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 27, 1996
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)
8000 Bent Branch Drive, Irving, Texas 75063
P.O. Box 619566, DFW, Texas 75261-9566
(Address of principal executive offices including zip code)
(972) 409-1300
(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 10, 1996
_____ _____________________
Common stock, par value $.10 per share 23,560,592
__________
<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 27, January 28,
1996 1996
___________ ___________
<S> <C) <C>
Current assets:
Cash and equivalents $ 2,635 $ 2,870
Merchandise inventories 471,083 366,102
Income taxes receivable and
deferred income taxes 48,925 35,177
Prepaid expenses and other 15,594 12,143
________ ________
Total current assets 538,237 416,292
________ ________
Property and equipment, at cost 298,567 255,386
Less accumulated depreciation (108,829) (82,157)
________ ________
189,738 173,229
Costs in excess of net assets of
acquired operations, net 141,018 143,721
Other assets 6,604 6,538
________ ________
147,622 150,259
________ ________
$875,597 $739,780
________ ________
________ ________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $153,757 $ 98,799
Bank debt 39,600 -
Accrued liabilities and other 96,371 88,510
________ ________
Total current liabilities 289,728 187,309
________ ________
Bank debt - 87,200
Convertible subordinated notes 96,940 96,940
Senior notes 125,000 -
Deferred income taxes and other 41,538 32,378
________ ________
Total long-term liabilities 263,478 216,518
________ ________
553,206 403,827
________ ________
Commitments and contingencies
Shareholders' equity:
Common stock, 23,560,592
shares outstanding 2,356 2,150
Additional paid-in capital 268,793 243,325
Retained earnings 51,242 90,478
________ ________
Total shareholders' equity 322,391 335,953
________ ________
$875,597 $739,780
________ ________
________ ________
</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>
Three Months Ended
__________________________
October 27, October 29,
1996 1995
___________ ___________
<S> <C> <C>
Net sales $322,221 $312,696
Cost of sales and occupancy expense 259,928 208,736
Selling, general and administrative
expense 99,912 91,039
________ ________
Operating (loss) income (37,619) 12,921
Interest expense 6,502 4,899
Other expense, net 1 440
________ ________
(Loss) income before income taxes (44,122) 7,582
(Benefit) provision for income taxes (9,892) 4,576
________ ________
Net (loss) income $(34,230) $ 3,006
________ ________
________ ________
(Loss) earnings per common and
common equivalent share $(1.45) $.14
______ ____
______ ____
Weighted average common and common
equivalent shares outstanding 23,553 21,337
______ ______
______ ______
</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 27, October 29,
1996 1995
___________ ___________
<S> <C> <C>
Net sales $884,572 $838,153
Cost of sales and occupancy expense 649,569 610,912
Selling, general and administrative
expense 272,863 253,873
________ ________
Operating loss (37,860) (26,632)
Interest expense 15,036 12,777
Other (income) expense, net (372) 1,707
________ _________
Loss before income taxes (52,524) (41,116)
Income tax benefit (13,086) (18,555)
________ _________
Net loss $(39,438) $(22,561)
________ ________
________ ________
Loss per common share $(1.71) $(1.06)
______ ______
______ ______
Weighted average common shares
outstanding 23,039 21,312
______ ______
______ ______
</TABLE>
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 27, October 29,
1996 1995
___________ ___________
<S> <C> <C>
Operating activities:
Net loss $(39,438) $(22,561)
Adjustments:
Depreciation and amortization 30,316 23,735
Amortization of deferred debt issue
costs 676 -
Change in assets and liabilities excluding
the effects of acquisitions:
Merchandise inventories (104,981) (73,998)
Prepaid expenses and other assets (4,232) (4,661)
Deferred income taxes and other (11,781) (18,775)
Accounts payable 54,958 26,078
Accrued liabilities and other 1,249 (5,923)
________ ________
Net change in assets and liabilities (64,787) (77,279)
________ ________
Net cash used in operating activities (73,233) (76,105)
________ ________
Investing activities:
Additions to property and equipment (23,823) (49,715)
Net proceeds from sales of property
and equipment - 1,791
Net proceeds from sales of marketable
securities and other investments 1,122 17,991
Acquisitions and other - (24,683)
________ ________
Net cash used in investing activities (22,701) (54,616)
________ ________
Financing activities:
Net borrowings (repayments) under bank
credit facilities (47,600) 131,600
Proceeds from issuance of senior notes 120,542 -
Proceeds from issuance of common stock
and other 22,757 899
________ ________
Net cash provided by financing activities 95,699 132,499
Net increase (decrease) in cash and equivalents (235) 1,778
Cash and equivalents at beginning of year 2,870 1,907
________ ________
Cash and equivalents at end of period $ 2,635 $ 3,685
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended October 27, 1996
(Unaudited)
Note A
______
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 28, 1996) 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
and nine months ended October 27, 1996. All of such adjustments are of a
normal and recurring nature. Because of the seasonal nature of the Company's
business and the unusual costs and expenses incurred in the third quarter of
fiscal 1996, the results of operations for the three and nine months ended
October 27, 1996 are not indicative of the results to be expected for the
entire year.
Note B
______
Indebtedness outstanding under the Company's bank credit agreement, as
amended (the "Credit Agreement") at the end of the third quarter of fiscal
1996 was $39.6 million versus $87.2 million at the end of the fiscal year
ended January 28, 1996. Amounts outstanding under the Credit Agreement, for
which the carrying cost is at fair value, bear interest at a Eurodollar rate
plus a premium and/or at the prime rate (a blended rate of 6.98% at October
27, 1996). Due to the operating loss incurred in the third quarter of 1996,
the Company is not in compliance with a fixed-charges coverage ratio covenant
contained in both the Credit Agreement and an operating lease (the "Leasing
Facility") relating to two distribution facilities. The banks under the
Credit Agreement and the Leasing Facility have waived the non-compliance
through February 1, 1997. Due to the significance of the third quarter
operating loss, the Company does not believe that it can come into compliance
with its current financial covenants by the end of the fourth quarter of 1996
and, therefore, intends to negotiate waivers under or amendments to the
Credit Agreement and the Leasing Facility, or replacement facilities, as
necessary. Under the Leasing Facility, without the waiver or amendment
described above, lease obligations of approximately $28 million could be
accelerated, in which case the Company anticipates that it would refinance
the two distribution facilities. Consistent with the requirement in the
Credit Agreement for an annual 30-day "clean down," the Company repaid all
indebtedness under the Credit Agreement on December 5, 1996 and has no
further borrowing availability under the Credit Agreement. Management
believes, however, that it will have sufficient liquidity through cash
generated from operations, together with waivers under or amendments to the
Credit Agreement and the Leasing Facility, or replacements for those
facilities, to meet its liquidity requirements for 1997.
Note C
______
Investing and financing activities not affecting cash in the nine months
ended October 27, 1996 included additions to property and equipment through
capital lease obligations of $18.1 million related to the acquisition of new
computer equipment.
Note D
______
Effective January 29, 1996 the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." In the
third quarter of 1996, the Company wrote down approximately $1.2 million of
leasehold improvements in four stores to be closed in the first quarter of 1997
and three other stores.
Note E
______
Earnings per share data are based on the weighted average number of shares
outstanding, including common stock equivalents and other dilutive securities
when applicable. The assumed conversion of the convertible subordinated
notes was anti-dilutive for all periods presented and was therefore not
included in the calculation of fully diluted earnings per share data for any
of the periods.
Note F
______
In August 1995, two lawsuits were filed by certain security holders against
the Company and certain present and former officers and directors seeking
class action status on behalf of purchasers of the Company's Common Stock
between February 1, 1995 and August 23, 1995. Among other things, the
plaintiffs allege that misstatements and omissions by defendants relating to
projected and historical operating results, inventory and other matters
involving future plans resulted in an inflation of the price of the Company's
Common Stock during the period between February 1, 1995 and August 23, 1995.
The plaintiffs seek on behalf of the purported class an unspecified amount of
compensatory damages and reimbursement for the plaintiffs' fees and expenses.
The United States District Court for the Northern District of Texas
consolidated the two lawsuits on November 16, 1995. In response to motions
filed by the Company and the individual defendants, the Court dismissed
certain portions of the complaint and permitted the plaintiffs to proceed
with discovery. The Company believes that it has meritorious defenses to
this action and intends to defend itself vigorously.
A lawsuit was commenced against the Company and several other parties on
September 19, 1994 in the Superior Court of Stanislaus County, California, on
behalf of a former employee, Naomi Snyder, her child, and her husband. The
complaint alleges that the former employee and her then-unborn child were
exposed to excessive levels of carbon monoxide in one of the Company's stores
caused by a propane gas powered floor buffer which was operated by an outside
cleaning service, resulting, among other things, in severe and permanent
injuries to the child. Plaintiffs' Statement of Damages, filed on or about
January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled
that the plaintiffs' pleadings did not state a cause of action against the
Company upon which relief could be granted. However, such ruling by the
trial court was overturned by the Court of Appeals of the State of
California, Fifth Appellate District, on September 23, 1996. On or about
November 1, 1996 the Company filed its petition for review with the
California Supreme Court requesting a review of the appellate decision.
Should that court sustain the appellate court ruling and remand the case to
the trial court, the Company believes it has meritorious defenses to this
action and will defend itself vigorously.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes
that resolution of all known contingencies, including the litigation
described above, would not have a material adverse impact on the Company's
financial position; however, the ultimate outcome is uncertain and there can
be no assurance that future costs would not be material to results of
operations of the Company for a particular future period.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
_______
Certain statements contained in this section which are not historical facts
are forward-looking statements that involve risks and uncertainties,
including, but not limited to, customer demand and trends in the arts, crafts
and decorative items industry, related inventory risks due to shifts in
customer demand, the effect of economic conditions, difficulties with respect
to new technologies, the impact of competitors' locations and pricing, supply
constraints or difficulties, and the results of financing efforts.
During the first nine months of fiscal 1996, the Company has focused on
certain projects to improve store operations including the implementation of
a standardized merchandising and operating format. In connection with these
projects, the Company has relaid substantially all stores with new planograms
and completed the installation of POS systems throughout the chain. This
temporary shift in focus diverted store labor from more traditional selling
activities. During this transition period, advertising was reduced from
prior-year levels. Comparable store sales during the first nine months of
fiscal 1996 were negatively affected and compared unfavorably to the first
nine months of fiscal 1995 (a period including promotional activity that
contributed to a 4% comparable store sales increase). While the favorable
effects of the Company's initiatives to improve profitability are not
expected to become apparent in the Company's operating results until the last
quarter of fiscal 1996 and beyond, the Company expects positive cash flow
from operations in fiscal 1996.
Liquidity and Capital Resources
_______________________________
Cash flow from operations of negative $73.2 million was absorbed during the
first nine months of fiscal 1996 compared to negative $76.1 million of cash
flow from operations absorbed during the first nine months of fiscal 1995.
Indebtedness outstanding under the Company's bank credit agreement (the
"Credit Agreement") at the end of the third quarter of fiscal 1996 was $39.6
million versus $172.7 million at the end of the third quarter of fiscal 1995,
reflecting the $25 million of proceeds from the April 1996 Private Placement
(defined below) and the $120.5 million of net proceeds from the offering of
the Notes (defined below), partially offset by property and equipment
additions and an increase in inventory primarily attributable to new store
additions. As of December 5, 1996 no indebtedness was outstanding under the
Credit Agreement.
At October 27, 1996, the Company had working capital of $248.5 million
compared to $229.0 million at January 28, 1996. Due to the operating loss
incurred in the third quarter of 1996, the Company is not in compliance with
a fixed-charges coverage ratio covenant contained in both the Credit
Agreement and an operating lease (the "Leasing Facility") relating to two
distribution facilities. The banks under the Credit Agreement and the
Leasing Facility have waived the non-compliance through February 1, 1997 and
provided, with respect to the Credit Agreement, the availability of up to $15
million of additional borrowings through November 30, 1996. Consistent with
the requirement in the Credit Agreement for an annual 30-day "Clean down,"
the Company repaid all indebtedness under the Credit Agreement on December 5,
1996 and has no further borrowing availability under the Credit Agreement.
Due to the significance of the third quarter operating loss, the Company does
not believe that it can come into compliance with its current financial
covenants by the end of the fourth quarter of 1996 and, therefore, intends to
negotiate waivers under or amendments to the Credit Agreement and the Leasing
Facility, or replacement facilities, as necessary to provide liquidity
required to finance seasonal working capital requirements. Under the Leasing
Facility, without the waiver or amendment described above, lease obligations
of approximately $28 million could be accelerated, in which case the Company
anticipates that it would refinance the two distribution facilities.
Management believes, however, that it will have sufficient liquidity through
cash generated from operations, together with waivers under or amendments to
the Credit Agreement and the Leasing Facility, or replacements for those
facilities, to meet its liquidity requirements for the remainder of fiscal
1996 and for 1997.
<PAGE>
In April 1996 the Company completed a private placement of 2,000,000 shares
of the Company's Common Stock at a price of $12.50 per share (the "Private
Placement"). The Common Stock was sold through three private transactions
with separate entities owned by independent trusts of which family members of
Sam Wyly and Charles J. Wyly, Jr., Chairman and Vice Chairman of the Company,
respectively, are beneficiaries. The shares of Common Stock sold in the
Private Placement are subject to certain restrictions on future transfer. In
addition, the Company will be required to register the shares issued in the
Private Placement pursuant to the Securities Act of 1933, as amended, upon
demand by the holders of the shares after one year from the date of purchase.
In June 1996 the Company completed a public offering of $125 million of
Senior Notes due 2006 (the "Notes"). The Company used the full amount of the
net proceeds from the sale of the Notes to reduce indebtedness under the
Credit Agreement.
The Company opened 12 Michaels stores and 2 Aaron Brothers stores during the
first nine months of fiscal 1996. Capital expenditures related to these
stores amounted to approximately $2.0 million. Additional capital
expenditures of approximately $21.8 million during the first nine months
related primarily to the expansion, relocation or remodeling of 28 existing
stores, the relocation of a distribution center and the corporate offices,
and various systems enhancements not funded through the Company's capital
lease facility with IBM Credit Corporation. The Company expects capital
expenditures during the remainder of fiscal 1996 to total approximately $9.0
million, relating primarily to costs for store relocations and remodeling and
for additional systems enhancements.
Results of Operations
_____________________
The following table shows the percentage of net sales that each item in the
Consolidated Statements of Operations 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
Three Months Ended Nine Months Ended
_______________________ _______________________
October 27, October 29, October 27, October 29,
1996 1995 1996 1995
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense 80.7 66.8 73.4 72.9
Selling, general and
administrative expense 31.0 29.1 30.9 30.3
_____ _____ _____ _____
Operating (loss) income (11.7) 4.1 (4.3) (3.2)
Interest expense 2.0 1.6 1.7 1.5
Other (income) and expense,
net 0.0 0.1 (0.1) 0.2
_____ _____ _____ _____
(Loss) income before
income taxes (13.7) 2.4 (5.9) (4.9)
(Benefit) provision for
income taxes (3.1) 1.4 (1.4) (2.2)
_____ _____ _____ _____
Net (loss) income (10.6)% 1.0% (4.5)% (2.7)%
_____ _____ _____ _____
_____ _____ _____ _____
</TABLE>
<PAGE>
Three months ended October 27, 1996 compared to the
___________________________________________________
three months ended October 29, 1995
___________________________________
Net sales for the third quarter of fiscal 1996 increased $9.5 million or 3%,
over the third quarter of fiscal 1995. The results for the third quarter of
fiscal 1996 included sales from 16 Michaels stores (net of one closure) that
were opened during the twelve month period ended October 27, 1996.
Comparable store sales declined 2 percent in the third quarter of fiscal 1996
compared to the third quarter of fiscal 1995. The third quarter of fiscal
1996 includes $9.6 million of sales attributable to an extended sidewalk sale
starting on Labor Day partially offset by lost sales from the cancellation of
an advertising circular during the store reset process.
Cost of sales and occupancy expense, as a percentage of net sales, for the
third quarter of fiscal 1996 was 80.7%, an increase of 13.9% compared to the
third quarter of fiscal 1995 due primarily to $47.7 million of unusual costs
and expenses recorded in the third quarter of 1996 to cover losses on an
extended sidewalk sale starting on Labor Day, markdowns on discontinued home
decor and other merchandise and reserves for the closure of four unproductive
stores and the write-down of leasehold improvements in three others.
Adjusting for the 1996 unusual items, cost of sales and occupancy expense for
the third quarter of 1996 was 67.9%, an increase of 1.1% compared to the
prior year, due primarily to the negative effect of fixed occupancy and
distribution costs on a lower sales base caused by the same-store sales
decline as well as the addition of 16 more Michaels stores since the third
quarter of fiscal 1995 (which have a relatively low sales base available to
absorb fixed occupancy expenses).
Selling, general and administrative expense, as a percentage of net sales,
was 31.0% in the third quarter of fiscal 1996, an increase of 1.9% compared
to the third quarter of fiscal 1995 due primarily to increased depreciation
from the new POS system and increased store labor involved in resetting the
stores as well as $3.1 million of unusual costs and expenses related
primarily to an extended sidewalk sale starting on Labor Day and certain
other unusual costs and expenses.
In summary, the $37.6 million operating loss for the third quarter of 1996
reflects $41.2 million of unusual items ($50.8 million of unusual costs and
expenses net of $9.6 million in sales) including: a $20 million loss resulting
from an extended sidewalk sale starting on Labor Day which was conducted to
sell off merchandise that was eliminated following the store resets; markdown
reserves of $15 million primarily related to the Company's strategic decision
to exit the home decor line and certain other discontinued merchandise; and
reserves of $4 million for the closure of four unproductive stores and the
write-down of leasehold improvements in three others.
Interest expense, as a percentage of net sales, was 2.0% for the three months
ended October 27, 1996, an increase of 0.4% compared to the prior year
primarily due to the higher interest rate on the Notes compared to the short
term bank borrowings in the prior year. Interest expense, in comparison to
the prior year, will continue to be higher due to the higher rate of the
Notes for the remainder of the year.
The effective tax rate of 22.4% for the third quarter of fiscal 1996 is lower
than our overall estimate of a 38% tax rate for the first six months due to
the size of the loss and our inability to fully carryback the tax loss to
prior years. The 60.4% effective tax rate in the third quarter of fiscal
1995 was due to a change at that time in the Company's estimated annual
effective tax rate, due, in part, to lower earnings expectations for fiscal
1995.
<PAGE>
Nine months ended October 27, 1996 compared to the
__________________________________________________
nine months ended October 29, 1995
__________________________________
Net sales in the first nine months of fiscal 1996 increased $46.4 million, or
6%, over the first nine months of fiscal 1995. The results for the first
nine months of fiscal 1996 included sales from 16 Michaels stores (net of one
closure) that were opened during the twelve month period ended October 27,
1996 and 70 Aaron Brothers stores that were acquired or opened since April
1995. Comparable store sales declined 3 percent in the first nine months of
fiscal 1996 compared to the first nine months of fiscal 1995. Net sales in
the first nine months of 1996 include $9.6 million of sales attributable to
an extended sidewalk sale starting on Labor Day partially offset by lost
sales from the cancellation of an advertising circular during the store reset
process.
Cost of sales and occupancy expense, as a percentage of net sales, for the
first nine months of fiscal 1996 was 73.4%, an increase of 0.5% compared to
the first nine months of fiscal 1995. The first nine months of fiscal 1996
included $47.7 million of unusual costs and expenses recorded in the third
quarter of 1996 to cover losses on an extended sidewalk sale starting on
Labor Day, markdowns on discontinued home decor and other merchandise and
reserves for the closure of four unproductive stores and the write-down of
leasehold improvements in three others while the first nine months of fiscal
1995 include a $57.5 million charge to cover unusual costs and expenses
associated with the SKU reduction program taken in the second quarter of
1995. Adjusting for both of these unusual items, cost of sales and occupancy
expense for the first nine months of 1996 was 68.8%, an increase of
2.8% compared to the prior year, which management believes was due primarily
to increases in promotional markdowns and increased distribution and
occupancy costs. Distribution costs, as a percentage of net sales, increased
primarily due to less efficient utilization of shipping capacity. Management
believes that transportation costs will be more effectively leveraged in the
future as the Company is in the process of moving a greater percentage of the
Company's merchandise inventories into its regional distribution centers in
order to reduce more expensive direct-to-store shipments. The increase in
occupancy costs, as a percentage of net sales, resulted from a high
proportion of newer stores having a relatively low sales base available to
absorb fixed occupancy costs.
Selling, general and administrative expense, as a percentage of net sales,
was 30.9% in the first nine months of fiscal 1996 and increased by 0.6%
compared to the first nine months of 1995. The first nine months of fiscal
1996 included $3.1 million of unusual costs and expenses related primarily to
an extended sidewalk sale starting on Labor Day and certain other unusual
costs and expenses while the first nine months of fiscal 1995 includes a
charge taken to cover certain retirement costs of the Company's former
President and Chief Operating Officer and costs related to the SKU reduction
program. Adjusting for both of these charges, selling, general and
administrative costs for the first nine months of fiscal 1996 was 30.8%, an
increase of 1.1% over the prior year due primarily to increased depreciation
from the new POS system and increased store labor included in resetting the
stores, offset in part by reductions in pre-opening and other store selling
costs.
<PAGE>
In summary, the $37.9 million operating loss for the first nine months of 1996
reflects $41.2 million of unusual items in the third quarter of 1996
($50.8 million of unusual costs and expenses net of $9.6 million sales)
including: a $20 million loss resulting from an extended sidewalk sale starting
on Labor Day which was conducted to sell off merchandise that was eliminated
following the store resets; markdown reserves of $15 million primarily related
to the Company's strategic decision to exit the home decor line and certain
other discontinued merchandise; and reserves of $4 million for the closure of
four unproductive stores and the write-down of leasehold improvements in three
others.
Interest expense, as a percentage of net sales, was 1.7% for the nine months
ended October 27, 1996, an increase of 0.2% compared to the prior year
primarily due to the higher interest rate on the Notes compared to the
short-term bank borrowings in the prior year. Interest expense, in comparison to
the prior year, will continue to be higher due to the higher rate of the
Notes for the remainder of the year.
For the nine months ended October 27, 1996, the Company's effective tax rate
shifted to a 24.9% benefit rate from a 45.1% benefit rate in the prior year
due to the size of the loss in fiscal 1996 and our inability to fully
carryback the tax loss to prior years.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to legal proceedings is set
forth in "Part I - Financial Information, Notes to
Consolidated Financial Statements, Note F," which is hereby
incorporated by reference herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 - Bylaws of the Registrant, as amended and restated. (1)
Exhibit 3.2 - Restated Certificate of Incorporation of the Registrant.
(2)
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter the following reports were filed:
(i) Form 8-K, dated June 20, 1996, reporting Items 5 and 7, and filing
Second Amended and Restated Credit Agreement among Michaels Stores, Inc.,
NationsBank of Texas, N.A. as Administrative Lender, Bank of America Illinois
as Co-Agent and the Lenders specified therein.
(ii) Form 8-K, dated September 30, 1996, reporting Items 5 and 7, and
filing Michaels Stores, Inc. Employees 401(k) Plan (As Amended and Restated
Effective February 1, 1994), Michaels Stores, Inc. Employees 401(k) Plan (As
Amended and Restated Effective October 1, 1996), and Michaels stores, Inc.
Employees 401(k) Trust.
__________________
(1) Previously filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the year ended January 29, 1995 and
incorporated herein by reference.
(2) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (No. 33-54726) and incorporated herein by
reference.
<PAGE>
MICHAELS STORES, INC.
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 11, 1996
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
3.1 Bylaws of the Registrant, as amended and restated. (1)
3.2 Restated Certificate of Incorporation of the Registrant. (2)
27 Financial Date Schedule.
________________________
(1) Previously filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the year ended January 29, 1995 and
incorporated herein by reference.
(2) Previously filed as an Exhibit to the Registrant's
Registration Statement on Form S-8 (No. 33-54726) and
incorporated herein by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-2-1997
<PERIOD-END> OCT-27-1996
<CASH> 2,635
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 471,083
<CURRENT-ASSETS> 538,237
<PP&E> 298,567
<DEPRECIATION> 108,829
<TOTAL-ASSETS> 875,597
<CURRENT-LIABILITIES> 289,728
<BONDS> 221,940
0
0
<COMMON> 2,356
<OTHER-SE> 320,035
<TOTAL-LIABILITY-AND-EQUITY> 875,597
<SALES> 884,572
<TOTAL-REVENUES> 884,572
<CGS> 649,569
<TOTAL-COSTS> 922,432
<OTHER-EXPENSES> (372)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,036
<INCOME-PRETAX> (52,524)
<INCOME-TAX> (13,086)
<INCOME-CONTINUING> (39,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,438)
<EPS-PRIMARY> (1.71)
<EPS-DILUTED> (1.71)
</TABLE>
