Michaels last week reported a third quarter net sales rise of 2.7% to $1.27 billion from $1.24 billion a year ago, including "very strong e-commerce sales," CEO Chuck Rubin said on a conference call, according to a transcript from Seeking Alpha. "While still a very small part of our total revenues online sales in the third quarter were nearly double the online sales in the third quarter last year."
The rise was driven by a 3.8% store comp increase (4.3% on a constant currency basis and 1.1% on a shifted-calendar basis) and operation of 19 net new stores, according to a company press release. The comp increase was driven by higher average ticket partially offset by a slight decline in customer transactions, Rubin said.
Operating income fell to $137.2 million from $153.9 million a year ago, due to lower gross profit and higher selling, general and administrative expenses, the company said. The decrease, as a percentage of sales, was due to higher distribution costs and inventory, including an unexpected write-down of $4.1 million related to a third-party product that failed to meet quality standards. Occupancy cost leverage and benefits from ongoing sourcing initiatives partly offset that. Net income rose 5% to $83.8 million from $79.8 million a year ago.
While Michaels moved the needle compared to the same period last year, the hobby retailer isn't faring as well as rivals and doesn't seem to be benefiting much from either the purring economy or the demise of Toys R Us, according to GlobalData Retail Managing Director Neil Saunders.
"This is especially so on the bottom line where operating profit fell by almost 11%, with net income only rising because of a much lower tax provision," Saunders said in comments emailed to Retail Dive, noting that not even the retailer's more robust top-line numbers do justice to healthy spending on arts and crafts, which GlobalData research shows grew 4.6% in the period.
"This runs counter to the narrative that Michaels likes to push that spending on crafts has been soft. In our view, such a position comes from a misreading of the data and a misunderstanding of the dynamics at play in the market," he warned. "Spending has not, in fact, weakened. If anything, the number of Americans engaging in arts and crafts of all kinds is at a high point."
The trouble for Michaels is that spending has shifted to generalists like Amazon and Target and to rivals in its own space. That includes legacy players like an expanding Hobby Lobby and a resurgent JoAnn, which has developed a new concept store and revamped merchandising, as well as more niche stores operating online, according to Saunders.
The company is now also contending with the specter of tariffs, and executives addressed that last week. If the 10% tariffs introduced in September stand, about $400 million of Michaels' product costs would be subject to higher duties next year, creating a "$40 million headwind to merchandising margin before any mitigation efforts," Chief Financial Officer Denise Paulonis told analysts. "Taking a holistic approach, our primary objective is to offset the total dollar impact of the tariffs rather than trying to maintain our product margin rate."
Although the tariffs situation remains unclear, the company does have options, and its ongoing sourcing initiatives are coming in handy, according to executives. "There's a lot of levers to pull; negotiation, switching factories, switching countries, retail price adjustments," Rubin said, noting that the company's size and scale and its plethora of private label merchandise are advantages. "[T]his sourcing effort has been a really good thing for us for the past couple of years and it has not run its full course. There is still more opportunity."
The company has raised prices and may again, but that "should have minimal impact to the customer" because its prices are so low, according to Paulonis.
During the period the company opened six Michaels stores, closed one and relocated four; at the end of the quarter, the company was operating 1,256 Michaels stores and 36 Pat Catan's stores.