Here's Why Michaels (MIK) Stock Shows Promise Despite Woes

The Michaels Companies Inc. MIK is one of the few stocks that have been resilient in the pandemic-ridden market, driven by its prudent growth strategies. The company’s progress on its Maker Strategy, e-commerce and omni-channel growth, strong quarterly results, and preparations for the holiday season are the reasons for the stock’s outperformance lately.

Notably, the company delivered impressive second-quarter fiscal 2020 results in September, wherein the top and bottom lines surpassed the Zacks Consensus Estimates and grew year over year. Net sales grew 11.1% year over year on the back of strong comparable store sales (comps) growth and sales gain from an additional 13 stores. Comps growth was driven by a rise in new customers, existing customers with higher basket size, solid store traffic after stores reopened, and strength in the e-commerce business, stemming from robust demand.

Management is particularly encouraged about new customer additions, and is working toward retaining the same. The company also informed that all of its stores reopened from July. However, the persistence of the soft gross margin trend remains concerning.

We note that shares of the Zacks Rank #3 (Hold) company have gained 51.7% in the past three months compared with the industry’s growth of 32.3%.



Factors Outlining the Growth Story

Michaels embarked on a customer-centric, core 'Maker' strategy, which aims at strengthening the company’s retail foundation, boosting omni-channel experience and repositioning the business. It opened its first Maker store in McKinney, TX, which offers personalized assortment, better layout, improved services and a host of omni-channel capabilities. Going ahead, the company plans to open more such stores in fiscal 2020. In efforts to boost the retail foundation, it aims to provide the right products at the right prices. The company is on track with the optimization of merchandise flow, thereby, ensuring inventory availability. It is also working toward enhancing the in-store shopping experience and customer engagement.

Management also highlighted plans to transform its acquired AC Moore stores as Michaels stores in 2021. In August, the company revamped the Michaels rewards loyalty program, which has been designed to create long-term engagement with program members as well as strengthen relationship across the Maker community. Per the recent developments, it is reinventing store formats with a new in-store layout, inspiration hubs and an innovative checkout design under its core Maker strategy. As planned, it transformed two of its existing retail locations in the North Texas suburbs of McKinney and Plano into testing and learning concept stores for a more engaging shopping experience.

Additionally, we note that the company is shifting to store selling culture, crafting a customer-centric assortment, optimizing pricing and promotions, and maximizing marketing productivity to build a better business. It launched a store-selling initiative in August 2019 to shift from a task-based store culture to serving customers and selling.

Further, it is progressing well to maximize marketing productivity through its media-mix model, wherein it will shift to higher productivity media options such as digital and addressable TV, without increasing the spending. Michaels also implemented a pricing and promotion strategy, which is likely to help in optimizing discounts and improving customers’ perception of the value it offers through discounts, coupons and other promotional activities.

Moreover, Michaels remains focused on integrating its e-commerce and in-store operations to enhance the omni-channel experience. Its enhanced and expanded omni-channel capabilities include new delivery options like curbside pick-up, same-day delivery, expanded shipment from store and BOPIS along with in-app purchases to provide a seamless shopping experience. It is also putting together additional data analytics into its supply chain, inventory and marketing programs, which should help expand operating margins over time.

Furthermore, it recently announced plans to hire 16,000 associates for seasonal positions across the United States and Canada to prepare for the upcoming holiday season. The hiring will comprise of position for team members across the organization. The company also expects to strengthen its buy-online, pickup in-store (BOPIS) team to provide a safe and convenient shopping experience to customers during the holiday season.

Deterrents & Conclusion

Michaels has been witnessing weakness in margins for the past few quarters. Lower gross margin can be attributed to wholesale store closures, negative channel mix and higher tariffs.

Although uncertainties prevail regarding the effects of the pandemic and soft gross margin, we expect the recent positive trends and strategies to be beneficial to Michaels’ performance in the near term.

Stocks to Consider

DICKS Sporting Goods, Inc. DKS currently has an expected long-term earnings growth rate of 4.8% and it sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports HIBB, also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 13.8%.

Sally Beauty Holdings, Inc. SBH has an expected long-term earnings growth rate of 4.1% and a Zacks Rank #2 (Buy).

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