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Michaels growth outlook underwhelms IPO investors

New store growth, 13.4% operating margins and totally untapped e-commerce potential failed to impress would-be Michaels investors when the company returned to public ownership Friday, June 27.

The company priced the nearly 28 million shares it offered to the public at $17 and raised roughly $472 million. However, the shares barely budged from the opening price despite backing from a long list of the biggest names on Wall Street. J.P. Morgan and Goldman, Sachs & Co. Barclays, Deutsche Bank Securities, BofA Merrill Lynch, Credit Suisse, Morgan Stanley and Wells Fargo were among the notable companies involved in the offering.

The tepid reception comes as Michaels looks to increase its base of 1,257 U.S. and Canadian stores this year by 40 to 45 units en route to what it believes is the potential to operate 1,500 units in those markets. The company’s next largest direct competitors are Hobby Lobby with roughly 620 stores and Jo-Ann Stores with 790 stores. Plans this year also call for the company to become a true omnichannel retailer by establishing an e-commerce platform.

Michaels grew sales last year by 3.7% to $4.57 billion and net income grew 32% to $264 million. Roughly half the company’s sales are generated by private brands while the broad categories of general crafts, home décor and seasonal, framing and scrapbooking accounted for 53%, 20%, 17% and 10% of the company’s sales, respectively.

Although Michaels is the nation’s leading arts and crafts retailer, some points of concern with the company involve a recent data breach and relatively lows levels of productivity of selling space. Sales per sq. ft. are roughly $218 and the 2.9% same store sales increase the company had in 2013 was driven entirely by a fad product called the Rainbow Loom. In addition, Michaels is heavily reliant on the fourth quarter, which accounted for 34% of net sales and approximately 46% of operating income last year.

There is also the issue of the company’s indebtedness. The private equity firms Bain Capital and Blackstone paid $6 billion to take Michaels private in 2006 and last year received a $714 million dividend that left the company with total debt of $3.7 billion.
 

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