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Phone: 785-760-5071
Email: mike@clnonline.com


A view of the industry through the eyes of a chain buyer.

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Michaels' Fourth Quarter, Fiscal Year Report

Highlights of a positive report.

by Staff Report (April 4, 2011)

The company's third-quarter sales and margins were up and costs were controlled, so why did the company post

Sales. For the fourth quarter ended Jan. 29, total sales were $1.331 billion, up 2.4% from a year ago. Same-store sales increased 0.7% due to a 0.3% increase in average ticket and a 0.4% increase in transactions. The fluctuation in exchange rates between the Canadian and U.S. dollars favorably affected same-store sales by approximately 40 basis points.

For the year, net sales increased 3.7% to $4.031 billion, thanks to a 2.5% increase in same-store sales and $47 million in sales from new stores. The increase in same-store sales was driven by a 1.3% increase in transactions and a 1.2% increase in average ticket including a favorable currency translation of approximately 70 basis points.

Comment. CEO John Menzer said custom framing, bakeware, and wall frame categories were particularly helpful in driving the sales growth.

Profit. Gross profit for the quarter, inclusive of occupancy costs, increased $6 million to $523 million. For the year, it increased $99 million to $1.564 billion.

Margins. Gross margin decreased 50 basis points to 39.3% for the quarter. The company said the decline was driven primarily by a 70 basis points decrease in merchandise margin. That was due to a decline in vendor allowances and higher freight costs, which were partially offset by lower merchandise costs from increased direct imports and improved pricing and promotion management. For the year, gross margin improved 110 basis points to 38.8% of sales.

SG&A. Selling, general and administrative expense in the quarter decreased $3 million to $312 million and, as a percentage of sales, decreased 80 basis points to 23.4% due primarily to decreased performance-based bonus expense. For the year, SG&A expense increased $7 million to $1.059 billion, but decreased 80 basis points as a percentage of sales.

Operating Income. Operating income increased $8 million to $207 million, (15.6% of sales) in the fourth quarter. For the year, it was $488 million (12.1%) from $397 million (10.1%). Net income increased 14% to $98 million in the quarter, but for the year, it dropped to $98 million from $107 million the previous year.

Interest. Interest expense dropped slightly to $69 million for the quarter, but increased $19 million for the year to $276 million. The company refinanced its $750 million Senior Notes during fiscal 2010, resulting in a loss on early extinguishment of debt of $53 million for the early call and tender premiums and remaining unamortized debt issuance costs.

EBITDA. Adjusted EBITDA (a measure of cash flow) for the quarter was $241 million, or 18.1% of sales, versus $238 million, or 18.3% of sales, for the same quarter last year. For the year it was $622 million, or 15.4% of sales, versus $544 million, or 14.0% of sales, the previous year.

Debt and Cash. Year-end debt levels totaled $3.668 billion, down from $3.803 billion a year ago. The cash balance at the end of the year was $319 million, up $102 million over a year ago. Michaels had no borrowings outstanding and $604 million available under its revolving credit facility. Subsequent to year-end, Michaels made an additional voluntary prepayment of $50 million toward its Senior Secured Term Loan.

Inventory. Average inventory per Michaels store at the end of the year was $758,000, down 6.8%, due to improved inventory turns and productivity.

Capital spending. This past year it jumped from $43 million to $81 million and is expected to increase to $115-$125 million this year, mostly for new, relocated, and remodeled stores.

Stores. During the year, the company opened 33 new stores, including 10 relocations, and closed one Michaels store and closed 15 Aaron Brothers stores. The current store count is 1,047 Michaels stores and 137 Aaron Brothers stores.

Call. Execs held a conference call with analysts and said, among other things, the company is looking at both smaller population centers and urban settings for smaller stores. A recording of the call is available. It can be accessed for the next three weeks www.michaels.com or by calling 800-642-1687 and using PIN # 34790384.

The complete report is available at www.michaels.com.




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