SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1995
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
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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 12 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 of June 9, 1995
21,413,710
Title
-----
Common stock, par value $.10 per share
<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)
<TABLE>
<CAPTION>
ASSETS
April 30, January 29,
1995 1995
--------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,836 $ 1,907
Marketable securities 14,777 15,002
Merchandise inventories 407,366 375,096
Deferred income taxes 16,236 15,002
Prepaid expenses and other 16,864 11,525
-------- --------
Total current assets 457,079 418,532
-------- --------
Property and equipment, at cost 225,450 204,032
Less accumulated depreciation (77,561) (62,228)
-------- --------
147,889 141,804
-------- --------
Costs in excess of net assets of
acquired operations, net 142,777 117,377
Other assets 8,257 8,313
-------- --------
151,034 125,690
-------- --------
$756,002 $686,026
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 71,938 $103,649
Short-term bank debt 27,000 -
Accrued liabilities and other 87,992 82,441
-------- --------
Total current liabilities 186,930 186,090
-------- --------
Bank debt 102,000 41,100
Convertible subordinated notes 96,940 96,950
Deferred income taxes and other 5,874 5,969
-------- --------
Total long-term liabilities 204,814 144,019
-------- --------
391,744 330,109
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, 21,409,685
shares outstanding 2,141 2,135
Additional paid-in capital 245,155 244,561
Retained earnings 116,962 109,221
-------- --------
Total shareholders' equity 364,258 355,917
-------- --------
$756,002 $686,026
======== ========
</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
------------------------
April 30, May 1,
1995 1994
--------- --------
<S> <C> <C>
Net sales $265,547 $159,798
Cost of sales and occupancy expense 172,043 103,511
Selling, general and administrative
expense 78,084 47,216
-------- --------
Operating income 15,420 9,071
Interest expense 3,341 2,026
Other income, net (209) (1,031)
-------- --------
Income before income taxes 12,288 8,076
Provision for income taxes 4,731 3,109
-------- --------
Net income $ 7,557 $ 4,967
======== ========
Earnings per common and common
equivalent share $.35 $.28
==== ====
Weighted average common and common
equivalent shares outstanding 21,845 17,856
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------
April 30, May 1,
1995 1994
--------- --------
<S> <C> <C>
Operating activities:
Net income $ 7,557 $ 4,967
Adjustments:
Depreciation and amortization 7,561 3,767
Change in assets and liabilities excluding
the effects of acquisitions:
Merchandise inventories (24,935) (18,562)
Prepaid expenses and other (1,773) (2,395)
Deferred income taxes and other 4,381 287
Accounts payable (36,866) (771)
Income taxes payable - (4,111)
Accrued liabilities and other (9,525) (7,321)
-------- --------
Net change in assets and liabilities (68,718) (32,873)
-------- --------
Net cash used in operating activities (53,600) (24,139)
-------- --------
Investing activities:
Additions to property and equipment (11,934) (14,178)
Net proceeds from sales of property
and equipment 1,791 -
Purchases of marketable securities - (5,046)
Net proceeds from sales of marketable
securities - 1,865
Acquisitions and other (24,684) (217)
-------- --------
Net cash used in investing activities (34,827) (17,576)
-------- --------
Financing activities:
Net borrowings under bank credit facilities 87,900 42,500
Proceeds from issuance of common stock and other 456 1,215
-------- --------
Net cash provided by financing activities 88,356 43,715
-------- --------
Net increase (decrease) in cash and equivalents (71) 2,000
Cash and equivalents at beginning of year 1,907 867
-------- --------
Cash and equivalents at end of period $ 1,836 $ 2,867
======== ========
Cash payments for:
Interest $ 1,141 $ 293
Income taxes 215 7,220
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months ended April 30, 1995
(Unaudited)
Note A
- ------
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 29, 1995) 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 ended April 30, 1995. 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 ended April 30, 1995 are not
indicative of the results to be expected for the entire year.
Note B
- ------
In March 1995, the Company purchased Aaron Brothers Holdings, Inc. ("Aaron
Brothers"), which owns a chain of 71 framing and art supplies stores
predominantly in California, for a purchase price of $25 million in cash
including the assumption of $19.7 million of debt. 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 $26.3
million, which will be amortized on a straight-line basis over a period of 40
years. The results of operations for April 1995 are included in the
accompanying consolidated financial statements.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
The Company acquired 71 specialty framing and art supplies stores and opened
15 Michaels stores during the first three months of fiscal 1995. Capital
expenditures for these stores, and, to a lesser extent, the remodeling and
expansion of existing stores, the opening of a new distribution facility, and
system enhancements, amounted to $11.9 million in the first three months of
fiscal 1995. The Company expects capital expenditures during the remainder
of fiscal 1995 to approximate $47.0 million, relating primarily to the
opening of new stores and additional systems enhancements.
In March 1995, the Company paid $25 million in cash, including the assumption
and retirement of $19.7 million of debt associated with the acquisition of
Aaron Brothers.
At April 30, 1995 the Company had working capital of $270.1 million, compared
to $232.4 million at January 29, 1995. 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, 1998, are limited to the lesser
of $200 million or the Company's borrowing base (as defined in the Credit
Agreement), in either case minus the aggregate amount of outstanding letters
of credit. As of April 30, 1995, the Company had $69.1 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
Quarter Ended
--------------------
April 30, May 1,
1995 1994
--------- ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales and occupancy
expense 64.8 64.8
Selling, general and
administrative expense 29.4 29.5
----- -----
Operating income 5.8 5.7
Interest expense 1.3 1.3
Other income, net (0.1) (0.6)
----- -----
Income before income taxes 4.6 5.0
Provision for income taxes 1.8 1.9
----- -----
Net income 2.8% 3.1%
===== =====
</TABLE>
<PAGE>
Three months ended April 30, 1995 compared to the
- -------------------------------------------------
three months ended May 1, 1994
------------------------------
Net sales for the three months ended April 30,1995 were $265.5 million, an
increase of $105.7 million or 66.2%, compared to the same period of the prior
year. The results for the first quarter of fiscal 1995 included sales of 205
Michaels stores (net of 25 closures) that were added during the previous
twelve months, 15 of which were added during the first quarter of fiscal
1995, and 71 Aaron Brothers stores which were included from March 27, 1995.
Sales of newer stores accounted for $98.1 million of the increase.
Comparable store sales increased 9% over the same period last year.
Cost of sales and occupancy expense was flat compared to the same period last
year, as a percentage of sales, with a slight decrease in cost of sales being
offset by an increase in occupancy costs, resulting from a high proportion in
the current year of newer and acquired stores having a relatively lower sales
base over which fixed occupancy costs can be spread. The Company expects cost
of sales and occupancy expense for the second quarter of this year to be
higher, as a percentage of sales, than last year's comparable quarter, due to
increased promotional sales activity as well as to an increase in occupancy
costs. The increased promotional sales activity has been undertaken
partly in response to a general softness in the retail sector. Primarily as
a result of this higher level of promotional activity, the Company expects a
decrease in net income and earnings per share for this year's second quarter
compared to the prior year comparable period, before giving effect to the
$7.1 million store closure and conversion charge reflected in last year's
second quarter results.
Selling, general and administrative expense decreased by 0.1%, as a
percentage of sales, in the first quarter of fiscal 1995 compared to the same
period of the prior year, due to a slight improvement in labor and related
administrative expenses as a percentage of sales.
The increase in interest expense for the first quarter of fiscal 1995 to $3.3
million from $2.0 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 size of the investment portfolio this year compared to
the prior year period.
The Company's effective tax rate remained static at 38.5%, with a tax
reduction due to investment in tax advantaged securities being offset by the
effect of additional amortization of goodwill, which is not deductible for
tax purposes, related to the Company's fiscal 1994 acquisitions.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on June 6, 1995.
The following are the results of the election of two directors to the board,
voted upon at the meeting:
<TABLE>
<CAPTION>
Nominees For Withheld
-------- --- --------
<S> <C> <C> <C>
Charles J. Wyly, Jr. 17,351,030 132,100
Jack E. Bush 17,354,765 128,365
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Common Share for the three
months ended April 30, 1995.
(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: June 14, 1995
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
11 Computation of Earnings Per Common
Share for the three months ended
April 30, 1995.
<PAGE>
EXHIBIT 11
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Three Months Ended April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
-----------------------
Total Fully
Outstanding Primary Diluted
----------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning
of quarter 21,354,167 21,354,167 21,354,167
Shares issued during quarter 55,518 16,084 16,084
---------- ----------
Weighted average outstanding
shares 21,370,251 21,370,251
Common Equivalent Shares:
Dilutive shares attributable
to stock options (computed
by the treasury stock
method) 474,469 474,469
---------- ---------- ----------
Total outstanding shares 21,409,685 21,844,720 21,844,720
========== ========== ==========
Earnings per common and
common equivalent share $.35 $.35
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-END> APR-30-1995
<CASH> 1,836
<SECURITIES> 14,777
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 407,366
<CURRENT-ASSETS> 457,079
<PP&E> 225,450
<DEPRECIATION> 77,561
<TOTAL-ASSETS> 756,002
<CURRENT-LIABILITIES> 186,930
<BONDS> 0
<COMMON> 2,141
0
0
<OTHER-SE> 362,117
<TOTAL-LIABILITY-AND-EQUITY> 756,002
<SALES> 265,547
<TOTAL-REVENUES> 265,547
<CGS> 172,043
<TOTAL-COSTS> 250,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,132
<INCOME-PRETAX> 12,288
<INCOME-TAX> 4,731
<INCOME-CONTINUING> 7,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,557
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
