Michaels (MIK) Down 16% in a Month: Is a Turnaround Likely?

The Michaels Companies, Inc.MIK has failed to impress investors on the sales front as its top line lagged estimates in 10 of the last 14 quarters, including second-quarter fiscal 2018. Also, the company's dismal margins trend due to higher costs has been weighing on investors' sentiments.

In the past month, shares of this leading arts and crafts retailer have declined 16% against the industry 's 7% rally. Additionally, the Zacks Consensus Estimate of 44 cents for the third quarter of fiscal 2018 moved south 17% over the last 30 days. Earnings are envisioned to be 42-45 cents per share for the third quarter. The company's Growth Score of D further raises concerns.

Why Shares Are Declining

Apart from missing sales estimates in second-quarter fiscal 2018, the top line slipped year over year mainly due to the closure of 94 full-size Aaron Brothers stores in the fiscal first quarter. Also, decline in comparable store sales (comps) further led to decrease in sales. Consequently, earnings declined year over year, which plunged 21.1% in the quarter. Additionally, sluggish core arts and crafts industry trends remain a potent headwind for the company.

Michaels continued to witness soft margins in the fiscal second quarter, with second straight gross margin decline and operating margin was soft for three consecutive quarters. In the reported quarter, gross margin contracted 210 basis points (bps) mainly due to rise in distribution-related costs, higher promotional activity and occupancy cost deleverage. Further, operating margin decreased 150 bps. Looking back, gross margin contracted 90 bps in first-quarter fiscal 2018. Moreover, operating margin declined 110 bps and 50 bps in first-quarter fiscal 2018 and fourth-quarter fiscal 2017, respectively.

Meanwhile, Michaels' business remains highly exposed to seasonal risks. In fact, the company witnesses increased sales in the third and fourth quarters of the fiscal years. Also, intense competition from key players in the industry is a major threat to the company's margins and profitability.

Can Strategies Aid a Turnaround?

Despite these above-discussed headwinds, Michaels' efforts to revive performance are clear from its focus on enhancing omni-channel capabilities. Though e-commerce contributes a very small part of its total revenues, online sales in the reported quarter were more than double compared with the prior-year quarter. The uptick was mainly driven by improved traffic and higher conversion rates.

Further, the company remains focused on improving omni-channel capabilities like "Buy Online Pick-up In Store (BOPIS)" and ship-from-store. During the fiscal second quarter, Michaels expanded the number of stores in its ship-from-store program. As a result, the company now has more than 400 stores ready to fulfill e-commerce orders from its stores this holiday season. Notably, management expects focus on ship-from-store to cater to almost half of the online sales this holiday season.

In second-quarter fiscal 2018, Michaels introduced nine flagship stores, closed one and relocated seven flagship stores. Management intends to open 19 and relocate 21 namesake stores in the fiscal year, which includes five namesake stores and relocation of five outlets in the fiscal third quarter. We believe that these moves will generate higher sales and boost profitability.

Also, the company has reported bottom-line beat in four of the trailing five quarters, which continued in the fiscal second quarter. Management raised its earnings view for fiscal 2018 as well. The company now anticipates earnings of $2.29-$2.42 per share, up from the previous guidance of $2.19-$2.32.

Michaels currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Bottom Line

While the company's omni-channel efforts with earnings surprise history are impressive, it remains to be seen whether this can lift the stock's momentum too.

Meanwhile, investors might count on some better-ranked stocks from the same industry, enlisted below:

Five Below, Inc. FIVE has an impressive long-term earnings growth rate of 30% and a Zacks Rank #2 (Buy).

Tractor Supply Company TSCO , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 12.8%.

Office Depot, Inc. ODP pulled off an average positive earnings surprise of 9.8% in the preceding four quarters. The company carries a Zacks Rank of 2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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