GAAP financial measures to the respective GAAP measures is included in this release.

“Our first quarter results were in-line with our expectations, and our team is executing well against our plans to make it easier for customers to bring their creativity to life,” said Chuck Rubin, Chairman and CEO. “We continue to operate from a position of financial strength, as the industry leader with healthy operating margins, strong cash flows and high returns on invested capital, and we remain committed to leveraging these strengths to accelerate key initiatives in fiscal 2018 to drive future sales and earnings growth.”

First Quarter Highlights

Net sales were $1,155.5 million compared to $1,158.6 million in the first quarter of fiscal 2017. The decrease in net sales was primarily due to the closure of all 94 full-size Aaron Brothers stores in the first quarter of fiscal 2018. Comparable store sales increased 0.4% (flat on a constant currency basis) due to an increase in average ticket, partially offset by a decrease in customer transactions. During the quarter, the Company opened six new Michaels stores, closed one Michaels store, and relocated nine Michaels stores. At the end of the first quarter, the Company operated 1,243 Michaels stores, 3 Aaron Brothers stores and 36 Pat Catan’s stores.

Operating income was $78.9 million compared to $139.3 million in the first quarter of fiscal 2017. The decrease in operating income was due to a $47.5 million one-time restructuring charge, higher distribution-related costs, and occupancy cost deleverage. The negative impact of these factors was partially offset by benefits from higher merchandise margin resulting from the Company’s ongoing sourcing initiatives. Excluding the $47.5 million one-time restructuring charge and $0.3 million of operating profit from Aaron Brothers operations prior to closure, adjusted operating income for the first quarter of fiscal 2018 was $126.1 million.

The effective tax rate was 41.6%, compared to 33.7% in the first quarter of fiscal 2017. The higher effective tax rate was primarily due to provisional adjustments of $8.1 million in the quarter related to repatriation taxes for accumulated earnings of foreign subsidiaries resulting from the enactment of the Tax Act. This increase was partially offset by a favorable reduction in the federal statutory tax rate from 35% to 21%, also in connection with the enactment of the Tax Act. Excluding the impact of the $8.1 million of provisional adjustments, the effective tax rate for the first quarter of fiscal 2018 was 24.0%.

Net income was $26.9 million, compared to $72.2 million in the first quarter of fiscal 2017. Excluding the $47.5 million one-time restructuring charge, $0.2 million of income from Aaron Brothers operations prior to closure, and $8.1 million of provisional adjustments related to the Tax Act, adjusted net income for the first quarter of fiscal 2018 was $70.9 million.

Diluted earnings per share was $0.15, compared to $0.38 per diluted share in the first quarter of fiscal 2017. Diluted weighted-average common shares outstanding for the quarter were 182.7 million compared with 190.4 million in the first quarter of fiscal 2017. Excluding the $47.5 million one-time restructuring charge, $0.2 million of income from Aaron Brothers operations prior to closure, and $8.1 million of provisional adjustments related to the Tax Act, adjusted diluted earnings per share was $0.39.

Second Quarter and Fiscal Year 2018 Outlook:

During the first quarter of fiscal 2018, the Company executed two interest rate swaps with an aggregate notional value of $1.0 billion associated with its outstanding Amended Term Loan Credit Facility to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR rate. The swaps replaced the one-month LIBOR rate with a fixed interest rate of 2.7765% and payments are settled monthly. The Company expects the incremental interest expense resulting from the cost of the swaps will be between $4 million and $5 million in fiscal 2018.

In addition, in May 2018, the Company successfully amended its $2.2 billion Amended Term Loan Credit Facility to reduce the interest rate to LIBOR plus 2.50% from LIBOR plus 2.75%. The Company expects to realize approximately $4 million in interest expense savings in fiscal 2018 resulting from the repricing of the Amended Term Loan Credit Facility. The Company expects to recognize a loss on the early extinguishment of debt related to this transaction of approximately $2 million in the second quarter of fiscal 2018.

The Company’s guidance for fiscal 2018 assumes Aaron Brothers stores were closed as of the start of the fiscal year, excludes the restructuring charge, excludes provisional tax adjustments and excludes any one-time costs associated with debt refinancing.

For fiscal 2018, a 52-week year, the Company continues to expect:

  • net sales will be between $5,217 million and $5,293 million;
  • comparable store sales to increase between 0% and 1.5%;
  • to open 19 new Michaels stores and relocate 17 Michaels stores;
  • adjusted operating income will be in the range of $677 million to $710 million;
  • net interest expense will be approximately $144 million;
  • the effective tax rate will be approximately 24%;
  • adjusted diluted earnings per common share will be between $2.19 and $2.32, based on diluted weighted average common shares of approximately 185 million; and
  • capital expenditures will be between $160 million and $170 million.

For the second quarter of fiscal 2018, the Company expects:

  • comparable store sales to be approximately flat;
  • to open six new Michaels stores and relocate eight Michaels stores;
  • adjusted operating income will be between $65 million and $70 million;
  • net interest expense will be approximately $37 million;
  • the effective tax rate will be approximately 24%; and
  • adjusted diluted earnings per common share will be between $0.12 and $0.14, based on diluted weighted average common shares of 183 million.

About The Michaels Companies, Inc.:

The Michaels Companies, Inc. is North America’s largest specialty provider of arts, crafts, framing, floral, wall décor, and seasonal merchandise for Makers and do-it-yourself home decorators. The Company owns and operates more than 1,200 stores in 49 states and Canada under the brands Michaels, Aaron Brothers and Pat Catan’s. Additionally, the Company serves customers through Michaels.com, consumercrafts.com and aaronbrothers.com. The Michaels Companies, Inc., also owns Artistree, a manufacturer of high quality custom and specialty framing merchandise, and Darice, a premier wholesale distributor in the craft, gift and decor industry. For a list of store locations or to shop online, visit Www.michaels.com or download the Michaels App.