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 November 1, 1997
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 of
Title December 10, 1997
_____ ________________________
Common stock, par value $.10 per share 28,872,120
<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
November 1, February 1,
1997 1997
___________ ___________
<S> <C> <C>
Current assets:
Cash and equivalents $ 48,089 $ 59,069
Merchandise inventories 489,755 351,208
Income taxes receivable and
deferred income taxes 6,178 15,207
Prepaid expenses and other 17,528 12,059
________ ________
Total current assets 561,550 437,543
________ ________
Property and equipment, at cost 319,416 294,022
Less accumulated depreciation (132,346) (104,943)
________ ________
187,070 189,079
________ ________
Costs in excess of net assets of
acquired operations, net 137,795 140,697
Deferred income taxes 19,141 10,550
Other assets 3,320 6,566
________ ________
160,256 157,813
________ ________
$908,876 $784,435
________ ________
________ ________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $154,288 $104,966
Accrued liabilities and other 94,659 92,765
________ ________
Total current liabilities 248,947 197,731
________ ________
Senior notes 125,000 125,000
Convertible subordinated notes 96,940 96,940
Other long-term liabilities 29,510 31,962
________ ________
Total long-term liabilities 251,450 253,902
________ ________
500,397 451,633
________ ________
Commitments and contingencies
Shareholders' equity:
Common stock, 28,746,454 shares
outstanding 2,875 2,369
Additional paid-in capital 342,452 271,405
Retained earnings 63,152 59,028
________ ________
Total shareholders' equity 408,479 332,802
________ ________
$908,876 $784,435
________ ________
________ ________
</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
__________________________
November 1, October 27,
1997 1996
___________ ___________
<S> <C> <C>
Net sales $350,070 $322,221
Cost of sales and occupancy expense 237,528 259,928
Selling, general and administrative
expense 99,599 99,912
________ _________
Operating income (loss) 12,943 (37,619)
Interest expense 5,936 6,502
Other (income) and expense, net (126) 1
________ _________
Income (loss) before income taxes 7,133 (44,122)
Provision (benefit) for income taxes 2,711 (9,892)
________ ________
Net income (loss) $ 4,422 $(34,230)
________ ________
________ ________
Earnings (loss) per common and
common equivalent share $ .15 $(1.45)
______ ______
______ ______
Weighted average common and common
equivalent shares outstanding 30,285 23,553
______ ______
______ ______
</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
___________________________
November 1, October 27,
1997 1996
___________ ___________
<S> <C> <C>
Net sales $949,426 $884,572
Cost of sales and occupancy expense 648,654 649,569
Selling, general and administrative
expense 277,030 272,863
________ ________
Operating income (loss) 23,742 (37,860)
Interest expense 17,380 15,036
Other income, net (1,214) (372)
________ ________
Income (loss) before income taxes 7,576 (52,524)
Provision (benefit) for income taxes 2,879 (13,086)
________ ________
Net income (loss) $ 4,697 $(39,438)
________ ________
________ ________
Earnings (loss) per common and
common equivalent share $ .17 $(1.71)
______ ______
______ ______
Weighted average common and common
equivalent shares outstanding 28,072 23,039
______ ______
______ ______
</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
________________________
November 1, October 27,
1997 1996
___________ ___________
<S> <C> <C>
Operating activities:
Net income (loss) $ 4,697 $(39,438)
Adjustments:
Depreciation 30,663 27,173
Amortization 3,173 3,143
Other 1,402 676
Change in assets and liabilities:
Merchandise inventories (138,547) (104,981)
Prepaid expenses and other (5,469) (3,450)
Deferred income taxes and other 6,327 (14,224)
Accounts payable 49,322 54,958
Accrued liabilities and other 1,120 1,249
________ ________
Net change in assets and liabilities (87,247) (66,448)
________ ________
Net cash used in operating activities (47,312) (74,894)
________ ________
Investing activities:
Additions to property and equipment (27,380) (23,823)
Net proceeds from sales of property
and equipment 1,623 -
Net proceeds from sales of investments 3,386 1,122
________ ________
Net cash used in investing activities (22,371) (22,701)
________ ________
Financing activities:
Net repayments under bank credit facilities - (47,600)
Payment of other long-term liabilities (3,331) (938)
Proceeds from issuance of senior notes - 120,542
Proceeds from issuance of common stock and other 62,034 25,356
________ ________
Net cash provided by financing activities 58,703 97,360
________ ________
Net decrease in cash and equivalents (10,980) (235)
Cash and equivalents at beginning of year 59,069 2,870
________ ________
Cash and equivalents at end of period $ 48,089 $ 2,635
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended November 1, 1997
(Unaudited)
Note A
______
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of February 1, 1997) 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 November 1, 1997. 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 and nine months ended
November 1, 1997 are not indicative of the results to be expected for the
entire year. Certain fiscal 1996 amounts have been reclassified to conform
to the fiscal 1997 presentation.
Note B
______
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 each period presented and was therefore not
included in the calculation of fully diluted earnings per share data.
Note C
______
Investing and financing activities not affecting cash during the nine months
ended November 1, 1997 included additions to property and equipment through
capital lease obligations of $3,292,000 related to the acquisition of new
computer equipment.
Note D
______
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 alleged 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 United States District Court for the Northern District of Texas
subsequently consolidated those two lawsuits and certified the class. The
Company and the other defendants denied any liability and believed they had
meritorious defenses to the lawsuit. On September 9, 1997, the Company,
together with the other defendants, and the plaintiffs agreed in principal to
a settlement with a cash payment of $6.25 million. After giving effect to
prior expenditures for costs incurred in defending the lawsuit, substantially
all of the settlement amount is expected to be covered by insurance. The
settlement is subject to the Court's approval of the fairness of the
settlement terms. The Court has scheduled a hearing on December 22, 1997 to
consider the fairness of the settlement. If the settlement is not approved,
the lawsuit will proceed.
<PAGE>
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
the plaintiff's pleadings did not state a cause of action against the Company
upon which relief could be granted. However, the 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 October 30, 1997, the
California Supreme Court sustained the appellate court ruling and remanded
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, is uncertain, and there can be no assurance that future
costs related to such litigation would not be material to the Company's
financial position or results of operations.
Note E
______
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share together with disclosure of how the per share amounts were
computed. The adoption of this new standard is not expected to have a
material impact on the disclosure of earnings per share in the financial
statements.
<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 and
crafts industry, related inventory risks due to shifts in customer demand,
the effect of economic conditions, the impact of competitors' locations or
pricing, the availability of acceptable real estate locations for new stores,
difficulties with respect to new information system technologies, supply
constraints or difficulties, the results of financing efforts, the effect of
the Company's accounting policies, and other risks detailed in the Company's
Securities and Exchange Commission filings.
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
Quarter Ended Nine Months Ended
_______________________ _______________________
November 1, October 27, November 1, October 27,
1997 1996 1997 1996
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense 67.9 80.7 68.3 73.4
Selling, general and
administrative expense 28.4 31.0 29.2 30.9
_____ _____ _____ ______
Operating income (loss) 3.7 (11.7) 2.5 (4.3)
Interest expense 1.7 2.0 1.8 1.7
Other income, net 0.0 0.0 (0.1) (0.1)
_____ _____ _____ ______
Income (loss) before
income taxes 2.0 (13.7) 0.8 (5.9)
Provision (benefit) for
income taxes 0.7 (3.1) 0.3 (1.4)
_____ _____ _____ ______
Net income (loss) 1.3% (10.6)% 0.5% (4.5)%
_____ _____ _____ ______
_____ _____ _____ ______
</TABLE>
<PAGE>
Three months ended November 1, 1997 compared to the
___________________________________________________
three months ended October 27, 1996
___________________________________
Net sales in the third quarter of fiscal 1997 increased $27.9 million, or 9%,
over the third quarter of fiscal 1996. The results for the third quarter of
fiscal 1997 included sales from 10 new Michaels stores that were opened
during the twelve month period ended November 1, 1997. During the third
quarter, sales at the new stores (net of 9 closures) accounted for an
increase of $3.5 million. Same-store sales increased 9% in the third quarter
of fiscal 1997 compared to the third quarter of fiscal 1996, which
contributed $24.4 million to the net sales increase. The improvement in
same-store sales performance is due to strong performance in the Company's
core categories of general crafts, framing, art and floral, which management
believes is the result of obtaining improved information from the new
point-of-sale (POS) item sales history database. Utilizing a "could-have-sold"
process, the Company planned the current year's order quantities by analyzing
the prior year's POS item sales history and item out-of-stock positions. In
addition, the Company held grand re-openings during the third quarter in
seven major markets in which the majority of the completed store relocations
and remodels were located.
Cost of sales and occupancy expense, as a percentage of net sales, for the
third quarter of fiscal 1997 decreased by 12.8% compared to the third quarter
of fiscal 1996. This decrease was primarily due to the $47.7 million of
unusual costs and expenses recorded in the third quarter of fiscal 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 fiscal 1997 was unchanged from the
prior year at 67.9%. An improved leveraging of fixed occupancy costs and
improved gross margins, which management attributes to decreasing the
dependency on advertising to fuel sales growth and fewer seasonal clearance
markdowns, was offset by higher distribution costs, which increased due to
the Company's increased utilization of the upgraded warehouse network.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 2.6% in the third quarter of fiscal 1997 compared to the third
quarter of 1996. This decrease included $3.1 million of unusual costs and
expenses related primarily to an extended sidewalk sale starting on Labor Day
recorded in the third quarter of fiscal 1996. In addition, the Company saved
$1.5 million in advertising costs versus last year, and showed improved
expense leverage in store labor and all other categories of store operating
expenses.
<PAGE>
Nine months ended November 1, 1997 compared to the
__________________________________________________
nine months ended October 27, 1996
__________________________________
Net sales in the first nine months of fiscal 1997 increased $64.9 million, or
7%, over the first nine months of fiscal 1996. The results for the first
nine months of fiscal 1997 included sales from 10 new Michaels stores that
were opened during the twelve month period ended November 1, 1997. During
the first nine months, sales at the new stores (net of 9 closures) accounted
for an increase of $11.3 million. Same-store sales increased 6% in the first
nine months of fiscal 1997 compared to the first nine months of fiscal 1996,
which contributed $53.6 million to the net sales increase. The improvement
in same-store sales performance is due to strong performance in the Company's
core categories of general crafts, framing, art and floral, which management
believes is the result of updated planograms put into place during the summer
in 1996 and obtaining improved information from the new POS item sales
history database. The POS item information and "could-have-sold" ordering
process has provided for improved in-stock positions in top selling and hot
items.
Cost of sales and occupancy expense, as a percentage of net sales, for the
first nine months of fiscal 1997 decreased by 5.1% compared to the first nine
months of fiscal 1996. The first nine months of fiscal 1996 included $47.7
million of unusual costs and expenses recorded in the third quarter of fiscal
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 first nine months of fiscal 1997
decreased by 0.5% compared to the first nine months of fiscal 1996. This
decrease was principally due to improved gross margins which management
attributes to decreasing the dependency on advertising to fuel sales growth
and fewer seasonal clearance markdowns in the third quarter of fiscal 1997.
The decrease was partially offset by higher distribution costs, which
increased due to the Company's increased utilization of the upgraded
warehouse network.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 1.7% in the first nine months of fiscal 1997 compared to the
first nine months of fiscal 1996. This decrease included $3.1 million of
unusual costs and expenses related primarily to an extended sidewalk sale
starting on Labor Day recorded in the third quarter of fiscal 1996. In
addition, the Company saved $8.4 million in advertising costs versus last
year, and showed improved expense leverage in store labor and nearly all
other categories of store operating expenses with the exception of
depreciation, which reflects the impact of its increased investment in the
POS system.
<PAGE>
Liquidity and Capital Resources
_______________________________
Cash flow from operations of negative $47.3 million was generated during the
first nine months of fiscal 1997 compared to negative $74.9 million of cash
flow from operations generated during the first nine months of fiscal 1996.
These results are consistent with the Company's pattern of building inventory
and opening and relocating stores early in the fiscal year. Inventories per
Michaels store increased 4% to $1,047,000 at November 1, 1997 compared to
$1,009,000 last year reflecting higher levels of basic stock merchandise
purchased to improve the Company's in-stock position. Borrowings outstanding
under the Company's bank credit agreement ("Credit Agreement"), which expires
in June 1999, were $39.6 million at the end of the third quarter of fiscal
1996 and there were no borrowings outstanding at November 1, 1997.
The Company opened nine Michaels stores and closed eight during the first
nine months of fiscal 1997. Capital expenditures for the newly opened stores
amounted to approximately $2.3 million. Additional capital expenditures of
approximately $25.1 million during the first nine months related primarily to
the relocation or remodeling of approximately 37 existing stores, and for
interim construction costs for the relocation in 1998 of one of its
distribution centers and various systems enhancements. The Company expects
capital expenditures during the remainder of fiscal 1997 to total
approximately $12 to $14 million, relating primarily to costs for new stores,
store relocations and remodeling, merchandising and other information systems
and various other projects. In addition, the Company may incur interim
construction costs and additional equipment costs during the remainder of
fiscal 1997 and in fiscal 1998 of an additional $21 million for the
relocation in 1998 of one of its distribution centers. The Company is
presently negotiating a sale/leaseback transaction with respect to this
distribution facility to be effected when the facility is completed.
However, no definitive agreement has been reached.
At November 1, 1997, the Company had working capital of $312.6 million
compared to $239.8 million at February 1, 1997. The Credit Agreement
provides for an unsecured line of credit of up to $100 million. Management
believes that the Company's available cash, funds generated by operations and
funds available under the Credit Agreement should be sufficient to finance
continuing operations and sustain current growth plans. Management believes
that the Company can finance an annual store expansion of 12% to 15% (on a
square footage basis) from internally generated cash flow.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
For a description of legal proceedings, see Note D to "Notes to
Consolidated Financial Statements," which description is incorporated
herein by this reference.
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 November 1, 1997.
Exhibit 11.2 - Computation of Earnings Per Common Share for the Nine
Months Ended November 1, 1997.
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>
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/ Bryan M. DeCordova
_______________________
Bryan M. DeCordova
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: December 16, 1997
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
11.1 Computation of Earnings Per Common
Share for the Three Months Ended
November 1, 1997.
11.2 Computation of Earnings Per Common
Share for the Nine Months Ended
November 1, 1997.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11.1
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Three Months Ended November 1, 1997
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
_____________________
Total Fully
Outstanding Primary Diluted
___________ __________ __________
<S> <C> <C> <C>
Outstanding at beginning
of quarter 27,954,811 27,954,811 27,954,811
Shares issued during
period 791,643 468,602 468,602
__________ __________
Weighted average common
shares outstanding 28,423,413 28,423,413
Net shares to be issued upon
exercise of dilutive stock
options after applying treasury
stock method 1,727,743 1,861,836
__________ __________ __________
Total outstanding common shares 28,746,454 30,151,156 30,285,249
__________ __________ __________
__________ __________ __________
Earnings per common and
common equivalent share $.15 $.15
____ ____
____ ____
</TABLE>
<PAGE>
EXHIBIT 11.2
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Nine Months Ended November 1, 1997
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
_______________________
Total Fully
Outstanding Primary Diluted
__________ __________
<S> <C> <C> <C>
Outstanding at beginning
of year 23,690,926 23,690,926 23,690,926
Shares issued during
period 5,055,528 2,959,604 2,959,604
__________ __________
Weighted average common
shares outstanding 26,650,530 26,650,530
Net shares to be issued upon
exercise of dilutive stock
options after applying treasury
stock method 1,281,834 1,421,770
__________ __________ __________
Total outstanding common shares 28,746,454 27,932,364 28,072,300
__________ __________ __________
__________ __________ __________
Earnings per common and
common equivalent share $.17 $.17
____ ____
____ ____
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 48,089
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 489,755
<CURRENT-ASSETS> 561,550
<PP&E> 319,416
<DEPRECIATION> 132,346
<TOTAL-ASSETS> 908,876
<CURRENT-LIABILITIES> 248,947
<BONDS> 221,940
0
0
<COMMON> 2,875
<OTHER-SE> 405,604
<TOTAL-LIABILITY-AND-EQUITY> 908,876
<SALES> 949,426
<TOTAL-REVENUES> 949,426
<CGS> 648,654
<TOTAL-COSTS> 925,684
<OTHER-EXPENSES> (1,214)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,380
<INCOME-PRETAX> 7,576
<INCOME-TAX> 2,879
<INCOME-CONTINUING> 4,697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,697
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
