Company Profile: Michaels
This week I am profiling a company that I have previously not given much thought about in terms of investing – The Michaels Companies, Inc. (Michaels). Michaels is what you think it is…the mega craft/home décor/baking supply/etc. store that is found in many retail complexes around Canada and the United States. I am not a crafty person so don’t go that often but I must say, when I do, I am often baffled at this store’s product selection. It covers the gambit from toys to baking chocolate to seasonal décor to framing and it is all jammed in to one big store. I guess they are stocking what sells and using a broad concept of what is in the crafting category (although, I see Home Depot is now selling Christmas toys so apparently everything goes).
The large volume of stock concept must work for Michaels as it is always busy, especially in the lead up to seasonal holidays. Its regular prices are most often high. You are well advised to not go unless you have one of their excellent weekly coupons which come like clockwork either online or in the paper each week. Only after the large discount is the price reasonable in many cases. Perhaps this high discount retail strategy is what works to bring people in to the store initially.
I also wanted to profile Michaels as it was listed on Forbes.com as one of the “magic formula” stocks Joel Greenblatt would like. Joel Greenblatt is the author of a book I am currently reading called The Little Book that Beats the Market. It is an excellent book that I will be reviewing on this site after I am done but I thought Michaels would be a good stock to profile in light of the approach put forth in that book.
· As I state many times on my site, I am not a financial advisor and have no financial accreditations whatsoever. I am applying some basic evaluation tools to this stock along with some commentary but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate A Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer. Also, I do not own Michaels stock and am not affiliated with them in any manner.
What is Michaels?
Michaels, a Fortune 500 company (this means it is one of the 500 largest companies in the United States) aims to be a “complete arts and crafts experience” and the “preferred destination in the industry”. It is the largest arts and crafts specialty provider in North America and also owns Artistree (framing merchandise) and Darice (wholesale distributor of craft, gift and décor). It has privately branded products, only available at Michaels, which represented 57% of net sales in 2016. It has pursued an active online presence to allow interaction about expert tips and project ideas and to work at building an online crafting community.
It recently announced the launch of a new online custom framing business called Framerspointe.com. This sounds interesting as Michaels is definitely known for its framing services and we have used it often in the past. I find the price is more reasonable than that of a custom framing store. The press release indicates that customers can upload, edit and print photos from their computer or social media site and have it framed appropriately starting at $39 USD. The frames used will be those from, surprise surprise, Artistree, which Michaels owns. I like this concept but I would think there is a great deal of competition from other companies in this space such as Minted.com and many others.
The company authorized a $500 million share repurchase program this past June. This means at various intervals, decided by the company, they may buy back some of their outstanding shares. Why would they do this and it this a good thing? Among other things, it is often seen a good thing and a company often buys back its own shares if it thinks they are undervalued by the stock market. They can buy the shares back at the low price and re-issue them later when the price has gone up and thus raise some money without having to issue any additional new shares.
Other interesting points from my research (most of my research was conducted from information directly off the Michaels website under the Investor tab) include:
· The arts and crafts industry is very fragmented and spans such categories as creative decorating, entertaining, art supplies to floral items and food crafts. Hence my comments above about the stores being a hodge podge of items! Michaels has approximately 30,000 SKU’s (stock keeping units) in its store which is a ton of different products;
· Craft and fabric stores remain the main way individuals in the US make purchases in this category (I would suspect dollar stores have made some inroads judging by their product selection);
· Arts and crafts have a very low e-commerce penetration rate with consumers, meaning online shopping is not a popular way to date for consumers to purchase arts and crafts (5% online share of sales v. 93% online share of sales for the book, music and video markets);
· Michaels customers are 85% female, 66% white and the majority earn between $50-$75,000 and are 25-34 years of age. Although, 35-44, 45-54 and 55-64 age groups are not far behind. Also, 50% of customers are households with children. Most customers (32%) come in for materials to complete a specific project while only 9% come in for a gift, everyone else is in between for decorating, family activities, stocking up on supplies or to entertain;
· The customer mix is 40% arts and crafts enthusiast v. 60% novice who comes in with a desire to be creative but may not know where to start;
· Michaels ranks #1 in key brand awareness, meaning customers think of Michaels for their arts and crafts needs above all other and are extremely likely to recommend the store; and
· Michaels is looking ahead to the future and its Vision 2020 is focused on creating customer centric shopping experiences, curating its offering based on trends, value and customer demand, engaging customers as to what they want, expanding their other businesses and implementing fuel for growth, spend smart strategies.
There is so much interesting information about Michaels and the arts and craft industry on their website specifically under its 2017 Investor Conference presentation PDF. I found the insights into consumers in this category fascinating and would highly recommend checking it out if you shop at Michaels or are interested in this stock. There is too much to write it all down so I need to move on to the stock analysis.
What is Michaels’ stock doing?
As at November 20, 2017, the numbers from our basic stock evaluation tools are as follows:
Share price: $19.10 USD
One share of Michaels would cost you $19.10 USD. The price over the past 52 weeks has ranged from $17.25 to $25.57 USD.
Price to Earnings (P/E): 10.1
Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued. The industry average here according to Morningstar is 45.1 so Michaels is much lower which is a good sign. To put this figure into perspective, the market is giving Michaels a value equal to 10.1 years of its earnings. This is in contrast to Lionsgate for example, which was profiled last week, which had a P/E closer to 29 so an investor would typically expect much more growth from Lionsgate than Michaels based on this ratio.
Dividend Yield: --
Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way. Michaels does not pay a dividend at this time. Usually this is a result of a need to keep in the money in the business. Indeed, on its Investor FAQ page, it indicates it has no plans to pay a dividend in the foreseeable future.
Earnings per Share (EPS): $1.89
This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential.
Michaels shares earn $1.89 per share and has increased in the past five years.
Revenue: $5,209 Million TTM (Trailing Twelve Months)
Increasing revenue is a good sign that the company is growing. If you look at past revenue figures, Michaels’ Revenue has more or less grown every year. Indeed, its Revenue is up from last year.
Return on Equity (ROE): Negative
ROE tells you what sort of return the company is getting on the shareholders money. An increasing ROE is a good sign. Why does Michaels have a negative ROE and what does that mean? Recall that ROE is Net income / shareholders equity (which is assets minus liabilities). A negative ROE can arise if the numerator is positive but the denominator is negative OR the numerator is negative and the denominator is positive.
Generally, you would rather have the first scenario rather than the second as the first means that the company is still making income, it is just that a situation has occurred where liabilities exceeded assets (for example, maybe the company took on debt to finance some business operations). The second means that the company truly had no net income. In the case of Michaels, net income is $380 Million and I have confirmed from their latest balance sheet that liabilities do exceed their assets so scenario one above is at play. Why do its liabilities exceed their assets? With a company as large and as profitable as Michaels, the negative shareholder equity is likely due to an accounting method that is employed to deal with accumulated losses in prior years and in reality, is nothing to be alarmed over. However, a further analysis of the balance sheet is beyond me so if you need a further explanation, please seek it out from an accountant!
Market Capitalization: $3.5 Billion
This indicates Michaels is a large cap stock. Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies.
Net Profit Margin: 7.25% TTM (Trailing Twelve Months)
This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin.
Here, Michaels’ Net Profit Margin has increased significantly over the past 6 years and is currently keeping just over 7 cents of profit for each dollar of sales.
Cash Flow per Share: $2.44 (as January 1, 2017)
Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio. A higher value usually indicates the company is in a healthier position.
This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance.
Price to Sales (P/S): 0.7
This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the industry average is 2.8 so Michaels is significantly lower suggesting it could be a good investment on this metric.
Price to Book (P/B): Negative
This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Because Michaels has negative equity (see above for the explanation under ROE), the P/B ratio is negative and is not helpful to the analysis.
Price to Cash Flow (P/CF): 6.4
Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the industry average for this industry is 8.8 whereas Michaels is at 6.4.
So, there you have it…a basic evaluation of Michaels. As always, there are tons of articles and discussions online about this stock and all stocks so they are also a good place to look at for further consideration. As I mentioned above, I profiled this company partially because it is a “magic formula” company that Joel Greenblatt (author of The Little Book that Beats the Market) would probably be interested in buying. I want to share his insights in a post in the near future so thought this company was a good introduction to his principles. All in all, Michaels appears to be a fairly good company in which to consider investing, my main question would be what is the long-term demand for arts and crafts? Are millennials and those younger interested in more “stuff’ around their house? Perhaps, if it is hands-on things one can make and potentially sell (Etsy, cake decorating, etc.).
**Top photo courtesy of rawpixels.com on Unsplash