UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 0-11822
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1943604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5931 Campus Circle Drive, Irving, Texas 75063
P.O. Box 619566, DFW, Texas 75261-9566
(Address of principal executive offices including zip code)
(214) 714-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 3 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding as
Title of December 12 , 1994
Common stock, par value $.10 per share 21,332,235
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
MICHAELS STORES, INC.
Consolidated Balance Sheets
(In thousands except share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
October 30, January 30,
1994 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 4,096 $ 867
Marketable securities 18,418 67,956
Merchandise inventories 381,456 206,185
Deferred income taxes 20,414 2,952
Prepaid expenses and other 20,183 13,052
-------- --------
Total current assets 444,567 291,012
-------- --------
Property and equipment, at cost 191,423 119,555
Less accumulated depreciation (56,325) (43,683)
-------- --------
135,098 75,872
-------- --------
Costs in excess of net assets of
acquired operations, net 100,803 23,503
Other assets 6,054 7,443
-------- --------
106,857 30,946
-------- --------
$686,522 $397,830
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $134,467 $ 42,309
Bank debt 50,000 13,000
Income taxes payable - 7,866
Accrued liabilities and other 66,228 46,021
-------- --------
Total current liabilities 250,695 109,196
-------- --------
Convertible subordinated notes 96,950 97,750
Deferred income taxes and other 7,135 5,469
-------- --------
Total long-term liabilities 104,085 103,219
-------- --------
354,780 212,415
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, 21,266,472
shares outstanding 2,127 1,670
Additional paid-in capital 242,722 107,168
Retained earnings 86,893 76,577
-------- --------
Total shareholders' equity 331,742 185,415
-------- --------
$686,522 $397,830
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
Consolidated Statements of Income
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
October 30, October 31,
1994 1993
----------- -----------
<S> <C> <C>
Net sales $283,069 $155,750
Cost of sales and occupancy expense 187,566 101,588
Selling, general and administrative
expense 80,676 46,343
-------- --------
Operating income 14,827 7,819
Interest expense 2,511 1,595
Other income, net (430) (1,666)
-------- --------
Income before income taxes 12,746 7,890
Provision for income taxes 4,933 3,038
------- --------
Net income $ 7,813 $ 4,852
======= ========
Earnings per common and common
equivalent share $.36 $.28
==== ====
Weighted average common and common
equivalent shares 21,930 17,287
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
Consolidated Statements of Income
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
October 30, October 31,
1994 1993
----------- -----------
<S> <C> <C>
Net sales $617,071 $384,125
Cost of sales and occupancy expense 402,314 249,017
Selling, general and administrative
expense 180,709 115,571
Store closing and conversion costs <F1> 7,074 -
-------- --------
Operating income 26,974 19,537
Interest expense 6,895 4,708
Other income, net (1,911) (5,147)
-------- --------
Income before income taxes 21,990 19,976
Provision for income taxes 8,497 7,691
-------- --------
Net income $ 13,493 $ 12,285
======== ========
Earnings per common and common
equivalent share $.69 $.71
==== ====
Weighted average common and common
equivalent shares 19,521 17,188
====== ======
</TABLE>
<F1> $4,385 net of tax, or $.22 per share.
See accompanying notes to consolidated financial statements.<PAGE>
<PAGE>
MICHAELS STORES, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
October 30, October 31,
1994 1993
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 13,493 $ 12,285
Depreciation and amortization 13,414 9,125
Change in assets and liabilities excluding
the effects of acquisitions:
Merchandise inventories (127,286) (114,028)
Prepaid expenses and other assets (6,050) (8,729)
Accounts payable 68,572 47,355
Income taxes payable (8,363) (1,260)
Accrued and other liabilities (10,144) 9,929
-------- --------
Net change in assets and liabilities (83,271) (66,733)
-------- --------
Net cash used in operating activities (56,364) (45,323)
-------- --------
Investing activities:
Additions to property and equipment (51,959) (32,651)
Net proceeds from sales of marketable
securities 46,184 13,997
Acquisitions and other (48,820) (1,349)
-------- --------
Net cash used in investing activities (54,595) (20,003)
-------- --------
Financing activities:
Net borrowings under bank credit facilities 36,500 21,000
Proceeds from issuance of common stock and other 77,688 3,428
-------- --------
Net cash provided by financing activities 114,188 24,428
-------- --------
Net increase (decrease) in cash and equivalents 3,229 (40,898)
Cash and equivalents at beginning of year 867 42,075
-------- --------
Cash and equivalents at end of period $ 4,096 $ 1,177
======== ========
Cash payments for:
Interest $ 4,253 $ 2,507
Income taxes 16,506 7,828
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
Notes to Consolidated Financial Statements
For the Three Months and Nine Months ended October 30, 1994
(Unaudited)
Note A
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 30, 1994) and, in the opinion of
management, reflect all adjustments that are necessary for a fair
presentation of financial position and results of operations for the three
months and nine months ended October 30, 1994. All of such adjustments are
of a normal and recurring nature. Because of the seasonal nature of the
Company's business, the results of operations for the three months and nine
months ended October 30, 1994 are not indicative of the results to be
expected for the entire year.
Note B
In February 1994, the Company acquired Treasure House Stores, Inc. ("THSI"),
a chain of nine arts and crafts stores operating primarily in the Seattle
market, for 280,000 shares of Michaels common stock in a transaction
accounted for as a pooling-of-interests. In April 1994, the Company acquired
the affiliated arts and crafts store chains of Oregon Craft & Floral Supply
Co. ("OCF"), with eight stores located primarily in the Portland, Oregon
area, and H&H Craft & Floral Supply Co. ("H&H"), with eight stores located in
southern California, for a total of 455,000 shares of Michaels common stock
in a transaction accounted for as a purchase. This transaction resulted in
the Company recording an addition to goodwill in the amount of $22.7 million.
Note C
Effective July 10, 1994, Michaels acquired Leewards Creative Crafts, Inc.
("Leewards"), an arts and crafts retailer with 98 stores located primarily in
the midwestern and northeastern United States. The acquisition consideration
consisted of $7.9 million in cash and 1,257,279 shares of Michaels common
stock valued at $39.9 million. Upon consummation of the Leewards
acquisition, Michaels also repaid $39.6 million of Leewards' indebtedness.
The transaction was accounted for as a purchase; accordingly, the purchase
price has been preliminarily allocated to assets and liabilities based on
estimated values as of the acquisition date. The cost in excess of the
estimated fair value of net assets acquired was recorded as goodwill in the
amount of $57.9 million, which will be amortized on a straight-line basis
over a period of 40 years. The results of operations since the acquisition
date are included in the accompanying consolidated financial statements.
<PAGE>
The following pro forma combined net sales, net income and earnings per share
data summarize the results of operations for the nine months ended October
30, 1994 and October 31, 1993 as if Leewards had been acquired as of the
beginning of fiscal 1993.
<TABLE>
<CAPTION>
Pro Forma
-----------------------------
Nine Months Ended
-----------------------------
Oct. 30, 1994 Oct. 31, 1993
------------- -------------
<S> <C> <C>
Net sales $679,424 $487,926
======== ========
Net income $ 14,123 $ 11,032
======== ========
Earnings per share $.70 $.60
==== ====
</TABLE>
The pro forma combined financial results do not purport to represent the
results of operations which would have occurred had such transactions been
consummated at the beginning of the period indicated or the Company's results
of operations for any future period. Anticipated operational efficiencies
from the integration of the acquisition are not fully reflected in the above
pro forma data.
The above pro forma data include adjustments to: eliminate net sales and
related expenses of overlapping Leewards stores that have been closed;
eliminate the duplicate occupancy costs of Leewards' distribution center and
duplicate purchasing costs; amortize goodwill; expense pre-opening costs in
the year incurred; reduce interest expense to Michaels' average borrowing
rate; and reflect the tax effects of the above adjustments. The pro forma
data for the nine-month period ended October 30, 1994 exclude a $7.1 million
charge ($4.4 million after tax or $.22 per share) for closure or relocation
of approximately ten Michaels stores (of which six have been closed and one
relocated as of October 30, 1994) that compete with certain acquired
locations, and conversion and training costs associated with the Leewards
acquisition.
The above pro forma data does not include THSI, OCF or H&H prior to their
respective acquisition dates in February 1994 and April 1994, since the
acquisitions are not considered material, individually or in the aggregate,
to the operating results of the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
The Company acquired 123 stores and opened 61 stores during the first nine
months of fiscal 1994. Capital expenditures for these stores, and, to a
lesser extent, the remodeling and expansion of existing stores, the expansion
of two distribution facilities, and system enhancements, amounted to $52.0
million in the first nine months of fiscal 1994. The Company expects capital
expenditures during the remainder of fiscal 1994 to be at least $16 million,
relating primarily to systems enhancements and the opening of new stores in
early fiscal 1995.
In July 1994, the Company paid $7.9 million in cash as part of the total
consideration provided to acquire Leewards, and repaid $39.6 million of
Leewards' outstanding debt.
Also in July 1994, the Company completed a public offering of 2,353,432
shares of Michaels common stock. The $72.9 million of net proceeds from the
sale were used to reduce outstanding bank debt.
At October 30, 1994 the Company had working capital of $193.9 million,
compared to $181.8 million at January 30, 1994. The Company currently has a
bank credit agreement ("Credit Agreement") which includes an unsecured line
of credit and provides for the issuance of letters of credit. Borrowings
under the Credit Agreement, which expires June 16, 1997, are limited to the
lesser of $150 million or the Company's borrowing base (as defined in the
Credit Agreement), in either case minus the aggregate amount of letters of
credit. As of October 30, 1994, the Company had $68.3 million in available
unused credit capacity under the Credit Agreement. Management believes that
the Company has sufficient working capital, cash flow from operating
activities, and available unused credit capacity to sustain current growth
plans.
<PAGE>
Results of Operations
- ---------------------
The following table shows the percentage of net sales that each item in the
Consolidated Statements of Income represents. This table should be read in
conjunction with the following discussion and with the Company's financial
statements, including the notes:
<TABLE>
<CAPTION>
For the For the
Quarter Ended Nine Months Ended
----------------------- -----------------------
October 30, October 31, October 30, October 31,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense 66.3 65.2 65.2 64.8
Selling, general and
administrative expense 28.5 29.8 29.3 30.1
Store closing and conversion
costs - - 1.1 -
----- ----- ----- -----
Operating income 5.2 5.0 4.4 5.1
Interest expense 0.9 1.0 1.1 1.2
Other income, net (0.2) (1.1) (0.3) (1.3)
----- ----- ----- -----
Income before income taxes 4.5 5.1 3.6 5.2
Provision for income taxes 1.7 2.0 1.4 2.0
----- ----- ----- -----
Net income 2.8% 3.1% 2.2% 3.2%
===== ===== ===== =====
</TABLE>
<PAGE>
Three months ended October 30, 1994 compared to the
- ---------------------------------------------------
three months ended October 31, 1993
-----------------------------------
Net sales for the three months ended October 30, 1994 were $283.1 million, an
increase of $127.3 million or 82%, compared to the same period of the prior
year. The results for the third quarter of fiscal 1994 included sales of 160
stores (net of 24 closures) that were added during the previous twelve
months, 32 of which were added during the third quarter of fiscal 1994 and 80
Leewards stores which were included from July 10, 1994. Also included were
liquidation sales of 18 Leewards stores that were closed during the third
quarter. In the third quarter of fiscal 1994, sales of newer stores (not
included in comparable store sales) accounted for $118.8 million of the
increase. Comparable store sales chainwide increased 10% over the same
period last year, and 7% for Michaels stores excluding the former Leewards
stores.
Cost of sales and occupancy expense increased by 1.1%, as a percentage of
sales, for the third quarter of fiscal 1994 compared to the same period of
the prior year. The increase was principally due to higher occupancy costs
on new and acquired lower volume stores, the impact of lower margins on
liquidation sales in 18 Leewards stores which were closed during the quarter,
and a higher level of promotional activity.
Selling, general and administrative expense decreased by 1.3%, as a
percentage of sales, in the third quarter of fiscal 1994 compared to the same
period of the prior year, due primarily to advertising, corporate and
administrative expenses being spread over a larger revenue base in the
current period.
The increase in interest expense for the third quarter of fiscal 1994 to $2.5
million from $1.6 million for the same period a year ago was due primarily to
increased bank borrowings. The decrease in other income was due principally
to a decline in the average investment portfolio this year compared to the
prior year period.
The slight increase in the Company's effective tax rate was due principally
to the effect of additional amortization of goodwill, which is not deductible
for tax purposes, related to the Company's recent acquisitions.
<PAGE>
Nine months ended October 30, 1994 compared to the
- --------------------------------------------------
nine months ended October 31, 1993
----------------------------------
Net sales for the nine months ended October 30, 1994 were $617.1 million, an
increase of $233.0 million or 61% over the same period of the prior year.
The results for the first nine months of fiscal 1994 included sales of 160
stores (net of 24 closures) that were added during the previous twelve
months, 55 of which were added during the first nine months of this year and
80 Leewards stores which were included from July 10, 1994. In the first nine
months of fiscal 1994, sales of newer stores (not included in comparable
store sales) accounted for $207.5 million of the increase. Comparable store
sales chainwide increased 9% over the same period last year, and 7% for
Michaels stores excluding the former Leewards stores.
Cost of sales and occupancy expense increased by 0.4%, as a percentage of
sales, for the first nine months of fiscal 1994 compared to the same period
of the prior year. The increase was primarily due to higher occupancy costs
on new and acquired lower volume stores, the impact of lower margins on
liquidation sales in 18 Leewards stores which were closed, and a higher level
of promotional activity.
Selling, general and administrative expense decreased by 0.8%, as a
percentage of sales, for the first nine months of fiscal 1994 compared to the
same period of the prior year, due primarily to advertising, corporate and
administrative expenses being spread over a larger revenue base in the
current period.
The $7.1 million ($4.4 million net of tax, or $.22 per share) of store
closure and conversion costs includes a charge for estimated net costs for
closure or relocation of approximately ten Michaels stores (six of which have
been closed and one relocated) that compete with certain acquired locations,
as well as certain conversion and training costs related to the recently
acquired Leewards stores.
Interest expense for the first nine months of fiscal 1994 increased to $6.9
million from $4.7 million for the same period a year ago. The increase was
due primarily to increased bank borrowings. The decrease in other income was
due principally to a decline in the average investment portfolio this year
compared to the prior year period.
The slight increase in the Company's effective tax rate was due principally
to the effect of additional amortization of goodwill, which is not deductible
for tax purposes, related to the Company's recent acquisitions.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 - Computation of Earnings Per Common Share for the three
months ended October 30, 1994.
Exhibit 11.2 - Computation of Earnings Per Common Share for the nine
months ended October 30, 1994.
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period covered by
this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAELS STORES, INC.
By: /s/ R. Don Morris
R. Don Morris
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: December 14, 1994
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
11.1 Computation of Earnings Per Common
Share for the three months ended
October 30, 1994.
11.2 Computation of Earnings Per Common
Share for the nine months ended
October 30, 1994.
<PAGE>
EXHIBIT 11.1
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Three Months Ended October 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
---------------------
Total Fully
Outstanding Primary Diluted
----------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning
of quarter 21,103,694 21,103,694 21,103,694
Shares issued during quarter 162,778 74,220 74,220
---------- ----------
Weighted average outstanding
shares 21,177,914 21,177,914
Common Equivalent Shares:
Dilutive shares attributable
to stock options (computed
by the treasury stock
method) 752,339 773,741
---------- ---------- ----------
Total outstanding shares 21,266,472 21,930,253 21,951,655
========== ========== ==========
Earnings per common and
common equivalent share $.36 $.36
==== ====
</TABLE>
<PAGE>
EXHIBIT 11.2
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Nine Months Ended October 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
---------------------
Total Fully
Outstanding Primary Diluted
----------- ---------- ----------
<S> <C> <C> <C>
Outstanding at January 30, 1994 16,697,357 16,697,357 16,697,357
Shares issued during period 4,569,115 2,068,328 2,068,328
---------- ----------
Weighted average outstanding
shares 18,765,685 18,765,685
Common Equivalent Shares:
Dilutive shares attributable
to stock options (computed
by the treasury stock
method) 754,952 781,540
---------- ---------- ----------
Total outstanding shares 21,266,472 19,520,637 19,547,225
========== ========== ==========
Earnings per common and
common equivalent share $.69 $.69
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> JAN-29-1995
<PERIOD-END> OCT-30-1994
<CASH> 4,096
<SECURITIES> 18,418
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 381,456
<CURRENT-ASSETS> 444,567
<PP&E> 191,423
<DEPRECIATION> 56,325
<TOTAL-ASSETS> 686,522
<CURRENT-LIABILITIES> 250,695
<BONDS> 0
<COMMON> 2,127
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 686,522
<SALES> 283,069
<TOTAL-REVENUES> 283,069
<CGS> 187,566
<TOTAL-COSTS> 268,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,081
<INCOME-PRETAX> 12,746
<INCOME-TAX> 4,933
<INCOME-CONTINUING> 7,813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,813
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
