IRVING, TX -- (MARKET WIRE) -- 12/02/08 -- Michaels Stores, Inc. (the "Company") today reported a net loss for the quarter ended November 1, 2008, of $20 million compared to an $18 million loss for the quarter ended November 3, 2007. The year-to-date net loss improved $15 million to $70 million for the nine months ended November 1, 2008, compared to a net loss of $85 million for the corresponding period of the prior year.
Net sales for the third quarter decreased 3.0% to $906 million from $934 million last year, with same-store sales declining 6.5%. Sales for the year-to-date period decreased 0.5% to $2.549 billion for the nine months ended November 1, 2008 from $2.561 billion for the corresponding period of the prior year. Same-store sales declined 4.1% for the year-to-date period.
Brian Cornell, Chief Executive Officer, said, "We continue to face difficult economic conditions, and the results for the quarter reflect the softness in spending on higher ticket items, particularly within the Seasonal and Home Décor categories. However, we were encouraged by the relative strength of our core Arts and Crafts business which declined only slightly for the quarter. While our long term strategic initiatives remain a priority, in order to manage through near-term challenges, our immediate focus is on delivering a value message through our merchandising and marketing efforts, controlling expenses, and preserving liquidity."
Operating Results
The 6.5% decline in same-store sales for the quarter was the result of a 2.8% decrease in average ticket, a 3.9% decrease in transactions, and a 0.2% increase in Custom Frame deliveries. For the year-to-date period, the 4.1% decline in same store sales was due to a 1.2% decrease in average ticket and a 2.9% decrease in transactions. Canadian currency translation reduced the average ticket for the third quarter by approximately 0.7% and added approximately 0.3% for the first nine months of fiscal 2008.
The Company's gross margin rate, inclusive of occupancy costs, decreased 120 basis points to 35.5% in the third quarter and 110 basis points on a year-to-date basis to 36.3%. The decline in the gross margin rate for the third quarter was driven primarily by a deleveraging in occupancy costs partly offset by a 10 basis point increase in merchandise margin. The year-to-date gross margin rate decline was primarily driven by a deleveraging in occupancy costs and a 40 basis point reduction in merchandise margin. The decrease in the Company's year-to-date merchandise margin rate was principally due to continued clearance and promotional programs partly offset by benefits from ongoing product sourcing initiatives.
Selling, general, and administrative expense in the third quarter decreased $14 million, a 5.4% decrease versus the prior year period, to $247 million, and declined 60 basis points to 27.3% as a percent of sales primarily due to a reversal of year-to-date bonus accruals. Year-to-date selling, general and administrative expense increased $7 million, to $765 million. As a percent to sales, selling, general and administrative expense increased 40 basis points to 30.0% of sales from 29.6% for the same period last year, resulting primarily from deleveraging of store expenses, incremental in-store investments and increased corporate payroll and severance expense, which were partially offset by lower bonus expense accruals.
Operating income increased approximately $1 million to $68 million, or to 7.5% of sales, in the third quarter of fiscal 2008 from $67 million, or 7.2% of sales in the third quarter of fiscal 2007. The increase was due primarily to lower selling, general and administrative expense and transaction expenses, partly offset by the reduction in gross profit. Year-to-date fiscal 2008 operating income was $143 million, or 5.6% of sales, versus $154 million, or 6.0% of sales, for the same period of fiscal 2007. The decrease in year-to-date operating income was primarily due to reduced gross profit and increased selling, general and administrative expenses, which were partially offset by reduced transaction costs.
Interest expense was lower by $18 million and $54 million for the quarter and the first nine months, respectively, due to a lower average interest rate on our floating rate debt and lower average debt levels.
Adjusted EBITDA for the third quarter of fiscal 2008 was $112 million, or 12.4% of sales, versus $118 million, or 12.6% of sales, for the same period last year. Year-to-date fiscal 2008 Adjusted EBITDA was $282 million, or 11.1% of sales, versus $321 million, or 12.5% of sales, in the first nine months of fiscal 2007. Reconciliations of GAAP measures to non-GAAP Adjusted EBITDA presented herein are included at the end of this press release.
Balance Sheet and Cash Flow
Third quarter debt levels totaled $4.183 billion, largely flat to last year's quarter ending balance of $4.181 billion. During the quarter, the Company made a $5.9 million amortization payment on its Senior Secured Term Loan. At the end of the third quarter, the Company had $92 million in cash and over $510 million of availability under its revolving credit facility compared to $57 million in cash and $509 million of availability under its credit facility as of the end of the third quarter last year. As of December 1, 2008, availability under the credit facility increased to approximately $630 million.
Average inventory per Michaels store at the end of the third quarter of fiscal 2008, inclusive of distribution centers, was flat to last year's balance of $1.02 million for the same period.
Capital spending for the nine months ended November 1, 2008, totaled $66 million versus $86 million for the same period last year. Nearly $40 million of this year's spend is attributable to real estate activities, such as new, relocated, existing and remodeled stores, with the remainder being attributable to strategic initiatives and maintenance requirements. In light of the current economic environment, the Company will be evaluating its capital expenditure plan for 2009 and currently expects its real estate activity to be significantly reduced by scaling back the new store opening program and focusing on the best opportunities available in the marketplace.
During the first nine months of fiscal 2008, the Company opened 50 new stores, relocated nine stores and remodeled 11 Michaels stores. In addition, the Company relocated one and closed three Aaron Brothers stores during this period.
The Company will host a conference call at 4:00 p.m. central time today, hosted by Chief Executive Officer, Brian Cornell and Executive Vice President and Chief Financial Officer, Elaine Crowley. Those who wish to participate in the call may do so by dialing 973-935-8513, conference ID# 9430846. Any interested party will also have the opportunity to access the call via the Internet at www.michaels.com. To listen to the live call, please go to the website at least 15 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 www.michaels.com or by phone at 800-642-1687, PIN #9430846.
Michaels Stores, Inc. is North America's largest specialty retailer of arts, crafts, framing, floral, wall décor, and seasonal merchandise for the hobbyist and do-it-yourself home decorator. As of December 1, 2008, the Company owns and operates 1,014 Michaels stores in 49 states and Canada, and 163 Aaron Brothers stores.
This news release 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 the Company 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 February 2, 2008 and in our Quarterly Reports on Form 10-Q for the quarter ended May 3, 2008 and August 2, 2008. Specific examples of forward-looking statements include, but are not limited to, forecasts of same-store sales growth, operating income, and forecasts of other financial performance. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of risks, uncertainties, and other factors, many of which are outside of our control, that could cause actual results to materially differ from such statements. Such risks, uncertainties, and other factors include, but are not necessarily limited to: risks related to our substantial indebtedness; our debt agreements contain restrictions that limit our flexibility in operating our business; our growth depends on our ability to open new stores; our success will depend on how well we manage our business; we may fail to optimize or adequately maintain our perpetual inventory and automated replenishment systems; improvements to our supply chain may not be fully successful; changes in customer demands could materially adversely affect our sales, operating results, and cash flow; unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our sales, operating results, and cash flow; changes in newspaper subscription rates may result in reduced exposure to our circular advertisements; changes in consumer confidence could result in a reduction in consumer spending on items perceived to be discretionary; failure to adequately maintain the security of our electronic and other confidential information could materially adversely affect our financial condition and operating results; our suppliers may fail us; our reliance on foreign suppliers increases our risk of obtaining adequate, timely, and cost-effective product supplies; product recalls and/or product liability may adversely impact our operations and merchandise offerings; significant increases in inflation or commodity prices such as petroleum, natural gas, electricity, steel and paper may adversely affect our costs, including cost of merchandise; our information systems may prove inadequate; a weak fourth quarter would materially adversely affect our operating results; competition could negatively impact our operations; the interests of our controlling stockholders may conflict with the interests of our creditors; and other factors as set forth in the our prior filings with the Securities and Exchange Commission, including those set forth under Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008. 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 (www.michaels.com).
Michaels Stores, Inc.
Supplemental Disclosures Regarding Non-GAAP Financial Information
The following table sets forth the Company's Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The Company defines EBITDA as net income before interest, income taxes, discontinued operations, goodwill impairment, depreciation and amortization. Additionally, the table presents Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"). The Company defines Adjusted EBITDA as EBITDA adjusted for certain defined amounts that are added to or subtracted from EBITDA in accordance with the Company's credit agreements (collectively, the "Adjustments"). The Adjustments are described in further detail in the footnotes to the table below.
The Company has presented EBITDA and Adjusted EBITDA in this press release to provide investors with additional information to evaluate our operating performance and our ability to service our debt. The Company uses EBITDA, among other things, to evaluate operating performance, to plan and forecast future periods' operating performance, and as an incentive compensation target for certain management personnel. The Company uses Adjusted EBITDA in its assessment to make restricted payments, as defined within its Senior Secured term loan which was executed on October 31, 2006. Contained in that agreement are limitations on the Company's ability to make restricted payments, with the eligibility to make such payments partly dependent upon Adjusted EBITDA.
As EBITDA and Adjusted EBITDA are not measures of operating performance or liquidity calculated in accordance with U.S. GAAP, these measures should not be considered in isolation of, or as a substitute for, net income, as an indicator of operating performance, or net cash provided by operating activities as an indicator of liquidity. Our computation of EBITDA and Adjusted EBITDA may differ from similarly titled measures used by other companies. As EBITDA and Adjusted EBITDA exclude certain financial information compared with net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded. The table below shows a reconciliation of EBITDA and Adjusted EBITDA to net earnings and net cash provided by operating activities.
Michaels Stores, Inc.
Consolidated Balance Sheets
(In millions, except share and per share amounts)
(Unaudited)
Subject to reclassification
November February November
1, 2008 2, 2008 3, 2007
--------- --------- ---------
ASSETS
Current assets:
Cash and equivalents $ 92 $ 29 $ 57
Merchandise inventories 1,083 845 1,027
Prepaid expenses and other 83 70 74
Deferred income taxes 30 31 35
Income tax receivable 38 5 78
Current assets - discontinued
operations - - 9
--------- --------- ---------
Total current assets 1,326 980 1,280
--------- --------- ---------
Property and equipment, at cost 1,204 1,155 1,143
Less accumulated depreciation (802) (722) (698)
--------- --------- ---------
402 433 445
--------- --------- ---------
Goodwill 94 94 116
Debt issuance costs, net of accumulated
amortization of $35 at November 1, 2008;
$22 at February 2, 2008; and $18 at
November 3, 2007 90 103 107
Other assets - 4 7
Non-current assets - discontinued
operations - - (1)
--------- --------- ---------
184 201 229
--------- --------- ---------
Total assets $ 1,912 $ 1,614 $ 1,954
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 274 $ 221 $ 282
Accrued liabilities and other 336 332 333
Current portion of long-term debt 432 122 445
Current liabilities - discontinued
operations 1 4 2
--------- --------- ---------
Total current liabilities 1,043 679 1,062
--------- --------- ---------
Long-term debt 3,751 3,741 3,736
Deferred income taxes 5 4 16
Other long-term liabilities 76 80 81
Long-term liabilities - discontinued
operations 1 2 1
--------- --------- ---------
Total long-term liabilities 3,833 3,827 3,834
--------- --------- ---------
4,876 4,506 4,896
--------- --------- ---------
Commitments and contingencies
Stockholders' deficit:
Common Stock, $0.10 par value,
220,000,000 shares authorized;
118,376,402 shares issued and
outstanding at November 1, 2008;
118,421,069 shares issued and
outstanding at February 2, 2008;
118,451,736 shares issued and
outstanding at November 3, 2007 12 12 12
Additional paid-in capital 17 12 11
Accumulated deficit (2,996) (2,926) (2,980)
Accumulated other comprehensive income 3 10 15
--------- --------- ---------
Total stockholders' deficit (2,964) (2,892) (2,942)
--------- --------- ---------
Total liabilities and stockholders'
deficit $ 1,912 $ 1,614 $ 1,954
========= ========= =========
Michaels Stores, Inc.
Consolidated Statements of Operations
(In millions)
(Unaudited)
Subject to reclassification
Quarter Ended Nine Months Ended
-------------------- --------------------
November November November November
1, 2008 3, 2007 1, 2008 3, 2007
--------- --------- --------- ---------
Net sales $ 906 $ 934 $ 2,549 $ 2,561
Cost of sales and occupancy
expense 584 591 1,623 1,602
--------- --------- --------- ---------
Gross profit 322 343 926 959
Selling, general, and
administrative expense 247 261 765 758
Transaction expenses - 8 - 29
Related party expenses 4 4 12 12
Store pre-opening costs 3 3 6 6
--------- --------- --------- ---------
Operating income 68 67 143 154
Interest expense 77 95 231 285
Other (income) and expense, net 3 (6) 3 (11)
--------- --------- --------- ---------
Loss before income taxes and
discontinued operations (12) (22) (91) (120)
Provision (benefit) for income
taxes 8 (9) (21) (42)
--------- --------- --------- ---------
Loss before discontinued
operations (20) (13) (70) (78)
Discontinued operations loss,
net of income tax - (5) - (7)
--------- --------- --------- ---------
Net loss $ (20) $ (18) $ (70) $ (85)
========= ========= ========= =========
Michaels Stores, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Subject to reclassification
Nine Months Ended
--------------------
November November
1, 2008 3, 2007
--------- ---------
Operating activities:
Net loss $ (70) $ (85)
Adjustments:
Depreciation and amortization 94 94
Share-based compensation 6 4
Deferred financing costs amortization 13 13
Accretion of subordinated discount notes 29 25
Impairment of discontinued operations - 6
Other 1 (1)
Changes in assets and liabilities:
Merchandise inventories (250) (188)
Prepaid expenses and other (5) -
Deferred income taxes and other 3 (14)
Accounts payable 51 56
Accrued interest (9) 10
Accrued liabilities and other 13 39
Income taxes receivable (37) (52)
Other long-term liabilities (5) 13
--------- ---------
Net cash used in operating activities (166) (80)
--------- ---------
Investing activities:
Additions to property and equipment (66) (86)
--------- ---------
Net cash used in investing activities (66) (86)
--------- ---------
Financing activities:
Borrowings on asset-based revolving credit
facility 749 793
Payments on asset-based revolving credit facility (439) (578)
Repayments on senior secured term loan facility (18) (18)
Equity investment of Management - 8
Repurchase of new Common Stock (1) (1)
Payments of capital leases (4) (6)
Change in cash overdraft 9 (5)
Other (1) -
--------- ---------
Net cash provided by financing activities 295 193
========= =========
Net increase in cash and equivalents 63 27
Cash and equivalents at beginning of period 29 30
--------- ---------
Cash and equivalents at end of period $ 92 $ 57
========= =========
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 operations:
(Schedule may not foot due to rounding)
Quarter Ended Nine Months Ended
--------------------- ---------------------
November November November November
1, 2008 3, 2007 1, 2008 3, 2007
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense 64.5 63.3 63.7 62.6
--------- --------- --------- ---------
Gross profit 35.5 36.7 36.3 37.4
Selling, general, and
administrative expense 27.3 27.9 30.0 29.6
Transaction expenses - 0.9 - 1.1
Related party expenses 0.4 0.4 0.5 0.5
Store pre-opening costs 0.3 0.3 0.2 0.2
--------- --------- --------- ---------
Operating income 7.5 7.2 5.6 6.0
Interest expense 8.5 10.2 9.0 11.1
Other (income) and expense,
net 0.3 (0.6) 0.1 (0.4)
--------- --------- --------- ---------
Loss before income taxes
and discontinued
operations (1.3) (2.4) (3.5) (4.7)
Income tax expense
(benefit) 0.9 (1.0) (0.8) (1.7)
--------- --------- --------- ---------
Loss before discontinued
operations (2.2) (1.4) (2.7) (3.0)
Discontinued operations
loss, net of income tax - (0.5) - (0.3)
--------- --------- --------- ---------
Net loss (2.2)% (1.9)% (2.7)% (3.3)%
========= ========= ========= =========
The following table sets
forth certain of our
unaudited operating data:
Quarter Ended Nine Months Ended
--------------------- ---------------------
November November November November
1, 2008 3, 2007 1, 2008 3, 2007
--------- --------- --------- ---------
Michaels stores:
Retail stores open at
beginning of period 991 938 963 921
Retail stores opened
during the period 22 23 50 43
Retail stores opened
(relocations) during
the period 3 4 9 11
Retail stores closed
during the period - - - (3)
Retail stores closed
(relocations) during
the period (3) (4) (9) (11)
--------- --------- --------- ---------
Retail stores open at
end of period 1,013 961 1,013 961
Aaron Brothers stores:
Retail stores open at
beginning of period 164 167 166 166
Retail stores opened
during the period - - - 2
Retail stores opened
(relocations) during
the period - - 1 -
Retail stores closed
during the period (1) - (3) (1)
Retail stores closed
(relocations) during
the period - - (1) -
--------- --------- --------- ---------
Retail stores open at
end of period 163 167 163 167
--------- --------- --------- ---------
Total store count at end of
period 1,176 1,128 1,176 1,128
========= ========= ========= =========
Other operating data:
Average inventory per
Michaels store (1) $ 1,022 $ 1,023 $ 1,022 $ 1,023
Comparable store sales
(decrease) increase (2) (6.5)% 1.9% (4.1)% 0.7%
Michaels Stores, Inc.
Footnotes to Financial and Operating Data Tables
(Unaudited)
(1) Average inventory per Michaels store calculation excludes Aaron
Brothers.
(2) Comparable store sales (decrease) increase represents the (decrease)
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.
Michaels Stores, Inc.
Reconciliation of Adjusted EBITDA
(in millions)
Nine Nine
Quarter months Quarter months
ended ended ended ended
November November November November
1, 2008 1, 2008 3, 2007 3, 2007
--------- --------- --------- ---------
Cash flows from operating
activities $ (68) $ (166) $ (50) $ (80)
Depreciation and amortization (31) (94) (32) (94)
Share-based compensation (2) (6) (1) (4)
Deferred financing cost
amortization (5) (13) (4) (13)
Accretion of subordinated
discount notes (10) (29) (8) (25)
Impairment of discontinued
operations - - (6) (6)
Other - - - 1
Changes in assets and
liabilities 96 238 83 136
--------- --------- --------- ---------
Net loss (20) (70) (18) (85)
Interest expense 77 231 95 285
Interest income - - - (1)
Income tax (benefit) provision 8 (21) (9) (42)
Depreciation and amortization 31 94 31 93
Discontinued operations - - 5 7
--------- --------- --------- ---------
EBITDA 96 234 104 257
Adjustments:
Share-based compensation 2 6 1 4
Strategic alternatives and
other legal - - 9 31
Sponsor Fees 3 10 3 10
Other 11 32 1 19
--------- --------- --------- ---------
Adjusted EBITDA $ 112 $ 282 $ 118 $ 321
========= ========= ========= =========
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