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Michaels and A.C. Moore: Fourth Quarter, Fiscal Year Results

Profits, losses, and sales.

Staff Report (April 5, 2010)

 A.C. Moore 

Sales for the fourth quarter ended Jan. 2 were $149.7 million, down 9.3%, primarily due to a decrease in same-store sales of 8.8% and operating fewer stores. But the pre-tax loss for the quarter was $6.3 million, compared to a loss of $13.2 million a year ago. The company recorded an income tax benefit of $5.7 million, due to a change in Federal tax law that allowed it to carry back tax losses for five years from the previously allowed two years. Net loss for the quarter was $0.5 million ($0.02/share) compared to a net loss of $13.0 million ($0.64) a year ago. 

Fourth quarter 2009 results include a non-cash fixed asset impairment of $0.17 per share, closed store expenses of $0.14 per share and an income tax benefit of $0.24 per share. Fourth quarter 2008 results include a non-cash fixed asset impairment of $0.21 per share, closed store expenses of $0.28 per share, adjusting an interest rate swap to fair market value of $0.12 per share and a tax valuation allowance of $0.01 per share. 

Sales for fiscal 2009 year were $468.9 million, down 12.3% and same-store sales fell 10.8%. The net loss for the fiscal year was $25.9 million ($1.15), versus a net loss of $26.6 million ($1.31) a year ago. This year included a non-cash fixed asset impairment of $0.19/share, closed store expenses of $0.18, and an income tax benefit of $0.25 per share. Fiscal 2008 results include a non-cash asset impairment of $0.30 per share, closed store expenses of $0.37 per share, adjusting an interest rate swap to fair market value of $0.12 per share and a tax valuation allowance of $0.17 per share. 

CEO Rick Lepley stated, “Obviously, we are not pleased with our performance for last year. But, we did make significant progress on many of our strategic initiatives during 2009 that we believe will lead to improved operations by the end of 2010.” 

The current store count is 135. 

The complete press report is available HERE


For the year ended Jan. 30, Michaels’ fourth quarter income rose 32% to $86 million. For the year, net income was $107 million compared to a net loss of $5 million the previous year. 

Net sales for the quarter increased 2.4% to $1.300 billion and same-store sales rose 1.5%. Net sales for the year were $3.888 billion, up 1.9%, and same-store sales increased 0.2%. 

CEO John Menzer said, "We are pleased with the significant improvement in our overall operating performance during the fourth quarter. Our focus was on in-store execution to drive sales and maximize gross margin dollars, while effectively clearing through seasonal merchandise. Continued strong control over expenses and well managed inventory levels significantly improved profitability and cash flow." 

The 2.4% sales increase was due to $12 million in incremental sales from new stores and a 1.5% increase in same-store sales, which was driven by a 1.6% increase in average ticket partially offset by a 0.1% decrease in transactions. The fluctuation in exchange rates between the Canadian and U.S. dollars favorably affected same-store sales for the fourth quarter by approximately 130 basis points. For the year, sales from new stores contributed an incremental $64 million of the $71 million growth in sales while same-store sales increased 0.2% due to a 3.2% increase in transactions, partially offset by a 2.9% decrease in average ticket and an adverse impact of 0.1% related to the change in deferred custom framing revenue. 

The quarter’s gross margin rate, inclusive of occupancy costs, increased 350 basis points to 39.8% of sales, driven primarily by a 300 basis-point improvement in merchandise margin due to more conservative purchases of seasonal merchandise, enhanced management of promotional and clearance activity, and lower transportation costs. The year’s margin rate improved 140 basis points to 37.7% of sales, of which 120 basis points were related to improved merchandise margins. The increase was primarily due to improved management of clearance and promotional activity, lower costs as a result of increased direct import activity, and lower fuel and distribution costs. 

Selling, general and administrative (SG&A) expense in the quarter increased $20 million to $315 million and, as a percent of sales, increased 90 basis points to 24.2%, due primarily to increased performance-based bonus expense partially offset by a decrease in payroll and ad expense. SG&A expense for the year decreased $8 million, to $1.052 billion and as a percent to sales, 70 basis points to 27.1% of sales. The decline is due primarily to decreased payroll, severance, depreciation, ad and supplies expenses, partially offset by performance-based bonus expense – and prior year amounts included consulting expenses for studies related to consumer insights and other strategic initiatives. 

Operating income increased approximately $38 million to $199 million, or to 15.4% of sales, in the fourth quarter compared to a year ago. For the year operating income was $397 million, or 10.1% of sales, versus $304 million, or 8.0% of sales, for fiscal 2008. 

Interest expense for the quarter was down slightly to $70 million. Interest expense for the year was $257 million, down $45 million, due to a lower average interest rate on variable-rate debt and lower average debt levels. 

Adjusted EBITDA for the quarter was $238 million, or 18.3% of sales, versus $207 million, or 16.3% of sales, a year ago. Adjusted EBITDA for the year was $544 million, or 14.0% of sales, compared to $489 million, or 12.8% of sales, the prior year. 

Year-end debt levels totaled $3.803 billion compared to $3.929 billion a year ago. The decrease is the result of scheduled repayments of its Sr. Secured Term Loan totaling $23 million, as well as ending the year with no borrowings under its revolving credit facility. At the end of fiscal 2009, the company had $217 million in cash compared to $33 million the previous year, and $674+ million of availability under its revolving credit facility. As of March 24, 2010, the credit facility remains undrawn and availability was approximately $640 million. 

Average inventory per Michaels store at the end of fiscal 2009, inclusive of distribution centers, was $814,000, down 4.1% from last year due to efforts to improve inventory turns and productivity. 

Capital spending during fiscal 2009 totaled $43 million versus $85 million for fiscal 2008. Approximately $27 million of current year expenditures were attributable to real estate activities, including new, relocated, existing, and remodeled stores, with the remainder being attributable to strategic initiatives and maintenance requirements.  

Michaels currently plans capital expenditures this year to be $90-$100 million as it accelerates new store openings and resumes investment in infrastructure and other long-term investments. 

During the past year, Michaels opened 23 new stores, including five relocations, and closed four Michaels stores. The company also closed nine Aaron Brothers stores. 



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