IRVING, Texas, Aug. 23 /PRNewswire-FirstCall/ -- Michaels Stores, Inc.
(NYSE: MIK) today reported its unaudited financial results for the second
quarter ended July 29, 2006. Net income for the second quarter of fiscal
2006 was $20.3 million and diluted earnings per share was $0.15. For the
second quarter of fiscal 2005, the Company reported net income of $16.5
million and diluted earnings per share of $0.12. Second quarter fiscal 2005
results include the effect of the early redemption of its Senior Notes, net
of tax, of $7.5 million, or approximately $0.05 per diluted share. Net
income for the first half of fiscal 2006 was $72.8 million compared to a
net loss of $19.5 million in the same period last year. First quarter
fiscal 2005 results include the cumulative effect of accounting change, net
of tax, of $88.5 million, for the Company's change in inventory accounting
policy from a retail method to the weighted average cost method. The
Company also adopted SFAS 123(R) as of the beginning of fiscal 2005. All
periods presented reflect merchandise inventories reported under the
weighted average cost method and include expenses associated with share
based compensation. Income before cumulative effect of accounting change
was $72.8 million in the first half of fiscal 2006, up 5.5% versus $69.0
million for the same period last year. Diluted earnings per share before
cumulative effect of accounting change for the first six months of fiscal
2006 increased 8% to $0.54 compared to $0.50 in the same period last year.
Quarterly Operating Performance
Total sales for the second quarter were $768.3 million, a 3.1% increase
over last year's second quarter sales of $745.5 million. Same-store sales
for the quarter decreased (0.3%) on a 2.9% increase in average ticket, a
(2.6%) decrease in transactions, and a (0.6%) decrease in custom frame
deliveries. A favorable Canadian currency translation added approximately
0.6% to the average ticket increase for the quarter.
As previously reported, same-store sales for the quarter were affected
by ongoing programs to reduce the level of promotional and clearance sales.
Second quarter clearance and discontinued inventory per store declined
significantly from year ago levels, and total inventory per store,
including distribution centers, finished the quarter at approximately (12%)
below prior year second quarter levels. On a same-store basis, promotional
and clearance sales in our Michaels domestic stores declined nearly (11%)
during the quarter, in part due to the lower clearance and discontinued
inventory levels, the elimination of a highly promotional Custom Frame
event and a reduction in the breadth of promotions in the Floral
department. The decrease in promotional and clearance sales was almost
entirely offset by an increase in regular price sales for the quarter.
For the second quarter, the Southeast, Southwest, and Northeast zones
delivered the strongest relative domestic same-store sales performances in
Michaels stores. The Company's strongest category performances were in
General Crafts, primarily driven by Jewelry and Beads, Apparel Crafts,
Impulse and Kids Crafts businesses.
For the second quarter of fiscal 2006, operating income decreased
($10.1) million, to $29.6 million from $39.7 million in fiscal 2005. As a
percent of sales, reported operating income decreased approximately (150)
basis points from 5.3% in the second quarter of 2005 to 3.8% in the second
quarter of 2006. The decrease in operating margin is primarily due to
incremental expenses related to the Company's strategic alternatives
process and review of its historical stock option practices.
Merchandise margins increased approximately 120 basis points versus the
prior year period. Improvement in merchandise margins was primarily due to
higher margin rates for both regular and promotional sales over the prior
year period, as well as improved sourcing. In addition, a higher percentage
of merchandise was sold at regular price. Total gross margin rate, which
includes occupancy costs, expanded approximately 20 basis points during the
second quarter compared to the prior year period as occupancy expense
increased as a percentage of sales by approximately 100 basis points due to
both the lower relative sales growth in the quarter and approximately $3.0
million of incremental occupancy expenses related to our store remodel
program.
Selling, general, and administrative expense increased 8.6% on a 3.1%
increase in total sales. As a result, selling, general, and administrative
expense as a percent of sales increased approximately 170 basis points from
29.9% in the second quarter of fiscal 2005 to 31.6% in the second quarter
of this year. Included in second quarter fiscal 2006 selling, general, and
administrative expense is $11.0 million, or approximately 140 basis points
as a percent of sales, related to the Company's strategic alternatives
process and review of its historical stock option practices. The remaining
$8.1 million of the increase is due to new store growth and inflation,
partially offset by effective cost control measures.
Pre-opening costs were approximately $1.5 million, consistent with the
second quarter of fiscal 2005.
Net interest and other income for the quarter totaled approximately
$3.1 million, over $16.2 million better than last year's expense of $13.1
million primarily due to the Company's early redemption of its 9 1/4%
Senior Notes in July 2005.
Balance Sheet
The Company's cash balance at the end of the quarter was $379.3
million, an increase of $196.4 million over last year's second quarter
ending balance of $182.9 million.
Average inventory per Michaels store, at the end of the second quarter
of fiscal 2006, inclusive of distribution centers, decreased (12.1%) to
approximately $903,000 from approximately $1,028,000 last year, on the
comparable weighted average cost inventory method, primarily due to a
significant reduction in our fashion yarn inventory.
Capital spending for the quarter totaled $30.6 million, with
approximately $14 million attributable to our store activities, such as
new, relocated, and remodeled stores. Spending for the store
standardization/remodel program was approximately $6 million as the Company
continued with its chain-wide rollout, converting 26 existing stores to the
more productive race track layout. During the second quarter, the Company
opened seven, relocated two, and closed one Michaels store.
Outlook
For the third quarter of fiscal 2006, same-store sales versus the prior
year are now expected to increase approximately 1% to 3%, with total sales
increasing between 4% and 6%. Operating income is expected to be
approximately $46 million versus third quarter fiscal 2005 operating income
of approximately $51 million. The operating income forecast for the third
quarter includes $2.6 million for estimated incremental store remodel
expenses for the store standardization program and $9.0 million of costs
related to the Company's review of strategic alternatives and the review of
its stock option practices. Including these incremental costs, diluted
earnings per share for the third quarter of fiscal 2006 is estimated to be
$0.22, an (8%) decrease from fiscal 2005 third quarter results of $0.24.
As previously announced on June 30, 2006, following a comprehensive
review of strategic alternatives that began on March 20, 2006, the Board of
Directors approved a merger of the Company with affiliates of two leading
global private investment firms, Bain Capital, LLC and The Blackstone
Group. Under the terms of the agreement, following the transaction Bain and
Blackstone will own substantially all of the outstanding shares of Michaels
Stores, and the shareholders will receive $44 per share in cash,
representing a transaction value of more than $6 billion. Completion of the
transaction is contingent on regulatory review and approval by the
shareholders of Michaels Stores, Inc. and is currently expected to occur in
late third quarter or early fourth quarter of this fiscal year.
Due to the expected timing for the closing of this transaction, the
Company has determined that it is not meaningful to provide comments on our
outlook beyond the third quarter.
The Company will host a conference call at 4:00 p.m. central time
today, hosted by Michaels Stores President and Chief Financial Officer,
Jeffrey Boyer, and President and Chief Operating Officer, Gregory Sandfort.
Those who wish to participate in the call may do so by dialing
973-633-6740. Any interested party will also have the opportunity to access
the call via the Internet at http://www.michaels.com . To listen to the
live call, please go to the website at least fifteen minutes early to
register and download any necessary audio software. For those who cannot
listen to the live broadcast, a recording will be available for 30 days
after the date of the event. Recordings may be accessed at
http://www.michaels.com or by phone at 973-341-3080, PIN 6885488.
Michaels Stores, Inc. is the world's largest specialty retailer of
arts, crafts, framing, floral, wall decor, and seasonal merchandise for the
hobbyist and do-it-yourself home decorator. As of August 23, 2006, the
Company owns and operates 907 Michaels stores in 48 states and Canada, 165
Aaron Brothers stores, 11 Recollections stores, and four Star Decorators
Wholesale operations.
This document may contain forward-looking statements that reflect our
plans, estimates, and beliefs. Any statements contained herein (including,
but not limited to, statements to the effect that Michaels or its
management "anticipates," "plans," "estimates," "expects," "believes," and
other similar expressions) that are not statements of historical fact
should be considered forward-looking statements and should be read in
conjunction with our consolidated financial statements and related notes in
our Annual Report on Form 10-K for the fiscal year ended January 28, 2006,
and in our Quarterly Report on Form 10-Q for the quarter ended April 29,
2006. Specific examples of forward-looking statements include, but are not
limited to, forecasts of same-store sales growth, operating income, and
diluted earnings per share. Our actual results could differ materially from
those discussed in these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to:
our ability to remain competitive in the areas of merchandise quality,
price, breadth of selection, customer service, and convenience; our ability
to anticipate and/or react to changes in customer demand; changes in
consumer confidence; unexpected consumer responses to changes in
promotional programs; unusual weather conditions; the execution and
management of our store growth and the availability of acceptable real
estate locations for new store openings; the effective maintenance of our
perpetual inventory and automated replenishment systems and related impacts
to inventory levels; delays in the receipt of merchandise ordered from our
suppliers due to delays in connection with either the manufacture or
shipment of such merchandise; transportation delays (including dock strikes
and other work stoppages); changes in political, economic, and social
conditions; commodity, energy and fuel cost increases, currency
fluctuations, and changes in import duties; our ability to maintain the
security of electronic and other confidential information; financial
difficulties of any of our insurance providers, key vendors, or suppliers;
our ability to obtain regulatory approval of the merger transaction; the
outcome of pending governmental inquiries; lawsuits asserted by our
stockholders or others challenging the merger transaction; disruptions from
the merger transaction, including the potential diversion of management's
attention to completion of the transaction and away from execution of
existing business plans and the potential loss of employees or business
partners because of perceived uncertainties; and other factors as set forth
in our Annual Report on Form 10-K for the fiscal year ended January 28,
2006, particularly in "Critical Accounting Policies and Estimates" and
"Risk Factors," and in our other Securities and Exchange Commission
filings. We intend these forward-looking statements to speak only as of the
time of this release and do not undertake to update or revise them as more
information becomes available.
This press release is also available on the Michaels Stores, Inc.
website (http://www.michaels.com ).
-- Tables Follow --
Michaels Stores, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Quarter Ended Six Months Ended
July 29, July 30, July 29, July 30,
2006 2005 (A) 2006 2005 (A)
Net sales $768,264 $745,493 $1,600,745 $1,566,509
Cost of sales and occupancy
expense 495,010 481,263 1,007,051 984,467
Gross profit 273,254 264,230 593,694 582,042
Selling, general, and
administrative expense 242,180 223,104 483,916 450,998
Store pre-opening costs 1,521 1,455 2,958 4,194
Operating income 29,553 39,671 106,820 126,850
Interest expense 252 15,500 424 20,589
Other (income) and expense,
net (3,329) (2,370) (10,491) (5,050)
Income before income taxes and
cumulative effect of
accounting change 32,630 26,541 116,887 111,311
Provision for income taxes 12,318 10,080 44,125 42,296
Income before cumulative
effect of accounting change 20,312 16,461 72,762 69,015
Cumulative effect of
accounting change, net of
income tax of $54.2 million --- --- --- 88,488
Net income $20,312 $16,461 $72,762 $(19,473)
Basic earnings (loss) per
common share:
Income before cumulative
effect of accounting change $0.15 $0.12 $0.55 $0.51
Cumulative effect of
accounting change, net of
income tax --- --- --- (0.65)
Net income $0.15 $0.12 $0.55 $(0.14)
Diluted earnings (loss) per
common share:
Income before cumulative
effect of accounting change $0.15 $0.12 $0.54 $0.50
Cumulative effect of
accounting change, net of
income tax --- --- --- (0.64)
Net income $0.15 $0.12 $0.54 $(0.14)
Weighted average shares
outstanding:
Basic 132,295 135,774 132,346 135,896
Diluted 134,531 138,408 134,450 139,203
Dividends per common share $0.12 $0.10 $0.22 $0.17
Michaels Stores, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
Subject to reclassification July 29, January 28, July 30,
2006 2006 2005 (A)
ASSETS
Current assets:
Cash and equivalents $379,320 $452,449 $182,909
Merchandise inventories 874,286 784,032 944,572
Prepaid expenses and other 46,594 44,042 39,010
Deferred and prepaid income taxes 56,863 34,125 113,936
Total current assets 1,357,063 1,314,648 1,280,427
Property and equipment, at cost 1,073,595 1,011,201 963,201
Less accumulated depreciation (636,349) (586,382) (544,714)
437,246 424,819 418,487
Goodwill 115,839 115,839 115,839
Other assets 22,929 20,249 18,687
138,768 136,088 134,526
Total assets $1,933,077 $1,875,555 $1,833,440
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $272,886 $193,595 $248,645
Accrued liabilities and other 249,691 282,499 232,385
Income taxes payable --- 20,672 ---
Total current liabilities 522,577 496,766 481,030
Deferred income taxes --- 2,803 22,747
Other long-term liabilities 89,173 88,637 86,898
Total long-term liabilities 89,173 91,440 109,645
611,750 588,206 590,675
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.10 par value,
2,000,000 shares authorized; none
issued --- --- ---
Common Stock, $0.10 par value,
350,000,000 shares authorized;
135,906,124 shares issued and
133,139,724 shares outstanding at
July 29, 2006, 133,821,417 shares
issued and 132,986,517 shares
outstanding at January 28, 2006,
and 135,827,039 shares issued and
outstanding at July 30, 2005 13,591 13,382 13,583
Additional paid-in capital 442,676 386,627 435,625
Retained earnings 951,354 907,773 784,169
Treasury Stock (2,766,400 shares at
July 29, 2006, 834,900 shares at
January 28, 2006, and none at
July 30, 2005) (94,127) (27,944) ---
Accumulated other comprehensive
income 7,833 7,511 9,388
Total stockholders' equity 1,321,327 1,287,349 1,242,765
Total liabilities and stockholders'
equity $1,933,077 $1,875,555 $1,833,440
Michaels Stores, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
Subject to reclassification July 29, July 30,
2006 2005 (A)
Operating activities:
Net income (loss) $72,762 $(19,473)
Adjustments:
Depreciation 56,433 48,085
Amortization 187 194
Share-based compensation 10,867 10,646
Tax benefits from stock options
exercised (16,065) (16,794)
Non-cash charge for the
cumulative effect of
accounting change --- 142,723
Loss from early extinguishment
of debt --- 12,133
Other 168 325
Changes in assets and
liabilities:
Merchandise inventories (90,027) (151,050)
Prepaid expenses and other (2,991) (12,397)
Deferred income taxes and
other (6,190) (8,899)
Accounts payable 50,560 (7,621)
Accrued liabilities and
other (8,707) 4,125
Income taxes payable (27,329) (88,035)
Other long-term liabilities 1,845 11,584
Net cash provided by
(used in) operating
activities 41,513 (74,454)
Investing activities:
Additions to property and
equipment (69,549) (60,510)
Purchases of short-term
investments --- (226)
Sales of short-term investments --- 50,605
Net proceeds from sales of
property and equipment 8 ---
Net cash used in
investing activities (69,541) (10,131)
Financing activities:
Repayment of Senior Notes --- (209,250)
Cash dividends paid to
stockholders (26,625) (32,670)
Repurchase of Common Stock (66,182) (71,197)
Proceeds from stock options
exercised 27,870 25,787
Tax benefits from stock options
exercised 16,065 16,794
Proceeds from issuance of Common
Stock and other 1,791 2,178
Change in cash overdraft 1,980 ---
Net cash used in
financing activities (45,101) (268,358)
Net decrease in cash and equivalents (73,129) (352,943)
Cash and equivalents at beginning of
period 452,449 535,852
Cash and equivalents at end of period $379,320 $182,909
Michaels Stores, Inc.
Summary of Operating Data
(Unaudited)
The following table sets forth the percentage relationship to net sales
of each line item of our unaudited consolidated statements of income:
Quarter Ended Six Months Ended
July 29, July 30, July 29, July 30,
2006 2005 (A) 2006 2005 (A)
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales and occupancy expense 64.4 64.6 62.9 62.8
Gross profit 35.6 35.4 37.1 37.2
Selling, general, and administrative
expense 31.6 29.9 30.2 28.8
Store pre-opening costs 0.2 0.2 0.2 0.3
Operating income 3.8 5.3 6.7 8.1
Interest expense --- 2.0 --- 1.3
Other (income) and expense, net (0.4) (0.3) (0.6) (0.3)
Income before income taxes and
cumulative effect of accounting
change 4.2 3.6 7.3 7.1
Provision for income taxes 1.6 1.4 2.8 2.7
Income before cumulative effect of
accounting change 2.6 2.2 4.5 4.4
Cumulative effect of accounting
change, net of income tax --- --- --- 5.6
Net income 2.6 % 2.2 % 4.5 % (1.2)%
The following table sets forth certain of our unaudited operating data
(dollar amounts in thousands):
Quarter Ended Six Months Ended
July 29, July 30, July 29, July 30,
2006 2005 2006 2005
Michaels stores:
Retail stores open at beginning of
period 899 857 885 844
Retail stores opened during the
period 7 13 24 27
Retail stores opened (relocations)
during the period 2 3 5 11
Retail stores closed during the
period (1) --- (4) (1)
Retail stores closed (relocations)
during the period (2) (3) (5) (11)
Retail stores open at end of
period 905 870 905 870
Aaron Brothers stores:
Retail stores open at beginning of
period 165 165 166 164
Retail stores opened during the
period --- --- --- 1
Retail stores closed during the
period --- --- (1) ---
Retail stores open at end of
period 165 165 165 165
Recollections stores:
Retail stores open at beginning of
period 11 9 11 8
Retail stores opened during the
period --- 2 --- 3
Retail stores open at end of
period 11 11 11 11
Star Decorators Wholesale stores:
Wholesale stores open at beginning
of period 4 4 4 3
Wholesale stores opened during the
period --- --- --- 1
Wholesale stores open at end of
period 4 4 4 4
Total store count at end of period 1,085 1,050 1,085 1,050
Other operating data:
Average inventory per Michaels
store (B) $903 $1,028 $903 $1,028
Comparable store sales (decrease)
increase (C) (0.3)% 4.2 % (1.7)% 6.1 %
Michaels Stores, Inc.
Footnotes to Financial and Operating Data Tables
(Unaudited)
(A) In the fourth quarter of the fiscal year ended January 28, 2006, the
Company changed its method of accounting for merchandise inventories
from a retail inventory method to the weighted average cost method,
effective as of the beginning of that fiscal year. As a result, the
Company recorded a cumulative effect of accounting change, net of
tax, of $88.5 million in the first quarter of fiscal 2005. In
addition, the Company elected to early adopt the provisions of
Statement of Financial Accounting Standards No. 123(R), Accounting
for Stock Based Compensation, which requires all share-based payments
to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair value over
the requisite service period. The Company applied the modified
retrospective transition method as permitted by SFAS No. 123(R) from
the beginning of fiscal 2005. Thus, the previously reported results
for the quarter and six months ended July 30, 2005 have been adjusted
to reflect the adoption of the weighted average cost method and the
impact of share based compensation expense under the provisions of
SFAS No. 123(R).
(B) Average inventory per Michaels store calculation excludes Aaron
Brothers, Recollections, and Star Decorators Wholesale stores.
(C) Comparable store sales increase represents the increase in net sales
for stores open the same number of months in the indicated period and
the comparable period of the previous year, including stores that
were relocated or expanded during either period. A store is deemed to
become comparable in its 14th month of operation in order to
eliminate grand opening sales distortions. A store temporarily
closed more than 2 weeks due to a catastrophic event is not
considered comparable during the month it closed. If a store is
closed longer than 2 weeks but less than 2 months, it becomes
comparable in the month in which it reopens, subject to a mid-month
convention. A store closed longer than 2 months becomes comparable
in its 14th month of operation after its reopening.
SOURCE Michaels Stores, Inc.
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CONTACT:
Lisa K. Klinger, Vice President - Treasurer
and Investor Relations of Michaels Stores, Inc., +1-972-409-1528,
or klingerl@michaels.com
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