SOURCE: Michaels Stores, Inc.

Michaels Stores, Inc.

December 01, 2009 16:00 ET

Michaels Stores, Inc. Reports $35 Million Improvement in Net Income

Positive 1.3% Third Quarter Same-Store Sales

IRVING, TX--(Marketwire - December 1, 2009) - Michaels Stores, Inc. reported net income for the quarter ended October 31, 2009, of $15 million compared to a $20 million loss for the quarter ended November 1, 2008. For the first nine months of fiscal 2009, the Company reported net income of $21 million compared to a $70 million net loss for the same period of fiscal 2008.

John Menzer, Chief Executive Officer, said, "We are pleased with our overall performance during the third quarter. Our strong focus on execution, including the Halloween season, helped drive improved sales, gross margin and reduced per store inventory levels. In addition, a number of categories reset earlier this year continue to perform above expectations, with bakeware, bead and jewelry making and impulse being our top performing departments. Also, we expanded our operating margin by 150 basis points to 9.0% of sales, driven by strong cost control efforts and improvement in our gross margin rate.

"Looking to the fourth quarter, we will be focused on driving customer traffic and capturing sales through the remainder of this year. A large number of category resets implemented throughout this year has brought a new level of creative and inspirational merchandise to our customer. With gift creation and gift giving so prevalent in today's economy, our value message, Endless Creativity - Endless Savings, will be at the forefront of our communications. While the Company's transition to a customer-focused sales culture is still evolving, I am confident our new and improved merchandise and solid store level execution of our customer service goals, we are well positioned for this year's holiday season."

Operating Results

Net sales for the quarter ended October 31, 2009, were $929 million, a 2.5% increase over last year's net sales of $906 million. Same-store sales for the quarter increased 1.3% due to a 4.7% increase in transactions, a 3.5% decrease in average ticket and a positive 0.1% impact from deferred custom framing revenue. Canadian currency translation positively affected same-store sales for the second quarter by approximately 20 basis points.

Year-to-date net sales increased 1.5% to $2.588 billion from $2.549 billion for the same period last year. Same-store sales decreased 0.5% over the same period a year ago on a 5.1% decrease in average ticket, a 4.7% increase in transactions and a negative 0.1% impact from deferred custom framing revenue. Canadian currency translation adversely affected same-store sales for the first nine months of fiscal 2009 by approximately 80 basis points.

The Company's third quarter gross margin increased 180 basis points to 37.3% and year-to-date gross margin increased 30 basis points to 36.6%. These increases were primarily driven by improvements in merchandise margin due to lower distribution and freight costs.

Selling, general and administrative expense in the third quarter increased $12 million to $259 million, or as a percent of sales, to 27.9% compared to 27.3% in the third quarter of fiscal 2008. The increase is due primarily to a $20 million unfavorable comparison of bonus accruals against prior year partly offset by reduction in payroll and advertising expense. Year-to-date selling, general and administrative expense decreased $28 million to $737 million, or as a percent of sales declined 150 basis points, to 28.5% of sales from 30.0% last year. The decrease is primarily the result of reductions in payroll, severance, depreciation and advertising expense, partly offset by the reversal of bonus accruals compared to last year.

Operating income for the third quarter of fiscal 2009 increased $16 million to $84 million, or 9.0% percent of sales, compared to 7.5% for the third quarter of fiscal 2008. Year-to-date operating income was $198 million, or 7.6% of sales, versus $143 million, or 5.6% of sales, for the first nine months of fiscal 2008.

Interest expense was lower by $15 million, and $44 million for the quarter and year-to-date period, respectively, due to a lower average interest rate on our floating rate debt and lower average debt levels. Other income reflects a change in the fair value of an interest rate cap of $1 million for the third quarter and $16 million for the nine months ended October 31, 2009.

Adjusted EBITDA for the third quarter of fiscal 2009 increased 5.4% or approximately $6 million to $118 million, from $112 million for the same period last year. Year-to-date Adjusted EBITDA was $307 million, or 11.9% of sales, versus $282 million, or 11.1% of sales, in the first nine months of fiscal 2008. The Company presents Adjusted EBITDA to provide additional information to evaluate its operating performance and its ability to service its debt. 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

As of October 31, 2009, the Company's cash balance was $49 million. Third quarter debt levels declined $272 million to $3.911 billion compared to$4.183 billion as of the end of the third quarter of fiscal 2008. Availability under the revolving credit facility was $799 million. During the quarter, the Company also made a $5.9 million amortization payment on its Senior Secured Term Loan.

Average inventory per Michaels store at the end of the third quarter of fiscal 2009, inclusive of distribution centers, was down 5.0% to $971,000 compared to $1.022 million at the end of the third quarter of fiscal 2008. The Company expects average inventory levels to be down to last year as of the end of fiscal 2009.

Capital spending for the nine months ended October 31, 2009, totaled $26 million, with $18 million attributable to real estate activities, such as new, relocated, existing and remodeled stores, and $8 million for strategic initiatives and maintenance activities.

Year-to-date, the Company opened 18 new stores and relocated five Michaels stores and closed nine Aaron Brothers stores.

The Company will host a conference call at 4:00 p.m. Central time on Tuesday, December 1, 2009, including Chief Executive Officer, John Menzer 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# 79813922. 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 # 79813922.

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 November 30, 2009, the Company owns and operates 1,027 Michaels stores in 49 states and Canada, and 152 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 January 31, 2009 and in our Quarterly Reports on Form 10-Q for the quarters ended May 2, 2009 and August 1, 2009. 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: the impact on our results of operations, cash flows and financial condition if the worldwide economic downturn continues or deteriorates further; 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; changes in customer demand 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; improvements to our supply chain may not be fully successful; our suppliers may fail us; our reliance on foreign suppliers increases our risk of obtaining adequate, timely, and cost-effective product supplies; risks associated with the vendors from whom our products are sourced could materially adversely affect our revenue and gross profit; product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our operations, merchandise offering, reputation and financial position; 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; we are co-sourcing certain of our information technology and accounts payable functions and may co-source other administrative functions, which will make us more dependent upon third parties; our information systems may prove inadequate; we may fail to optimize or adequately maintain our perpetual inventory and automated replenishment systems; failure to adequately maintain the security of our electronic and other confidential information could materially adversely affect our financial condition and operating results; if the Employee Free Choice Act is adopted, it would be easier for our associates to obtain union representation and our businesses could be adversely impacted; 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 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 January 31, 2009. 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 Statements of Operations
                              (In millions)
                               (Unaudited)


Subject to reclassification
                                Quarter Ended         Nine Months Ended
                            ----------------------  ----------------------
                            October 31, November 1, October 31, November 1,
                               2009        2008        2009        2008
                            ----------  ----------  ----------  ----------
Net sales                   $      929  $      906  $    2,588  $    2,549
Cost of sales and occupancy
 expense                           582         584       1,640       1,623
                            ----------  ----------  ----------  ----------
Gross profit                       347         322         948         926
Selling, general, and
 administrative expense            259         247         737         765
Related party expenses               4           4          11          12
Store pre-opening costs              -           3           2           6
                            ----------  ----------  ----------  ----------
Operating income                    84          68         198         143
Interest expense                    62          77         187         231
Other (income) and expense,
 net                                (1)          3         (21)          3
                            ----------  ----------  ----------  ----------
Income (loss) before income
 taxes                              23         (12)         32         (91)
Provision (benefit) for
 income taxes                        8           8          11         (21)
                            ----------  ----------  ----------  ----------
Net income (loss)           $       15  $      (20) $       21  $      (70)
                            ==========  ==========  ==========  ==========


                          Michaels Stores, Inc.
                        Consolidated Balance Sheets
            (In millions, except share and per share amounts)
                                (Unaudited)


Subject to reclassification
                                        October 31, January 31, November 1,
                                           2009        2009        2008
                                        ----------  ----------  ----------
                    ASSETS
Current assets:
  Cash and equivalents                  $       49  $       33  $       92
  Merchandise inventories                    1,039         900       1,083
  Prepaid expenses and other                    83          73          83
  Deferred income taxes                         41          41          30
  Income tax receivable                         12           2          38
                                        ----------  ----------  ----------
     Total current assets                    1,224       1,049       1,326
                                        ----------  ----------  ----------
Property and equipment, at cost              1,236       1,214       1,204
Less accumulated depreciation                 (911)       (832)       (802)
                                        ----------  ----------  ----------
                                               325         382         402
                                        ----------  ----------  ----------
Goodwill                                        94          94          94
Debt issuance costs, net of accumulated
 amortization of $52, $39, and $35,
 respectively                                   73          86          90
Deferred income taxes                           16          12           -
Other assets                                    28           2           -
                                        ----------  ----------  ----------
                                               211         194         184
                                        ----------  ----------  ----------
Total assets                            $    1,760  $    1,625  $    1,912
                                        ==========  ==========  ==========

 LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable                      $      274  $      230  $      274
  Accrued liabilities and other                353         275         336
  Current portion of long-term debt            139         173         432
  Income taxes payable                           1           2           -
  Current liabilities - discontinued
   operations                                    1           1           1
                                        ----------  ----------  ----------
     Total current liabilities                 768         681       1,043
                                        ----------  ----------  ----------
Long-term debt                               3,772       3,756       3,751
Deferred income taxes                            -           -           5
Other long-term liabilities                     78          74          76
Long-term liabilities - discontinued
 operations                                      1           1           1
                                        ----------  ----------  ----------
     Total long-term liabilities             3,851       3,831       3,833
                                        ----------  ----------  ----------
                                             4,619       4,512       4,876
                                        ----------  ----------  ----------
Commitments and contingencies
Stockholders' deficit:
  Common Stock, $0.10 par value,
   220,000,000 shares authorized;
   118,387,229 shares issued and
   outstanding at October 31, 2009;
   118,376,402 shares issued and
   outstanding at January 31, 2009;
   118,376,402 shares issued and
   outstanding at November 1, 2008              12          12          12
  Additional paid-in capital                    34          27          17
  Accumulated deficit                       (2,911)     (2,931)     (2,996)
  Accumulated other comprehensive
   income                                        6           5           3
                                        ----------  ----------  ----------
     Total stockholders' deficit            (2,859)     (2,887)     (2,964)
                                        ----------  ----------  ----------
Total liabilities and stockholders'
 deficit                                $    1,760  $    1,625  $    1,912
                                        ==========  ==========  ==========



                          Michaels Stores, Inc.
                  Consolidated Statements of Cash Flows
                              (In millions)
                               (Unaudited)

Subject to reclassification
                                                      Nine Months Ended
                                                    ----------------------
                                                      October    November
                                                        31,         1,
                                                       2009        2008
                                                    ----------  ----------
Operating activities:
  Net income (loss)                                 $       21  $      (70)
  Adjustments:
   Depreciation and amortization                            86          94
   Share-based compensation                                  6           6
   Deferred financing costs amortization                    13          13
   Accretion of subordinated discount notes                 33          29
   Change in fair value of interest rate cap               (16)          -
   Other                                                     -           1
   Changes in assets and liabilities:
    Merchandise inventories                               (133)       (250)
    Prepaid expenses and other                             (14)         (5)
    Deferred income taxes and other                        (12)          3
    Accounts payable                                        54          51
    Accrued interest                                        33          (9)
    Accrued liabilities and other                           42          13
    Income taxes receivable                                (11)        (37)
    Other long-term liabilities                              4          (5)
                                                    ----------  ----------
     Net cash provided by (used in) operating
      activities                                           106        (166)
                                                    ----------  ----------

Investing activities:
   Additions to property and equipment                     (26)        (66)
                                                    ----------  ----------
     Net cash used in investing activities                 (26)        (66)
                                                    ----------  ----------

Financing activities:
  Borrowings on asset-based revolving credit facility      621         749
  Payments on asset-based revolving credit facility       (655)       (439)
  Repayments on senior secured term loan facility          (18)        (18)
  Repurchase of new Common Stock                             -          (1)
  Payments of capital leases                                 -          (4)
  Change in cash overdraft                                 (12)          9
  Other                                                      -          (1)
                                                    ----------  ----------
     Net cash (used in) provided by financing
      activities                                           (64)        295
                                                    ----------  ----------

Net increase in cash and equivalents                        16          63
Cash and equivalents at beginning of period                 33          29
                                                    ----------  ----------
Cash and equivalents at end of period               $       49  $       92
                                                    ==========  ==========
Supplemental Cash Flow Information:
  Cash paid for interest                            $      109  $      199
                                                    ==========  ==========
  Cash paid for income taxes                        $       22  $       17
                                                    ==========  ==========



                          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
                                --------------------  -------------------
                                 October   November    October   November
                                   31,        1,         31,        1,
                                  2009       2008       2009       2008
                                ---------  --------   --------   --------
Net sales                           100.0%    100.0 %    100.0%     100.0 %
Cost of sales and occupancy
 expense                             62.7      64.5       63.4       63.7
                                ---------  --------   --------   --------
Gross profit                         37.3      35.5       36.6       36.3
Selling, general, and
 administrative expense              27.9      27.3       28.5       30.0
Related party expenses                0.4       0.4        0.4        0.5
Store pre-opening costs                 -       0.3        0.1        0.2
                                ---------  --------   --------   --------
Operating income                      9.0       7.5        7.6        5.6
Interest expense                      6.7       8.5        7.2        9.0
Other (income) and expense, net      (0.2)      0.3       (0.8)       0.1
                                ---------  --------   --------   --------
Income (loss) before income
 taxes                                2.5      (1.3)       1.2       (3.5)
Income tax provision (benefit)        0.9       0.9        0.4       (0.8)
                                ---------  --------   --------   --------
Net income (loss)                     1.6%     (2.2)%      0.8%      (2.7)%
                                =========  ========   ========   ========


The following table sets forth certain of our unaudited operating data:

                                   Quarter Ended       Nine Months Ended
                                -------------------   -------------------
                                 October   November    October   November
                                   31,        1,         31,        1,
                                  2009       2008       2009       2008
                                ---------  --------   --------   --------
Michaels stores:
  Retail stores open at
   beginning of period              1,023       991      1,009        963
  Retail stores opened during
   the period                           4        22         18         50
  Retail stores opened
   (relocations) during the
   period                               1         3          5          9
  Retail stores closed during
   the period                           -         -          -          -
  Retail stores closed
   (relocations) during the
   period                              (1)       (3)        (5)        (9)
                                ---------  --------   --------   --------
  Retail stores open at end of
   period                           1,027     1,013      1,027      1,013

Aaron Brothers stores:
  Retail stores open at
   beginning of period                155       164        161        166
  Retail stores opened during
   the period                           -         -          -          -
  Retail stores opened
   (relocations) during the
   period                               -         -          -          1
  Retail stores closed during
   the period                          (3)       (1)        (9)        (3)
  Retail stores closed
   (relocations) during the
   period                               -         -          -         (1)
                                ---------  --------   --------   --------
  Retail stores open at end of
   period                             152       163        152        163

                                ---------  --------   --------   --------
Total store count at end of
 period                             1,179     1,176      1,179      1,176
                                =========  ========   ========   ========

Other operating data:
  Average inventory per
   Michaels store (in
   thousands) (1)               $     971  $  1,022   $    971   $  1,022
  Comparable store sales
   decrease (2)                      1.3 %     (6.5)%     (0.5)%     (4.1)%



                             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 increase represents the 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     Quarter     months      months
                              ended       ended       ended       ended
                            October 31, November 1, October 31, November 1,
                               2009        2008        2009        2008
                            ----------  ----------  ----------  ----------

Cash flows from operating
 activities                 $       76  $      (68) $      106  $     (166)
Depreciation and
 amortization                      (28)        (31)        (86)        (94)
Share-based compensation            (2)         (2)         (6)         (6)
Deferred financing cost
 amortization                       (5)         (5)        (13)        (13)
Accretion of subordinated
 discount notes                    (11)        (10)        (33)        (29)
Change in fair value of
 interest rate cap                   1           -          16           -
Changes in assets and
 liabilities                       (16)         96          37         238
                            ----------  ----------  ----------  ----------
Net income (loss)                   15         (20)         21         (70)
Interest expense                    62          77         187         231
Interest income                      -           -           -           -
Income tax (benefit)
 provision                           8           8          11         (21)
Depreciation and
 amortization                       28          31          86          94
                            ----------  ----------  ----------  ----------
EBITDA                             113          96         305         234
Adjustments:
  Share-based compensation           2           2           6           6
  Strategic alternatives
   and other legal                   -           -           -           -
  Sponsor Fees                       4           3          11          10
  Termination expense                1           2           4          13
  Pre-opening costs                  1           2           2           6
  Multi-year initiatives
   (1)                               -           2           -           2
  Foreign currency
   translation gains/losses          -           3          (5)          3
  Store closing costs                1           -           4           2
  Gain on interest rate cap         (1)          -         (16)          -
  Other (2)                         (3)          2          (4)          6
                            ----------  ----------  ----------  ----------
Adjusted EBITDA             $      118  $      112  $      307  $      282
                            ==========  ==========  ==========  ==========



(1) Multi-year initiatives relate to store remodel costs.
(2) Other adjustments relate to items such as the moving & relocation
    expenses, franchise taxes, foreign currency hedge and legal
    settlements.