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Total net sales increased 3.4% to $1.2 billion, or 5.1% on a constant currency basis – Operating income increased 9.4% to $155.9 million; diluted EPS increased 19.4% to $0.37
The Michaels Companies, Inc. (NASDAQ:MIK) has today announced financial results for the quarter ended October 31, 2015.
Chuck Rubin, Chairman and Chief Executive Officer, stated, “I am pleased with our third quarter performance where we delivered 3.1% comparable store sales growth on a local currency basis. We also improved our operating margin by 70 basis points and delivered a 19.4% increase in diluted earnings per share. The positive results in a choppy consumer spending environment demonstrate our strategy is resonating with our customers.”
For the quarter ended October 31, 2015:
Net sales increased by 3.4%, or 5.1% on a constant currency basis, to $1.2 billion from $1.1 billion in the third quarter of fiscal 2014 and comparable store sales increased by 1.5% or 3.1% on a constant currency basis.
Gross profit decreased 20 basis points to 39.8% of net sales compared to 40.0% of net sales in the third quarter of fiscal 2014. The decline was driven by heightened promotional activity and a shift in product and service sales mix partially offset by an increase resulting from our pricing optimization effort and improved sourcing efficiencies. The negative impact of foreign exchange rates was felt more this quarter as inventory was sold that had been purchased at higher foreign exchange rates earlier in the year.
Selling, general and administrative expense, including related party and store pre-opening costs (“SG&A”) as a percent of net sales improved 90 basis points to 26.5% versus 27.4% during the third quarter last year. SG&A dollars remained flat at $309.7 million when compared to the third quarter of fiscal 2014 due to an increase in costs associated with operating 27 additional stores (net of closures) offset by good cost management, timing of marketing spend year over year and a decrease in Canadian operating costs due to the exchange rate.
Operating income grew 9.4% to $155.9 million from $142.5 million in the third quarter of fiscal 2014. As a percent of net sales, operating income increased 70 basis points to 13.3%. The total negative impact to operating income from the stronger US dollar was $10 million, or 90 basis points, in the third quarter of fiscal 2015.
Interest expense decreased to $33.8 million from $41.5 million in the third quarter of fiscal 2014 due to the early redemption of $360.9 million of the 7.50%/8.25% PIK Toggle Notes (“PIK Notes”), funded with cash from operations, during the fourth quarter of fiscal 2014 and second quarter of fiscal 2015.
The effective tax rate was 37.0% for the third quarter of fiscal 2015 compared to 36.1% for the third quarter of fiscal 2014. The effective tax rate was lower in the third quarter of last year due to the carry over impact of initial public offering related expenses.
Net income increased 19.9% to $76.8 million in the third quarter of fiscal 2015 compared to $64.1 million in the same quarter last year. Diluted earnings per share increased 19.4% to $0.37 from $0.31 in the third quarter of fiscal 2014.
The Company opened 10 new Michaels stores and relocated four Michaels stores during the third quarter of fiscal 2015, compared with 19 new Michaels stores, three Michaels relocations, five new Aaron Brothers stores and one Aaron Brothers closure in the third quarter of fiscal 2014. At the end of the third quarter, the Company operated 1,196 Michaels stores and 118 Aaron Brothers stores.
Balance sheet highlights as of October 31, 2015:
The Company ended the third quarter with $114.7 million in cash, $2.9 billion in debt and approximately $586.7 million in availability under its asset-based revolving credit facility.
Inventory at the end of the quarter was $1.3 billion. Average Michaels inventory on a per store basis, inclusive of inventory in transit, distribution centers and inventory for our e-commerce site was $1.0 million compared to last year’s balance of $0.9 million. This per store increase was due to earlier receipt of product for fourth quarter sales and a strategic decision to increase inventory levels of core products. Inventory levels, on a per store basis, are anticipated to end fiscal 2015 at a low to mid single digit percentage increase over the prior year.
Mr. Rubin continued, “Despite the uneven consumer environment, we are proud of our operating performance to date. We are excited about our merchandising and marketing plans for the fourth quarter and what our stores and website will offer to our customers. We remain focused on executing our long term strategy and driving value for our shareholders.”
Fourth Quarter and Fiscal Year 2015 Outlook:
The Company expects diluted earnings per share of $1.68 to $1.71 for full year fiscal 2015. This guidance includes the opening of one more Michaels store in the last quarter of fiscal 2015. It assumes total annual net sales growth of 2.9% to 3.2% or 4.3% to 4.6% on a constant currency basis, comparable store sales growth of 0.9% to 1.2%, or 2.3% to 2.6% on a constant currency basis and operating income of $704 to $715 million. The currency impact of the weaker Canadian dollar in the first three quarters of the year negatively impacted sales by approximately $45 million and diluted earnings per share by $0.06 including both translation and cost of goods sold impacts which were higher than previously anticipated. This updated full year outlook reflects current market conditions and assumes a $69 million sales headwind and an approximate $0.09 to $0.10 diluted earnings per share reduction from the exchange rate translations and cost of goods sold impact. Annual interest expense, excluding the $6 million premium payment for the PIK Notes redemption in the second quarter of fiscal 2015, is forecasted to be $140 million which is one million dollars lower than previous estimates. The effective tax rate is expected to be approximately 36.9% for fiscal 2015 and the diluted weighted average shares are anticipated to be approximately 210 million for the full year.
This full year outlook implies fourth quarter comparable store sales growth of 0.5% to 1.5% or 1.9% to 2.9% on a constant currency basis, operating income of $308 to $319 million and diluted earnings per share of $0.82 to $0.85. The effective tax rate is expected to be approximately 36.9% and the diluted weighted average shares are anticipated to be approximately 210 million for the fourth quarter fiscal 2015.
