A view of the industry through the
eyes of a chain buyer.
Highlights of Michaels'
The finances and the plans.
Staff Report (June 4. 2012)
(Note: Recently Michaels filed a
statement with the Securities & Exchange Commission regarding its
intent to hold an Initial Public Offering (IPO) of common stock.
Below are highlights of the 220-page filing. To read the complete
New Stores. During this fiscal year, "we
anticipate opening 45 to 50 new Michaels stores, which includes 10
to 15 relocations, 10 to 15 new urban and small-market formats, as
well as seven stores in Québec." There are plans to open stores in
Puerto Rico by 2014. Store openings will be funded primarily by cash
Products. "We plan to increase the
penetration of our private branded products assortment and believe
additional opportunities exist through global sourcing and product
design to reduce costs and balance value, selection and new product
introductions. We will continue to replace third party offerings
with our private branded products to enhance our gross margin. In
addition to capitalizing on our direct sourcing capabilities,
increasing our private brand offerings will allow us to more
effectively tailor our products to customer tastes, control costs
and manage our supply chain."
Media. "A substantial portion of our
promotional activities utilize circular advertisements in local
newspapers. A continued decline in consumer subscriptions of these
newspapers could reduce the frequency with which consumers receive
our circular advertisements, thereby negatively affecting sales,
results of operations and cash flow." (CLN's Comment: Yet
more evidence of the change in hard-copy publishing.)
Execs. "We are dependent on the
services, abilities and experience of our executive officers,
including John B. Menzer, our Chief Executive Officer, and
Charles M. Sonsteby, our Chief Administrative Officer and Chief
Financial Officer. Mr. Menzer is currently on medical leave from the
Company and the timing of his return is unclear. The permanent loss
of the services of any of these senior executives and any change in
the composition of our senior management team could have a negative
impact on our ability to execute on our business and operating
IPO Purpose. Proceeds from the stock
offering will be used to to repurchase or redeem all outstanding
indebtedness under the Subordinated Discount Notes (an aggregate
amount of $306 million of which was outstanding as of January 28,
2012), and to repurchase or redeem all, or a portion, of the Senior
Subordinated Notes (an aggregate amount of $393 million of which was
outstanding as of January 28, 2012). Michaels plans to repay any
remainder of the Senior Subordinated Notes with cash on hand. Any
excess proceeds will be used for working capital and other general
Miscellaneous. The private brand
merchandise represented 44% of total net sales, up from 32% in
fiscal 2010. … Direct imports, as a percent of total sales,
increased to 26% compared to 23% in fiscal 2010. … There will be
"frequent" merchandise resets.
Vendor Allowances. "We recognized vendor
allowances of $115 million, or 2.7% of Net sales, in fiscal 2011,
$112 million, or 2.8% of Net sales, in fiscal 2010, and
$133 million, or 3.4% of Net sales, in fiscal 2009….As a result of
our increased direct import penetration, vendor allowances, as a
percentage of sales, have been declining and we expect this trend to
continue in future years."
Gift Cards. "We record a gift card
liability on the date we issue the gift card to the customer. We
record revenue and reduce the gift card liability as the customer
redeems the gift card. The deferred revenue associated with
outstanding gift cards increased $4 million from $26 million at
January 29, 2011, to $30 million as of January 28, 2012."
Legal. There are numerous lawsuits
1. Some related to the pin pad tampering
that occurred in approximately 90 stores last year.
2. To date, MasterCard has assessed
approximately $400,000 of re-issuance fees and alleged fraud losses.
Michaels is appealing.
3. Lawsuits, usually in California,
claiming managers and employees were not paid properly.
4. A lawsuit in Ohio claiming "Michaels
advertised discounts on its framing products and/or services without
actually providing a discount to its customers since Michaels has a
perpetual sale on framing products and/or services in its stores."
Management Fees. Michaels paid
"$13 million and $14 million for fiscal 2011 and fiscal 2010,
respectively, consisting of management fees and associated expenses
paid to our Sponsors [Bain and Blackstone] and Highfields Capital
Bain. The company owns a piece of
various vendors Michaels uses:
1. From 2009 to 2011, Michaels paid
$83.3 million to Unisource for printing Michaels circular ads. Bain
owns 58% of Unisource, but Michaels stopped using Unisource during
the first quarter of fiscal 2011.
2. Bain also owns approximately 51% of
LogicSource, an external vendor for "print procurement services"
beginning in the fourth quarter of fiscal 2010. Since then Michaels
has paid LogicSource $5+ million.
3. Bain also owns an approximately 28%
of HD Supply, a vendor used for non-merchandise supplies. Michaels
paid HD approximately $1.1 million during fiscal 2009, but has not
used them since.
4. Bain also owns approximately 14% of
Sungard, utilized for certain integrated software and processing
services. The Blackstone Group owns a piece of Sunguard, too –
approximately 12%. In three years Michaels paid Sungard $0.6
Blackstone. The company also owns a
piece of various Michaels vendors.
1. Has a participation agreement with
CoreTrust Purchasing Group ("CPG"), a division of HealthTrust
Purchasing, designating CPG as Michaels' exclusive "group purchasing
organization" to purchase certain non-merchandise products and
services from other vendors. CPG receives a commission from the
vendors and remits a portion of the commission to an affiliate of
2. Blackstone owns approximately 77% of
RGIS, for count store inventory. In the last three years Michaels
paid RGIS $19.1 million.
3. Blackstone owns approximately 67% of
Vistar, used for all of the candy-type items in the stores. In the
past three years, Michaels has paid Vistar $57.6 million.
4. During the second quarter of fiscal
2011, Blackstone acquired approximately 99% of Centro Properties
Group, a vendor utilized to lease certain properties. Michaels paid
Centro $3.2 million in fiscal 2011 and expects to pay $6.0 million
this fiscal year.
5. An affiliate of Blackstone is Equity
Healthcare which negotiates with providers of health benefit plans
and other services. Michaels pays a fee of $2 per employee per
month. In recent years Michaels has had 5,400, 5,700, and 5,800
employees enrolled in health and welfare benefit plans
6. Blackstone owns approximately 99% of
Hilton Hotels, used for "hospitality services." . In the past two
years Michaels has paid Hilton $2.4 million.
7. In fiscal 2010 and 2009, The
Blackstone Group owned approximately 6% of Allied Waste, used for
waste management services. During that period Michaels paid Waste
Management $1.7 million.
8. In fiscal 2009, Blackstone owned
approximately 28% of Freedom Communications, used for newspaper
advertisements. Michaels paid Freedom $1.7 million in fiscal 2009.
9. Blackstone Group owns approximately
99% of La Quinta, used as the preferred hotel provider. In the past
three year Michaels has paid La Quinta $0.5 million.
Underwriters. Financial institutions
involved in the IPO are J.P. Morgan Securities, Goldman, Sachs,
Barclays Capital, Deutsche Bank Securities, Merrill Lynch, Pierce,
Fenner & Smith, Credit Suisse Securities (USA), Morgan Stanley, and
Wells Fargo Securities.