Via online business online marketing online business opportunities Michaels: Catching A Falling Knife
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Via online business online marketing online business opportunities

via online business online marketing online business opportunities Source: BarronSource: Barron’s

Traditional retailers have faced strong headwinds this earnings season. Many have faced stagnant to declining revenue growth and shrinking margins. Michaels Companies (MIK) has been no different. In its most recent quarter, the company reported revenue of $1.22 billion, down 4% Y/Y. The company’s financial results have been so disconcerting that Michaels replaced its with Walmart’s (WMT) former Chief Merchandising Officer, Ashley Buchanan:

Michaels Stores [NASDAQ:MIK] appoints Walmart executive Ashley Buchanan as its new President and CEO, effective Jan. 6.

Buchanan will succeed Mark Cosby as CEO upon completion of a transition period ending April 1; Cosby will remain a member of MIK’s board following the CEO transition.

Buchanan joined WMT in 2007 and has served in various roles of increased leadership and responsibility across the company, most recently as Chief Merchandising and Chief Operating Officer for Walmart U.S. eCommerce.

Buchanan’s expertise in merchandising and eCommerce should add value to Michaels. Many traditional retailers are struggling to build out effective digital platforms. Walmart and Target (TGT) have thrived in the new online sales environment, having consistently generated double-digit growth from their digital platforms. Buchanan could potentially replicate Walmart’s success at Michaels, but it may take a while.

Via online business online marketing online business opportunities Same-Store Sales Are In Decline

In November, retail sales through department stores fell 7.2% Y/Y, while sales through non-store retailers rose 11.5%. With that backdrop, Michaels has struggled to drive traffic to its stores. Comparable sales fell 2.2%, partially due to the closure of Pat Catan stores. Customer transactions fell, partially offset by an increase in the average ticket. Management suggested online sales were up nicely. However, they were not robust enough to grow total comparable-store sales. The fact that the company hired a former Walmart executive with eCommerce expertise could indicate where Michaels believes it needs the most help.

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Gross profit was $442 million, down 8% Y/Y. Gross margin was 36.1%, down 150 basis points versus the year-earlier period. Discounting hurt margins during the quarter:

Gross margin as a percent of sales came in slightly lower than our original expectations due to higher than anticipated seasonal discounting and the deleverage of occupancy and distribution costs given lower than expected sales in the quarter. The decline versus last year in gross margin was also driven by the impact of tariffs on inventory we purchase from and changes in sales mix. As I mentioned earlier, we saw solid growth in categories such as technology and craft storage that are lower margin than the box overall. These declines were partially offset by benefits from our ongoing pricing and sourcing initiatives and a decrease in inventory reserves.

Traditional retailers with strong products like Lululemon (LULU) and Target have done extremely well in this environment. Off-price retailers like Burlington (BURL) and TJX (TJX) have thrived with same-store sales growth and improving margins. Several other retailers like Michaels may have to continue the aggressive promotions to drive traffic to the stores. That could hurt margins further.

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SG&A expense was $323 million, down 5% Y/Y. Management cut into operating costs, which was prudent. SG&A as a percentage of revenue was 26.4%, down only 30 basis points versus the year-earlier period. The fallout was that EBITDA of $150 million fell 11% Y/Y. EBITDA margin was 12.3%, down 100 basis points versus the year-earlier period. Expense cuts were not enough to offset the diminution in revenue and margins. The declining scale is hurting the company. It may not end anytime soon.

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Via online business online marketing online business opportunities Valuation Appears Cheap

Michaels generated last 12 months (“LTM”) EBITDA of $777 million. It has an enterprise value of $3.8 billion and trades at 4.8x EBITDA. The valuation appears cheap on the surface. However, it does not look so cheap amid sliding same-store sales and deteriorating margins.

Via online business online marketing online business opportunities Conclusion

MIK is off over 40% Y/Y and will likely fall further. The stock could be equivalent to catching a falling knife. Sell MIK.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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