SOURCE: Michaels Stores, Inc.

March 07, 2007 16:00 ET

Michaels Stores, Inc. Reports Fourth Quarter and Full Year Earnings

IRVING, TX -- (MARKET WIRE) -- March 7, 2007 -- Michaels Stores, Inc. today reported unaudited financial results for the fourth quarter and fiscal year 2006. Financial results for fiscal 2006, as reported under U.S. generally accepted accounting principles (GAAP), include several significant items, such as costs associated with the Company's recent merger with affiliates of Bain Capital and The Blackstone Group as well as expenses associated with various legal matters. For the fourth quarter, net income decreased $184.9 million to a loss of ($67.6) million, versus $117.3 million for the same quarter last year. For fiscal 2006, income before cumulative effect of accounting change was $41.2 million, a decrease of $178.3 million from $219.5 million last year.

Operating Performance

Fourth Quarter

The Company had solid sales growth and significantly improved margin performance as a result of continued focus on improving overall profitability and further strengthening financial returns. Total sales for the fourth quarter were $1.368 billion, a 7.7% increase over last year's fourth quarter sales of $1.270 billion. Fiscal 2006 was a 53-week year and sales for the additional week contributed $58.7 million in sales for the quarter. Same-store sales for the comparable 13-week period increased 0.8% on a 2.0% increase in average ticket, a (1.7%) decrease in transactions and a 0.5% increase in custom frame deliveries. The decline in sales of yarn products adversely impacted the fourth quarter same-store sales by approximately 1.9%. A favorable Canadian currency translation added approximately 0.1% to the average ticket increase for the fourth quarter. Michaels stores' best performing domestic departments were Framing, Impulse, General Crafts (primarily Jewelry and Beads) and Seasonal.

The Company's gross margin rate in the fourth quarter increased from 37.2% in 2005 to 41.7% in 2006, an increase of 450 basis points. The increase in the gross margin rate was primarily due to ongoing product sourcing initiatives, improved seasonal sell-through and enhancements to pricing and promotion execution. In addition, the Company experienced lower shrink expense as a percent of sales than in the prior year period, contributing to the increased merchandise margins. Occupancy costs as a percent of sales increased slightly for the quarter primarily due to higher rent-related expenses.

Selling, general, and administrative expenses in the fourth quarter increased $243.1 million to $528.2 million, or as a percent of sales, to 38.6% in fiscal 2006 compared to 22.4% in the fourth quarter of fiscal 2005. The increase in selling, general, and administrative expenses as a percent of sales versus the fourth quarter of fiscal 2005 was primarily due to $217.3 million of merger-related expenses, or 15.9% as a percent of sales in the quarter. Merger-related expenses include such items as share-based compensation, investment banking, legal, accounting and other professional fees.

Operating income decreased as a percent of sales, from 14.7% in the fourth quarter of fiscal 2005 to 3.1% in the fourth quarter of fiscal 2006. The decrease was primarily due to the $217.3 million of merger-related expenses, partially offset by strong gross margin improvement in the quarter.

For the fourth quarter, net income decreased $184.9 million, primarily due to the merger-related expenses, from $117.3 million in fiscal 2005 to a net loss of ($67.6) million in fiscal 2006.

The Company presents EBITDA and Adjusted EBITDA to provide investors with additional information to evaluate our operating performance and our ability to service our debt. EBITDA for the quarter was $72.8 million or 5.3% of sales. Adjusted EBITDA for the quarter was $304.0 million or 22.2% of sales. Reconciliations of fourth quarter and full year actual results to EBITDA and Adjusted EBITDA, which are non-GAAP measures, are included at the end of this press release.

Full Year Results

Fiscal 2006 sales of $3.865 billion increased 5.1% from $3.676 billion in fiscal 2005. New store growth net of store closures contributed approximately $124.3 million of the increase in net sales, with sales in the 53rd week of fiscal 2006 contributing an additional $58.7 million. Our same-store sales for fiscal 2006 were up 0.3% over fiscal 2005 on a (2.3%) decrease in transactions, a 2.5% increase in average ticket, and a 0.1% increase in custom frame deliveries. The decline in sales of yarn products for the year adversely impacted same-store sales by approximately 1.4%. A favorable Canadian currency translation added approximately 0.3% to the average ticket increase for the fiscal year. Michaels stores' best-performing domestic departments for the year were General Crafts (led by Jewelry & Beads), Impulse, Framing, and Apparel Crafts.

The gross margin rate for the fiscal year increased from 37.0% in fiscal 2005 to 38.4% in fiscal 2006. Gross margin expanded as a result of stronger sales of merchandise at regular price, improved sourcing, stronger seasonal sell-through and better shrink results. In fiscal 2005 the Company recorded various accounting items affecting gross margin, the most significant of these was the $23.9 million charge related to inventory cost deferral and vendor allowance recognition. Occupancy expenses, as a percentage of sales, increased by 60 basis points due primarily to increased property taxes and higher remodel expenses. Remodel expenses increased as the Company remodeled 67 stores in fiscal 2006 compared to 27 stores in fiscal 2005.

Selling, general, and administrative expenses for the year, as a percent of sales, increased 610 basis points to 33.0%, compared to 26.9% in fiscal 2005. The expense increase was primarily due to $239.0 million of merger-related expenses and $7.4 million of incremental expenses related to the stock option review and responses to government inquiries, representing a total of 640 basis points as a percent of sales for the year.

For fiscal 2006, operating income as a percent of sales decreased 460 basis points from 9.9% in fiscal 2005 to 5.3% in fiscal 2006. The decrease was primarily due to the $239.0 million of merger-related expenses and the $7.4 million of incremental legal fees, offset partly by the $23.9 million inventory cost deferral and vendor allowance recognition adjustment recorded in fiscal 2005 and strong gross margin rate improvement in the fourth quarter of fiscal 2006.

Fiscal 2006 income before cumulative effect of accounting change decreased 81.2%, primarily due to the merger-related expenses and a higher effective tax rate, from $219.5 million in fiscal 2005 to $41.2 million this year.

EBITDA for fiscal 2006 was $323.7 million or 8.4% of sales. Adjusted EBITDA was $618.4 million or 16.0% of sales for the year.

Balance Sheet

The Company's cash balance at the end of fiscal 2006 was $30.1 million, a decrease of $422.3 million over last year's ending balance of $452.4 million. This reduction was primarily a result of the Company using its available cash to finance, in part, the Company's merger transaction with affiliates of Bain Capital and The Blackstone Group.

Year-end debt levels totaled $3.959 billion, down $296 million from the peak post-closing borrowing level of $4.255 billion on November 9, 2006. During the fourth quarter the Company voluntarily prepaid $50 million of its long-term debt, made a $5.9 million amortization payment and executed a repricing amendment on its Senior secured term loan.

Average inventory per Michaels store, at the end of fiscal 2006, inclusive of distribution centers, increased 6.2% to $867,000 from $816,000 last year. The fiscal 2006 increase compares to the 3.1% decrease reported at the end of fiscal 2005.

Capital spending for the year totaled $142.6 million, with $79.8 million attributable to real estate activities, such as new, relocated, existing and remodeled stores, and $19.3 million for its new Centralia, Washington distribution center. The Company also spent approximately $21.1 million on strategic initiatives such as a work force management system, an energy management system, and a new merchandise planning system.

During fiscal 2006, the Company opened 43 new stores, relocated seven stores, remodeled 67 stores and closed eight stores under the Michaels banner. It also opened one and closed one Aaron Brothers store.

The Company will host a conference call at 4:00 p.m. central time today, hosted by President and Chief Financial Officer, Jeffrey Boyer, and President and Chief Operating Officer, Gregory Sandfort. Those who wish to participate in the call may do so by dialing 973-935-8513, conference ID# 8403458. 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 fifteen 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 973-341-3080, PIN 8403458.

Michaels Stores, Inc. is the world'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 March 6, 2007, the Company owns and operates 921 Michaels stores in 48 states and Canada, 167 Aaron Brothers stores, 11 Recollections stores and four Star Wholesale operations.

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 Michaels 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 28, 2006, and in our Quarterly Reports on Form 10-Q for the quarters ended April 29, 2006, July 29, 2006 and October 28, 2006. 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. Our actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: our substantial leverage, as well as the restrictions and financial exposure associated with the same; our ability to service the interest and principal payments of our debt; restrictions contained in our various debt agreements that limit our flexibility in operating our business; the finalization of our fiscal year end closing process including the accounting for the merger transaction; our ability to remain competitive in the areas of merchandise quality, price, breadth of selection, customer service, and convenience; our ability to anticipate and/or react to changes in customer demand; changes in consumer confidence; unexpected consumer responses to changes in promotional programs; unusual weather conditions; the execution and management of our store growth and the availability of acceptable real estate locations for new store openings; the effective maintenance of our perpetual inventory and automated replenishment systems and related impacts to inventory levels; delays in the receipt of merchandise ordered from our suppliers due to delays in connection with either the manufacture or shipment of such merchandise; transportation delays (including dock strikes and other work stoppages); changes in political, economic, and social conditions; commodity, energy and fuel cost increases, currency fluctuations, and changes in import duties; our ability to maintain the security of electronic and other confidential information; financial difficulties of any of our insurance providers, key vendors, or suppliers; lawsuits asserted by our previous stockholders or others challenging the merger transaction; and other factors as set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006, particularly in "Critical Accounting Policies and Estimates" and "Risk Factors," and in our other Securities and Exchange Commission filings. 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, 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 the calculation of various financial covenants that the Company is subject to under its current credit agreements. On October 31, 2006, the Company entered into various credit agreements with lenders, including a $1.0 billion Revolving Credit Facility and a $2.4 billion Term Loan Facility. Contained in those agreements are covenants that require the maintenance of financial ratios tied to Adjusted EBITDA. Under the Company's Revolving Credit Facility, a Fixed Charge Ratio covenant requires the maintenance of a ratio of certain fixed charges, such as interest expense and principal payments, to Adjusted EBITDA of 1.1 to 1. However, testing for such covenant compliance is not required unless availability falls below $75 million. As of March 6, availability was approximately $513 million. Under the Term Loan facility, a Secured Debt Ratio covenant requires the maintenance of certain total indebtedness to 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.
Regulation G Reconciliation of non-GAAP data

                                          Fourth fiscal      Fiscal year
                                         quarter ending      2006 ending
(in millions)                           February 3, 2007  February 3, 2007
                                        ----------------  ----------------

Cash flows from operating activities    $          186.6  $          205.6
  Depreciation and amortization                    (33.6)           (118.6)
  Share-based compensation                        (119.1)           (134.7)
  Tax benefit from stock options
   exercised                                        62.5              83.2
  Other                                             (5.2)             (5.4)
  Changes in assets and liabilities               (158.7)             11.2
                                        ----------------  ----------------
Net (loss) income                                  (67.6)             41.2
  Interest expense                                 103.9             104.5
  Interest income                                      -              (9.6)
  Income tax provision (1)                           3.0              69.0
  Depreciation and amortization                     33.6             118.6
                                        ----------------  ----------------
EBITDA                                              72.8             323.7
Adjustments:
  Share-based compensation (2)                     119.1             134.7
  Strategic alternatives and other
   legal (3)                                        99.0             127.3
  Store pre-opening costs (4)                        0.6               5.2
  Multi-year initiatives (5)                         1.5              13.5
  Other (6)                                         10.9              13.9
                                        ----------------  ----------------
Adjusted EBITDA                         $          304.0  $          618.4
                                        ================  ================
Notes:
(amounts in table may not foot due to rounding)
(1) The fiscal 2006 income tax rate of 63.5% was adversely impacted
    primarily by non-deductible merger-related expenses.
(2) Reflects share-based compensation expense recorded under the
    provisions of  SFAS No. 123 (R), Share-Based Payment.  Note fiscal
    2006 contains share-based compensation expense of about $119.1 million
    associated with the merger.
(3) Reflects legal, investment banking and other costs incurred in
    connection with our strategic alternatives process, as well as CEO
    post-employment benefits and costs associated with the review of our
    historical stock option practices and responses to
    governmental inquiries.
(4) The company opened 44 stores in fiscal 2006. We expense all start-up
    activity costs as incurred, which primarily include store pre-opening
    costs.  Rent expense incurred prior to a store opening is recorded in
    cost of sales and occupancy expense on our consolidated income
    statement.
(5) Reflects costs associated with multi-year initiatives related to the
    company's hybrid distribution network, expenses associated with
    opening the new northwest distribution center, and store
    standardization/remodel program.  Under the hybrid initiative, the
    company incurred approximately $1.9 million in fiscal 2006 of abnormal
    costs as a result of consolidation and repositioning of merchandise
    inventories in our distribution centers. The company expects this
    consolidation to be substantially complete in fiscal 2007. In fiscal
    2006, we incurred approximately $1.3 million of costs associated with
    opening our northwest distribution center. Under our store
    standardization/remodel initiative the company is changing store
    layouts to enhance the in-store experience. The company remodeled
    67 stores in fiscal 2006 under this program, incurring costs of
    approximately $10.3 million.
(6) Reflects other adjustments required in calculating debt covenant
    compliance.  Positive adjustments to the calculation consist of
    management fees paid to our Sponsors, employee severance and
    relocation costs, closed store expense, costs we identified as
    related to our former public company status (partially reduced by
    costs incurred under our new ownership structure), foreign currency
    losses arising from the translation of our intercompany debt, and
    franchise and similar taxes.

                          Michaels Stores, Inc.
                    Consolidated Statements of Income
                              (In thousands)
                                (Unaudited)

                             Quarter Ended              Fiscal Year
                        ------------------------  ------------------------
                        February 3,  January 28,  February 3,  January 28,
                            2007         2006         2007         2006
                        -----------  -----------  -----------  -----------
Net sales               $ 1,368,151  $ 1,270,193  $ 3,864,976  $ 3,676,365
Cost of sales and
 occupancy expense          797,458      797,460    2,379,584    2,317,082
                        -----------  -----------  -----------  -----------
Gross profit                570,693      472,733    1,485,392    1,359,283
Selling, general, and
 administrative expense     528,210      285,079    1,276,011      987,312
Store pre-opening costs         576          981        5,218        7,631
                        -----------  -----------  -----------  -----------
Operating income             41,907      186,673      204,163      364,340
Interest expense            103,899        1,594      104,548       22,409
Other (income) and
 expense, net                 2,617       (1,854)     (10,591)      (9,944)
                        -----------  -----------  -----------  -----------
(Loss) Income before
 income taxes and
 cumulative effect of
 accounting change          (64,609)     186,933      110,206      351,875
Provision for income
 taxes                        2,977       69,683       68,970      132,363
                        -----------  -----------  -----------  -----------
(Loss) Income before
 cumulative effect of
 accounting change          (67,586)     117,250       41,236      219,512
Cumulative effect of
 accounting change, net
 of income tax of $54.2
 million                          -            -            -       88,488
                        -----------  -----------  -----------  -----------
Net (loss) income       $   (67,586) $   117,250  $    41,236  $   131,024
                        ===========  ===========  ===========  ===========


                          Michaels Stores, Inc.
                        Consolidated Balance Sheets
                   (In thousands, except share amounts)
                                (Unaudited)

Subject to reclassification                       February 3,  January 28,
                                                      2007         2006
                                                  -----------  -----------

                         ASSETS
Current assets:
   Cash and equivalents                           $    30,098  $   452,449
   Merchandise inventories                            847,612      784,032
   Prepaid expenses and other                          54,435       44,042
   Deferred and prepaid income taxes                   77,811       34,125
                                                  -----------  -----------
      Total current assets                          1,009,956    1,314,648
                                                  -----------  -----------
Property and equipment, at cost                     1,122,948    1,011,201
Less accumulated depreciation                        (674,275)    (586,382)
                                                  -----------  -----------
                                                      448,673      424,819
                                                  -----------  -----------
Goodwill                                              115,839      115,839
Debt issuance costs, net of accumulated
 amortization of $4,537 at February 3, 2007           120,193            -
Other assets                                            8,117       20,249
                                                  -----------  -----------
                                                      244,149      136,088
                                                  -----------  -----------
Total assets                                      $ 1,702,778  $ 1,875,555
                                                  ===========  ===========

   LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
   Accounts payable                               $   214,470  $   193,595
   Accrued liabilities and other                      290,431      282,499
   Income taxes payable                                 7,331       20,672
   Current portion of long-term debt                  229,765            -
                                                  -----------  -----------
      Total current liabilities                       741,997      496,766
                                                  -----------  -----------
Long-term debt                                      3,728,745            -
Deferred income taxes                                  29,139        2,803
Other long-term liabilities                            68,444       88,637
                                                  -----------  -----------
      Total long-term liabilities                   3,826,328       91,440
                                                  -----------  -----------
                                                    4,568,325      588,206
                                                  -----------  -----------
Commitments and contingencies
Stockholders' (deficit) equity:
   Common Stock, $0.10 par value, 220,000,000
    shares authorized; 117,973,396 shares issued
    and outstanding at February 3, 2007;
    350,000,000 shares authorized and 133,821,417
    shares issued and 132,986,517 shares
    outstanding at January 28, 2006                    11,797       13,382
   Additional paid-in capital                               -      386,627
   Retained (deficit) earnings                     (2,884,064)     907,773
   Treasury Stock (none at February 3, 2007 and
    834,900 shares at January 28, 2006)                     -      (27,944)   
   Accumulated other comprehensive income               6,720        7,511
                                                  -----------  -----------
      Total stockholders' (deficit) equity         (2,865,547)   1,287,349
                                                  -----------  -----------
Total liabilities and stockholders' (deficit)
 equity                                           $ 1,702,778  $ 1,875,555
                                                  ===========  ===========




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

                                                      Fiscal Year
                                              ----------------------------
Subject to reclassification                    February 3,    January 28,
                                                   2007           2006
                                              -------------  -------------
Operating activities:
   Net income                                 $      41,236  $     131,024
   Adjustments:
      Depreciation                                  117,458         99,686
      Amortization                                    1,164            388
      Share-based compensation                      134,699         29,808
      Tax benefits from stock options
       exercised                                    (83,248)       (25,221)
      Loss from early extinguishment of debt              -         12,136
      Non-cash charge for the cumulative
       effect of accounting change                        -        142,723
      Other                                           5,449          1,005
      Changes in assets and liabilities:
         Merchandise inventories                    (63,830)        10,885
         Prepaid expenses and other                 (11,242)       (17,429)
         Deferred income taxes and other            (25,618)       (42,657)
         Accounts payable                            31,141        (62,671)
         Accrued liabilities and other               42,769         38,027
         Income taxes payable                        26,189         32,901
         Other long-term liabilities                (10,573)        13,351
                                              -------------  -------------
            Net cash provided by operating
             activities                             205,594        363,956
                                              -------------  -------------

Investing activities:
   Additions to property and equipment             (142,625)      (118,346)
   Purchases of short-term investments                    -           (226)
   Sales of short-term investments                        -         50,605
   Net proceeds from sales of property and
    equipment                                            40             49
                                              -------------  -------------
            Net cash used in investing
             activities                            (142,585)       (67,918)
                                              -------------  -------------

Financing activities:
   Issuance of Notes                              1,400,000              -
   Payment of debt issuance costs                  (124,813)             -
   Borrowings on senior secured term loan
    facility                                      2,400,000              -
   Repayments on senior secured term loan
    facility                                        (55,875)             -
   Borrowings on asset-based revolving credit
    facility                                      1,005,436              -
   Payments on asset-based revolving credit
    facility                                       (799,671)             -
   Equity investment of the Sponsors              1,760,261              -
   Payment for old Common Stock in the Merger    (6,034,833)             -
   Repayment of Senior Notes                              -       (209,250)
   Cash dividends paid to stockholders              (58,589)       (46,181)
   Repurchase of Common Stock                       (66,182)      (190,431)
   Proceeds from stock options exercised             35,608         37,690
   Tax benefits from stock options exercised         83,248         25,221
   Proceeds from issuance of Common Stock and
    other                                             1,804          3,510
   Cash overdraft                                   (31,459)             -
   Other                                               (295)             -
                                              -------------  -------------
            Net cash used in financing
             activities                            (485,360)      (379,441)
                                              -------------  -------------
Net (decrease) in cash and equivalents             (422,351)       (83,403)
Cash and equivalents at beginning of period         452,449        535,852
                                              -------------  -------------
Cash and equivalents at end of period         $      30,098  $     452,449
                                              =============  =============

Supplemental Cash Flow Information:
  Cash paid for interest                      $      55,388  $      19,653
                                              =============  =============
  Cash paid for income taxes                  $      78,526  $      94,591
                                              =============  =============


                           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 income:


                            Quarter Ended               Fiscal Year
                        ------------------------  ------------------------
                        February 3,  January 28,  February 3,  January 28,
                            2007         2006         2007         2006
                        ----------   -----------  -----------  -----------
Net sales                    100.0%        100.0%       100.0%       100.0%
Cost of sales and
 occupancy expense            58.3          62.8         61.6         63.0
                        ----------   -----------  -----------  -----------
Gross profit                  41.7          37.2         38.4         37.0
Selling, general, and
 administrative expense       38.6          22.4         33.0         26.9
Store pre-opening costs        0.0           0.1          0.1          0.2
                        ----------   -----------  -----------  -----------
Operating income               3.1          14.7          5.3          9.9
Interest expense               7.6           0.1          2.7          0.6
Other (income) and
 expense, net                  0.2          (0.1)        (0.3)        (0.3)
                        ----------   -----------  -----------  -----------
(Loss) Income before
 income taxes and
 cumulative effect of
 accounting change            (4.7)         14.7          2.9          9.6
Provision for income
 taxes                         0.2           5.5          1.8          3.6
                        ----------   -----------  -----------  -----------
(Loss) Income before
 cumulative effect of
 accounting change            (4.9)          9.2          1.1          6.0
Cumulative effect of
 accounting change, net
 of income tax                   -             -            -          2.4
                        ----------   -----------  -----------  -----------
Net (loss) income             (4.9)%         9.2%         1.1%         3.6%
                        ==========   ===========  ===========  ===========


The following table sets forth certain of our unaudited operating data
 (dollar amounts in thousands):

                            Quarter Ended                Fiscal Year
                        ------------------------  -----------------------
                        February 3,   January 28, February 3,  January 28,
                            2007          2006        2007         2006
                        ----------   -----------  -----------  -----------
Michaels stores:
 Retail stores open at
  beginning of period          919           889          885          844
 Retail stores opened
  during the period              4             -           43           46
 Retail stores opened
  (relocations) during
  the period                     -             -            7           18
 Retail stores closed
  during the period             (3)           (4)          (8)          (5)
 Retail stores closed
  (relocations) during
  the period                     -             -           (7)         (18)
                        ----------   -----------  -----------  -----------
 Retail stores open at
  end of period                920           885          920          885

Aaron Brothers stores:
 Retail stores open at
  beginning of period          165           166          166          164
 Retail stores opened
  during the period              1             -            1            2
 Retail stores closed
  during the period              -             -           (1)           -
                        ----------   -----------  -----------  -----------
 Retail stores open at
  end of period                166           166          166          166

Recollections stores:
 Retail stores open at
  beginning of period           11            11           11            8
 Retail stores opened
  during the period              -             -            -            3
                        ----------   -----------  -----------  -----------
 Retail stores open at
  end of period                 11            11           11           11

Star Decorators
 Wholesale stores:
 Wholesale stores open
  at beginning of period         4             4            4            3
 Wholesale stores opened
  during the period              -             -            -            1
                        ----------   -----------  -----------  -----------
 Wholesale stores open
  at end of period               4             4            4            4

                        ----------   -----------  -----------  -----------
Total store count at
 end of period               1,101         1,066        1,101        1,066
                        ==========   ===========  ===========  ===========

Other operating data:
 Average inventory per
  Michaels store (1)    $      867   $       816  $       867  $       816
 Comparable store sales
  increase (2)                 0.8%          2.4%         0.3%         3.6%


                           Michaels Stores, Inc.
              Footnotes to Financial and Operating Data Tables
                                 (Unaudited)

(1) Average inventory per Michaels store calculation excludes Aaron
    Brothers, Recollections, and Star Decorators Wholesale stores.

(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.

Contact Information

  • Contact:
    Lisa K. Klinger
    Senior Vice President - Finance
    Treasurer
    (972) 409-1528
    Email Contact