SOURCE: Michaels Stores, Inc.

Michaels Stores, Inc.

August 26, 2010 16:00 ET

Michaels Stores, Inc. Reports Record Sales and Operating Income for the Second Quarter

IRVING, TX--(Marketwire - August 26, 2010) - Michaels Stores, Inc. today reported unaudited financial results for the second quarter of fiscal 2010 ended July 31, 2010. Total sales for the quarter were $831 million, a 3.0% increase from fiscal 2009 second quarter sales of $807 million. Same-store sales for the comparable 13-week period increased 2.3%.

John Menzer, Chief Executive Officer, said, "While we had moderate comparable store sales growth this quarter, we were pleased with our 210 basis point improvement in gross margin which helped drive a 48% increase in operating income. Continued increases in direct import and focus on pricing and promotional strategies helped drive improved operating performance for the quarter."

Operating Results

Same-store sales for the quarter increased 2.3% due to a 1.4% increase in transactions, a 0.8% increase in average ticket, and a positive impact of 0.1% from deferred custom framing revenue. Canadian currency translation positively affected same-store sales for the second quarter by approximately 70 basis points.

Year-to-date net sales increased 4.4% to $1.732 billion from $1.659 billion for the same period last year. Same-store sales increased 3.6% over the same period a year ago on a 2.2% increase in average ticket, a 1.3% increase in transactions, and a positive 0.1% impact from deferred custom framing revenue. Canadian currency translation positively affected same-store sales for the first six months of fiscal 2010 by approximately 110 basis points.

The Company's second quarter gross margin increased 210 basis points to 37.5% driven by a merchandise margin improvement of 160 basis points and a 50 basis point reduction in occupancy costs. The improvement in merchandise margin is attributable to higher initial mark up, lower clearance markdowns and pricing initiatives. The reduction in occupancy costs is due to lower amortization expense and increased leverage on higher same-store sales. Year-to-date gross margin increased 220 basis points to 38.4% driven by an increase of 150 basis points in merchandise margin and increased leverage of 70 basis points in occupancy costs. The improvement in year-to-date merchandise margin is primarily attributable to higher initial mark up, lower clearance markdowns and pricing initiatives.

Selling, general and administrative expense in the second quarter increased $1 million to $233 million, or as a percent of sales, decreased to 28.0% compared to 28.7% in the second quarter of fiscal 2009. The 70 basis point decrease is primarily due to increased payroll leverage on higher same-store sales as well as lower group insurance expense. Year-to-date selling, general and administrative expense was flat to 2009 at $478 million. As a percent of sales, expenses declined 120 basis points, to 27.6% from 28.8% last year due to improved leverage on payroll and advertising expenses, lower group insurance costs, and a reduction in depreciation expense.

Operating income for the second quarter of fiscal 2010 increased $24 million to $74 million, or 8.9% percent of sales, compared to 6.2% for the second quarter of fiscal 2009. Year-to-date operating income was $179 million, or 10.3% of sales, versus $114 million, or 6.9% of sales, for the first half of fiscal 2009.

Interest expense increased $8 million for the second quarter to $70 million. Interest expense for the first half of fiscal 2010 increased $13 million to $138 million. The higher interest expense is primarily due to increased interest rates associated with our amended credit facilities. Other expense for the quarter reflects a $3 million loss from the change in the fair value of the interest rate cap and a $1 million loss from the change in foreign currency translation. During the second quarter of 2009, other income included a gain of $11 million from the change in the fair value of the interest rate cap, and a $4 million gain from foreign currency translation. Other expense for the year-to-date period reflects a $13 million loss from the change in the fair value of the interest rate cap partially offset by a $2 million gain from the change in foreign currency translation. In 2009, other income included a $15 million gain from the change in the fair value of the interest rate cap, and a $5 million gain from foreign currency translation.

For the quarter the Company reported a net loss of $1 million compared to net income of $2 million for the quarter ended August 1, 2009. For the first half of fiscal 2010, the Company reported net income of $12 million compared to $6 million for first half of fiscal 2009.

Adjusted EBITDA for the second quarter of fiscal 2010 increased 24.7% or approximately $21 million to $106 million, from $85 million for the same period last year. Year-to-date Adjusted EBITDA was $244 million, or 14.1% of sales, versus $192 million, or 11.6% of sales, in the first half of fiscal 2009. 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 July 31, 2010, the Company's cash balance was $69 million. Second quarter debt levels declined $256 million to $3.708 billion compared to $3.964 billion as of the end of second quarter of fiscal 2009. As of August 25, 2010, availability under the revolving credit facility was approximately $629 million.

Average inventory per Michaels store at the end of the second quarter of fiscal 2010, inclusive of distribution centers, was down 7.4% to $823,000 compared to $889,000 at the end of the second quarter of fiscal 2009. The decrease in average inventory per store is primarily due to a planned reduction of store inventory levels.

Capital spending for the six months ended July 31, 2010, totaled $33 million, with $21 million attributable to real estate activities, including new, relocated, and existing stores, and $12 million for information systems and corporate investments.

During the first half of fiscal 2010, the Company opened ten new stores and relocated seven Michaels stores and closed seven Aaron Brothers stores.

The Company will host a conference call at 4:00 p.m. Central time today, including Chief Executive Officer, John Menzer and Vice President - Finance and Interim Controller, Rick Jablonski. Those who wish to participate in the call may do so by dialing 973-935-8513, conference ID# 50926591. 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 #50926591.

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 August 25, 2010, the Company owns and operates 1,035 Michaels stores in 49 states and Canada, and 144 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 30, 2010 and in our Quarterly Reports on Form 10-Q for the quarter ended May 1, 2010. 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 worldwide economic conditions deteriorate further or if recovery from the downturn remains slow or prolonged; 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 have co-sourced certain of our information technology, accounts payable, payroll, accounting and human resources 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; unauthorized access to our electronic and other confidential information could materially adversely affect our financial condition and operating results; changes in regulations may adversely impact our business; 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 30, 2010. 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 (collectively, the "Adjustments") in accordance with the Company's $2.4 billion Senior secured term loan and $1.2 billion Asset-based revolving credit facilities. 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 metrics, to evaluate operating performance, to plan and forecast future periods' operating performance and as an element of its incentive compensation targets for certain management personnel. Adjusted EBITDA is a required calculation under the Company's Senior secured term loan and its Asset-based revolving credit facility. As it relates to the Senior secured term loan, Adjusted EBITDA is used in the calculations of fixed charge coverage and leverage ratios, which, under certain circumstances may result in limitations on the Company's ability to make restricted payments as well as the determination of mandatory repayments of the loans. Under the Asset-based revolving facility, Adjusted EBITDA is used in the calculation of fixed charge coverage ratios, which, under certain circumstances, may restrict the Company's ability to make certain payments (characterized as restricted payments), investments (including acquisitions) and debt repayments.

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          Six Months Ended
                            ----------------------  -----------------------
                             July 31,   August 1,    July 31,   August 1,
                               2010        2009        2010        2009
                            ----------  ----------  ----------- ----------
Net sales                   $      831  $      807  $     1,732 $    1,659
Cost of sales and occupancy
 expense                           520         521        1,067      1,058
                            ----------  ----------  ----------- ----------
Gross profit                       311         286          665        601
Selling, general, and
 administrative expense            233         232          478        478
Related party expenses               4           3            7          7
Store pre-opening costs              -           1            1          2
                            ----------  ----------  ----------- ----------
Operating income                    74          50          179        114
Interest expense                    70          62          138        125
Other (income) and expense,
 net                                 4         (14)          11        (20)
                            ----------  ----------  ----------- ----------
Income before income taxes           -           2           30          9
Provision for income taxes           1           -           18          3
                            ----------  ----------  ----------- ----------
Net (loss) income           $       (1) $        2  $        12 $        6
                            ==========  ==========  =========== ==========




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


Subject to reclassification
                                    July 31,    January 30,     August 1,
                                      2010          2010          2009
                                  ------------  ------------  ------------
            ASSETS
Current assets:
  Cash and equivalents            $         69  $        217  $         36
  Merchandise inventories                  888           873           950
  Prepaid expenses and other                70            72            75
  Deferred income taxes                     42            45            41
  Income tax receivable                     31             -            16
                                  ------------  ------------  ------------
    Total current assets                 1,100         1,207         1,118
                                  ------------  ------------  ------------
Property and equipment, at cost          1,276         1,257         1,228
Less accumulated depreciation             (981)         (940)         (883)
                                  ------------  ------------  ------------
    Property and equipment, net            295           317           345
                                  ------------  ------------  ------------
Goodwill                                    94            94            94
Debt issuance costs, net of
 accumulated amortization of $65,
 $56, and $47, respectively                 80            70            78
Deferred income taxes                        8             1            14
Other assets                                 7            21            26
                                  ------------  ------------  ------------
    Total non-current assets               189           186           212
                                  ------------  ------------  ------------
Total assets                      $      1,584  $      1,710  $      1,675
                                  ============  ============  ============

   LIABILITIES AND STOCKHOLDERS'
            DEFICIT
Current liabilities:
  Accounts payable                $        222  $        231  $        216
  Accrued liabilities and other            321           355           288
  Current portion of long-term debt          1           119           198
  Income taxes payable                       1            11             -
  Current liabilities -
   discontinued operations                   -             1             1
                                  ------------  ------------  ------------
    Total current liabilities              545           717           703
                                  ------------  ------------  ------------
Long-term debt                           3,707         3,684         3,766
Deferred income taxes                        2             -             -
Other long-term liabilities                 84            80            79
Long-term liabilities -
 discontinued operations                     -             -             1
                                  ------------  ------------  ------------
    Total long-term liabilities          3,793         3,764         3,846
                                  ------------  ------------  ------------
      Total liabilities                  4,338         4,481         4,549
                                  ------------  ------------  ------------
Commitments and contingencies
Stockholders' deficit:
  Common Stock, $0.10 par value,
   220,000,000 shares authorized;
   118,389,571 shares issued and
   outstanding at July 31, 2010;
   118,387,229 shares issued and
   outstanding at January 30, 2010;
   118,387,229 shares issued and
   outstanding at August 1, 2009            12            12            12
  Additional paid-in capital                39            35            32
  Accumulated deficit                   (2,812)       (2,824)       (2,925)
  Accumulated other comprehensive
   income                                    7             6             7
                                  ------------  ------------  ------------
    Total stockholders' deficit         (2,754)       (2,771)       (2,874)
                                  ------------  ------------  ------------
Total liabilities and
 stockholders' deficit            $      1,584  $      1,710  $      1,675
                                  ============  ============  ============




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

Subject to reclassification
                                                     Six Months Ended
                                                --------------------------
                                                  July 31,      August 1,
                                                    2010          2009
                                                ------------  ------------
Operating activities:
  Net income                                    $         12  $          6
  Adjustments:
    Depreciation and amortization                         52            58
    Share-based compensation                               4             4
    Deferred financing costs amortization                  9             8
    Accretion of subordinated discount notes              24            22
    Change in fair value of interest rate cap             13           (15)
    Changes in assets and liabilities:
      Merchandise inventories                            (15)          (43)
      Prepaid expenses and other                           2            (5)
      Deferred income taxes and other                     (1)           (8)
      Accounts payable                                    (9)            7
      Accrued interest                                    (2)            1
      Accrued liabilities and other                      (29)            7
      Income taxes receivable                            (41)          (17)
      Other long-term liabilities                          4             5
                                                ------------  ------------
        Net cash provided by operating
         activities                                       23            30
                                                ------------  ------------

Investing activities:
  Additions to property and equipment                    (33)          (17)
                                                ------------  ------------
        Net cash used in investing activities            (33)          (17)
                                                ------------  ------------

Financing activities:
  Borrowings on asset-based revolving credit
   facility                                               13           441
  Payments on asset-based revolving credit
   facility                                              (13)         (415)
  Repayments on senior secured term loan facility       (118)          (12)
  Payment of debt issuance costs                         (19)            -
  Change in cash overdraft                                 -           (23)
  Other                                                   (1)           (1)
                                                ------------  ------------
        Net cash used in financing activities           (138)          (10)
                                                ------------  ------------

(Decrease) increase in cash and equivalents             (148)            3
Cash and equivalents at beginning of period              217            33
                                                ------------  ------------
Cash and equivalents at end of period           $         69  $         36
                                                ============  ============

Supplemental Cash Flow Information:
  Cash paid for interest                        $        105  $         93
                                                ============  ============
  Cash paid for income taxes                    $         58  $         19
                                                ============  ============




Michaels Stores, Inc.
Reconciliation of Adjusted EBITDA
(in millions)


                                                         Six       Six
                                   Quarter   Quarter    Months    Months
                                    ended     ended     ended     ended
                                  July 31,  August 1,  July 31,  August 1,
                                    2010      2009       2010      2009
                                  --------  ---------  --------  ---------

Net cash (used in) provided by
 operating activities             $     (4) $      28  $     23  $      30
Depreciation and amortization          (26)       (28)      (52)       (58)
Share-based compensation                (2)        (2)       (4)        (4)
Deferred financing cost
 amortization                           (4)        (4)       (9)        (8)
Accretion of subordinated
 discount notes                        (12)       (11)      (24)       (22)
Change in fair value of interest
 rate cap                               (3)        11       (13)        15
Changes in assets and liabilities       50          8        91         53
                                  --------  ---------  --------  ---------
Net income                              (1)         2        12          6
Interest expense                        70         62       138        125
Income tax provision                     1          -        18          3
Depreciation and amortization           26         28        52         58
                                  --------  ---------  --------  ---------
EBITDA                                  96         92       220        192
Adjustments:
  Share-based compensation               2          2         4          4
  Sponsor Fees                           4          3         7          7
  Termination expense                    -          -         -          3
  Pre-opening costs                      -          -         1          1
  Foreign currency translation
   gains                                 1         (4)       (2)        (5)
  Store closing costs                    -          2         1          3
  Loss (gain) on interest rate
   cap                                   3        (11)       13        (15)
  Other (1)                              -          1         -          2
                                  --------  ---------  --------  ---------
Adjusted EBITDA                   $    106  $      85  $    244  $     192
                                  ========  =========  ========  =========


(1) Other adjustments relate to items such as the moving & relocation
    expenses, franchise taxes and foreign currency hedge.





                          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       Six Months Ended
                                  ------------------   -------------------
                                  July 31,  August 1,   July 31,  August 1,
                                    2010      2009       2010      2009
                                  -------   --------   --------  --------
Net sales                           100.0 %    100.0%     100.0%    100.0%
Cost of sales and occupancy
 expense                             62.5       64.6       61.6      63.8
                                  -------   --------   --------  --------
Gross profit                         37.5       35.4       38.4      36.2
Selling, general, and
 administrative expense              28.0       28.7       27.6      28.8
Related party expenses                0.5        0.4        0.4       0.4
Store pre-opening costs               0.1        0.1        0.1       0.1
                                  -------   --------   --------  --------
Operating income                      8.9        6.2       10.3       6.9
Interest expense                      8.4        7.8        8.0       7.5
Other (income) and expense, net       0.5       (1.8)       0.6      (1.2)
                                  -------   --------   --------  --------
Income before income taxes              -        0.2        1.7       0.6
Income tax provision                  0.1          -        1.0       0.2
                                  -------   --------   --------  --------
Net (loss) income                    (0.1)%      0.2%       0.7%      0.4%
                                  =======   ========   ========  ========

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

                                     Quarter Ended       Six Months Ended
                                  ------------------   -------------------
                                  July 31,  August 1,   July 31,  August 1,
                                    2010      2009       2010      2009
                                  -------   --------   --------  --------
Michaels stores:
  Retail stores open at beginning
   of period                        1,028      1,020      1,023     1,009
  Retail stores opened during the
   period                               5          3         10        14
  Retail stores opened
   (relocations) during the
   period                               -          -          7         4
  Retail stores closed during the
   period                               -          -          -         -
  Retail stores closed
   (relocations) during the
   period                               -          -         (7)       (4)
                                  -------   --------   --------  --------
  Retail stores open at end of
   period                           1,033      1,023      1,033     1,023

Aaron Brothers stores:
  Retail stores open at beginning
   of period                          146        156        152       161
  Retail stores opened during the
   period                               -          -          -         -
  Retail stores opened
   (relocations) during the
   period                               -          -          -         -
  Retail stores closed during the
   period                              (1)        (1)        (7)       (6)
  Retail stores closed
   (relocations) during the
   period                               -          -          -         -
                                  -------   --------   --------  --------
  Retail stores open at end of
   period                             145        155        145       155

                                  -------   --------   --------  --------
Total store count at end of
 period                             1,178      1,178      1,178     1,178
                                  =======   ========   ========  ========

Other operating data:
  Average inventory per Michaels
   store (in thousands) (1)       $   823   $    889   $    823  $    889
  Comparable store sales (2)          2.3%      (0.8)%      3.6%     (1.4)%




                           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 (decrease) represents the increase
    (decrease) 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.