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 October 29, 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
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
Title of December 8, 1995
----- -------------------
Common stock, par value $.10 per share 21,482,195
<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
October 29, January 29,
1995 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 3,685 $ 1,907
Marketable securities - 15,002
Merchandise inventories 456,429 375,096
Deferred income taxes 34,295 15,002
Prepaid expenses and other 16,332 11,525
-------- --------
Total current assets 510,741 418,532
-------- --------
Property and equipment, at cost 262,564 204,032
Less accumulated depreciation (90,942) (62,228)
-------- --------
171,622 141,804
-------- --------
Costs in excess of net assets of
acquired operations, net 145,099 117,377
Other assets 8,147 8,313
153,246 125,690
-------- --------
$835,609 $686,026
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $131,462 $103,649
Short-term bank debt 70,500 -
Accrued liabilities and other 77,681 82,441
-------- --------
Total current liabilities 279,643 186,090
-------- --------
Bank debt 102,200 41,100
Convertible subordinated notes 96,940 96,950
Other 26,206 5,969
-------- --------
Total long-term liabilities 225,346 144,019
-------- --------
504,989 330,109
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, 21,232,195
shares outstanding 2,135 2,135
Additional paid-in capital 243,498 244,561
Retained earnings 88,547 109,221
Treasury stock, at cost (3,560) -
-------- --------
Total shareholders' equity 330,620 355,917
-------- --------
$835,609 $686,026
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
October 29, October 30,
1995 1994
----------- -----------
<S> <C> <C>
Net sales $312,696 $283,069
Cost of sales and occupancy expense 208,736 187,566
Selling, general and administrative
expense 91,039 80,676
-------- --------
Operating income 12,921 14,827
Interest expense 4,899 2,511
Other expense and (income), net 440 (430)
-------- --------
Income before income taxes 7,582 12,746
Provision for income taxes 4,576 4,933
-------- --------
Net income $ 3,006 $ 7,813
======== ========
Earnings per common and common
equivalent share $.14 $.36
==== ====
Weighted average common and common
equivalent shares outstanding 21,337 21,930
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
October 29, October 30,
1995 1994
----------- -----------
<S> <C> <C>
Net sales $838,153 $617,071
Cost of sales and occupancy expense 610,912 402,314
Selling, general and administrative
expense 253,873 180,709
Store closing and conversion costs (A) - 7,074
-------- --------
Operating (loss) income (26,632) 26,974
Interest expense 12,777 6,895
Other expense and (income), net 1,707 (1,911)
-------- --------
(Loss) income before income taxes (41,116) 21,990
(Benefit) provision for income taxes (18,555) 8,497
-------- --------
Net (loss) income $(22,561) $ 13,493
======== ========
(Loss) earnings per common and common
equivalent share $(1.06) $.69
====== ====
Weighted average common and common
equivalent shares outstanding 21,312 19,521
====== ======
</TABLE>
(A) $4,385 net of tax, or $.22 per share
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
October 29, October 30,
1995 1994
----------- -----------
<S> <C> <C>
Operating activities:
Net (loss) income $(22,561) $ 13,493
Adjustments:
Depreciation and amortization 23,735 13,414
Change in assets and liabilities excluding
the effects of acquisitions:
Merchandise inventories (73,998) (127,286)
Prepaid expenses and other (4,661) (14,962)
Deferred income taxes and other (18,775) 5,307
Accounts payable 26,078 68,572
Income taxes payable - (8,363)
Accrued liabilities and other (5,923) (6,587)
-------- --------
Net change in assets and liabilities (77,279) (83,319)
-------- --------
Net cash used in operating activities (76,105) (56,412)
-------- --------
Investing activities:
Additions to property and equipment (49,715) (51,959)
Net proceeds from sales of property
and equipment 1,791 -
Net proceeds from sales of marketable
securities 17,991 46,184
Acquisitions (24,683) (48,820)
-------- --------
Net cash used in investing activities (54,616) (54,595)
Financing activities:
Net borrowings under bank credit facilities 131,600 36,500
Proceeds from issuance of common stock
and other 899 77,736
-------- --------
Net cash provided by financing
activities 132,499 114,236
-------- --------
Net increase in cash and equivalents 1,778 3,229
Cash and equivalents at beginning of period 1,907 867
-------- --------
Cash and equivalents at end of period $ 3,685 $ 4,096
======== ========
Cash payments (refunds) for:
Interest $ 10,354 $ 4,253
Income taxes (1,332) 16,506
</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 29, 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 and nine months ended October 29, 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 and nine
months ended October 29, 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 owned a chain of 71 framing and art supplies stores
predominantly in California (the "Aaron Brothers Stores"), 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 from April 1995 forward
are included in the accompanying consolidated financial statements.
Note C
- ------
Certain fiscal 1994 balances included in the consolidated financial
statements have been reclassified to conform to the fiscal 1995 presentation.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
The Company acquired 71 Aaron Brothers stores and opened 59 Michaels stores
during the first nine months of fiscal 1995 (with 5 additional stores opening
in early November 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 $49.7
million in the first nine months of fiscal 1995. The Company expects capital
expenditures during the fourth quarter of fiscal 1995 to total approximately
$10 million, relating primarily to costs for stores to be relocated or opened
in early 1996 and for 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 October 29, 1995, the Company had working capital of $231.1 million
compared to $232.4 million at January 29, 1995. The Company currently has a
bank credit agreement (as amended, the "Credit Agreement") which includes an
unsecured line of credit and provides for the issuance of letters of credit.
As of October 29, 1995, the Company had $45.2 million in available unused
credit capacity under the Credit Agreement.
During the second quarter of 1995, management made a strategic decision to
reduce the number of product stock keeping units ("SKUs") typically carried
in the Michaels inventory assortment by embarking on an aggressive
promotional and markdown program. The proceeds from this inventory reduction
program are being used to pay down bank debt. The Company has also decided
to reduce the number of planned store openings in 1996 from the 90 to 100
units that were being considered to approximately 30 to 40 new units.
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 29, October 30, October 29, October 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense 66.8 66.3 72.9 65.2
Selling, general and
administrative expense 29.1 28.5 30.3 29.3
Store closing and conversion
costs - - - 1.1
----- ----- ----- -----
Operating income (loss) 4.1 5.2 (3.2) 4.4
Interest expense 1.6 0.9 1.5 1.1
Other expense and
(income), net 0.1 (0.2) 0.2 (0.3)
----- ----- ----- -----
Income (loss) before
income taxes 2.4 4.5 (4.9) 3.6
Provision (benefit) for
income taxes 1.4 1.7 (2.2) 1.4
----- ----- ----- -----
Net income (loss) 1.0% 2.8% (2.7)% 2.2%
===== ===== ===== =====
</TABLE>
<PAGE>
Three months ended October 29, 1995 compared to the
- ---------------------------------------------------
three months ended October 30, 1994
-----------------------------------
Net sales for the three months ended October 29, 1995 were $312.7 million, an
increase of $29.6 million, or 10.5%, compared to the same period of the prior
year. The results for the third quarter of fiscal 1995 included sales of 59
Michaels stores that were added during the previous twelve months, 23 of
which were added during the third quarter of fiscal 1995, and 69 (net of two
closures) Aaron Brothers Stores which were included since April 1995. Sales
of newer stores accounted for $42.7 million of the increase. Comparable
store sales decreased 4% from the same period last year. Although the
Company achieved an increase in comparable store sales of 5% in November, 1995,
it cannot predict with any certainty that an increase in comparable store sales
will be achieved for the fourth quarter of fiscal 1995.
Cost of sales and occupancy expense increased as a percentage of sales by 0.5%
compared to the same period last year principally due to higher occupancy costs
resulting from both a higher proportion in the current year of newer and
acquired stores, which have a relatively low sales base over which fixed
occupancy costs can be spread, and to the decline in sales at mature stores.
Selling, general and administrative expense increased by 0.6%, as a
percentage of sales, in the third quarter of fiscal 1995 compared to the same
period of the prior year due principally to the reduced leveraging of costs
resulting from the decline in comparable store sales. Had comparable store
sales been even with last year, selling, general and administrative expenses
would have declined by 0.6% as a percentage of sales, not withstanding the
increase in goodwill amortization due to the Aaron Brothers acquisition.
The increase in interest expense for the third quarter of fiscal 1995 to $4.9
million from $2.5 million for the same period a year ago was due primarily to
increased bank borrowings to finance new stores and seasonal inventory
growth. The increase in other expense over other income was due principally
to losses recognized in liquidating the investment portfolio this year
compared to investment income recorded in the prior year period.
The Company's effective tax rate increased to 60.4% from 38.7% for the same
period last year due to a change in the Company's estimated annual effective
tax rate due, in part, to lower expectations as to the Company's earnings
outlook for fiscal 1995.
<PAGE>
Nine months ended October 29, 1995 compared to the
- --------------------------------------------------
nine months ended October 30, 1994
----------------------------------
Net sales for the nine months ended October 29, 1995 were $838.2 million, an
increase of $221.1 million, or 35.8%, compared to the same period of the
prior year. The results for the nine months of fiscal 1995 included sales of
59 Michaels stores that were added during the previous twelve months, all of
which were added during fiscal 1995, and 69 (net of two closures) Aaron
Brothers stores which were included since April 1995. Sales of newer stores
accounted for $216.6 million of the increase. Comparable store sales
increased 4% over the same period last year. Although the Company achieved
an increase in comparable store sales of 5% in November 1995, it cannot predict
with any certainty that an increase in comparable store sales will be
achieved for the fourth quarter of fiscal 1995.
Cost of sales and occupancy expense increased by 7.7% compared to the same
period last year, as a percentage of sales, principally due to $57.5 million
of unusual costs which were recorded in the second quarter of fiscal 1995
associated with the retail markdown of inventory. This markdown action was
initiated as a result of the Company's strategic decision to reduce the
number of product SKUs typically carried in the Michaels inventory
assortment. Management believes that its efforts to reduce the overall SKU
base will result in a more efficient deployment of capital going forward.
Excluding the inventory charge, cost of sales and occupancy expense increased
0.8%, as a percentage of sales, compared to last year's comparable period.
The increase was due principally to higher occupancy expense, as a percentage
of sales, resulting from a higher proportion in the current year of newer and
acquired stores having a relatively low sales base over which fixed occupancy
costs can be spread.
Selling, general and administrative expense increased by 1.0%, as a
percentage of sales, for the first nine months of fiscal 1995 compared to the
same period of the prior year. The largest item causing the increase was
increased amortization of goodwill resulting from the Company's acquisition
activity during 1994 and early 1995. As a percentage of sales, an increase in
payroll and related expenses due principally to the higher proportion of newer
stores in the current year was offset by a reduction in advertising expenses as
additional economies of scale were achieved.
The increase in interest expense for the first nine months of fiscal 1995 to
$12.8 million from $6.9 million for the same period a year ago was due
primarily to increased bank borrowings to finance new stores and seasonal
inventory growth. The increase in other expense over other income was due
principally to losses recognized in liquidating the investment portfolio this
year compared to investment income recorded in the prior year period.
The Company's effective tax rate shifted to a 45.1% benefit rate from a 38.6%
provision rate for the same period last year. The rate difference is due to
the effect of the increased goodwill amortization on the lower earnings
outlook for the year.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - Other Information
Item 1. Legal Proceedings
On August 28, 1995, two lawsuits were filed against Michaels and certain
of its officers and directors in the United States District Court for the
Northern District of Texas, Dallas Division (the "Class Action Suits"). Each
of the Class Action Suits is purportedly a class action lawsuit on behalf of
Michaels' stockholders alleging violations of Sections 10 (b) and 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5
under the Exchange Act and related common law. The alleged factual basis
underlying the Class Action Suits and the relief sought therein is the
plaintiff's allegations that Michaels and the individual defendants
misrepresented or failed to disclose material information concerning the
financial condition of Michaels, its operations and prospects and that the
value of Michaels Common Stock was artificially inflated as a result of such
misrepresentations or failures to disclose. Each of the Class Action Suits
seeks compensatory damages and reimbursement for the plaintiffs' fees and
expenses. The Company believes the Class Action Suits are without merit and
intends to vigorously defend this litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Common Share for the Three
Months Ended October 29, 1995.
Exhibit 27 - Financial Data Schedule
(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 13, 1995
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
11 Computation of Earnings Per Common
Share for The Three Months Ended
October 29, 1995.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Three Months Ended October 29, 1995
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
---------------------
Total Fully
Outstanding Primary Diluted
----------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning
of quarter 21,293,759 21,293,759 21,293,759
Shares issued (cancelled)
during quarter (61,564) (20,036) (20,036)
---------- ----------
Weighted average outstanding
shares 21,273,723 21,273,723
Common Equivalent Shares:
Dilutive shares attributable
to stock options (computed
by the treasury stock
method) 63,140 63,140
---------- ---------- ----------
Total outstanding shares 21,232,195 21,336,863 21,336,863
========== ========== ==========
Earnings per common and
common equivalent share $.14 $.14
==== ====
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-END> OCT-29-1995
<CASH> 3,685
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 456,429
<CURRENT-ASSETS> 510,741
<PP&E> 262,564
<DEPRECIATION> 90,942
<TOTAL-ASSETS> 835,609
<CURRENT-LIABILITIES> 279,643
<BONDS> 0
<COMMON> 2,135
0
0
<OTHER-SE> 328,485
<TOTAL-LIABILITY-AND-EQUITY> 835,609
<SALES> 838,153
<TOTAL-REVENUES> 838,153
<CGS> 610,912
<TOTAL-COSTS> 864,785
<OTHER-EXPENSES> 1,707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,777
<INCOME-PRETAX> (41,116)
<INCOME-TAX> (18,555)
<INCOME-CONTINUING> (22,561)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,561)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
