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 May 2, 1998
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 June 10, 1998
_____ _____________
Common stock, par value $.10 per share 29,589,819
<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>
May 2, 1998 January 31, 1998
___________ ________________
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 140,456 $ 162,283
Merchandise inventories 448,922 385,580
Income taxes receivable and
deferred income taxes 11,521 11,291
Prepaid expenses and other 13,814 14,029
_________ _________
Total current assets 614,713 573,183
_________ _________
Property and equipment, at cost 351,327 331,755
Less accumulated depreciation (147,472) (138,719)
_________ _________
203,855 193,036
_________ _________
Costs in excess of net assets of
acquired operations, net 135,860 136,827
Deferred income taxes 3,833 2,695
Other assets 2,642 2,753
_________ _________
142,335 142,275
_________ _________
$ 960,903 $ 908,494
_________ _________
_________ _________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 148,481 $ 109,456
Accrued liabilities and other 99,499 105,036
_________ _________
Total current liabilities 247,980 214,492
_________ _________
Senior notes 125,000 125,000
Convertible subordinated notes 96,940 96,940
Other long-term liabilities 29,605 30,151
_________ _________
Total long-term liabilities 251,545 252,091
_________ _________
499,525 466,583
_________ _________
Commitments and contingencies
Stockholders' equity:
Common stock, 29,561,142 shares
outstanding 2,956 2,903
Additional paid-in capital 364,642 350,977
Retained earnings 93,780 88,031
_________ _________
Total stockholders' equity 461,378 441,911
_________ _________
$ 960,903 $ 908,494
_________ _________
_________ _________
</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
_________________________
May 2, May 3,
1998 1997
________ ________
<S> <C> <C>
Net sales $335,770 $321,318
Cost of sales and occupancy expense 224,874 220,128
Selling, general and administrative
expense 96,561 91,884
Store pre-opening costs 1,788 -
________ ________
Operating income 12,547 9,306
Interest expense 5,703 5,742
Other income, net (2,028) (1,549)
________ ________
Income before income taxes 8,872 5,113
Provision for income taxes 3,371 1,943
________ ________
Net income $ 5,501 $ 3,170
________ ________
________ ________
Earnings per common share:
Basic $0.19 $0.13
Diluted $0.18 $0.12
Common shares used in per share calculations:
Basic 29,321 25,229
Diluted 31,277 26,186
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
____________________
May 2, May 3,
1998 1997
________ ________
<S> <C> <C>
Operating activities:
Net income $ 5,501 $ 3,170
Adjustments:
Depreciation 10,350 9,945
Amortization 1,070 1,056
Other 278 (60)
Change in assets and liabilities:
Merchandise inventories (63,342) (19,473)
Prepaid expenses and other 215 (1,245)
Deferred income taxes and other 424 285
Accounts payable 39,025 10,151
Accrued liabilities and other (6,201) (6,546)
________ ________
Net change in assets and liabilities (29,879) (16,828)
________ ________
Net cash used in operating activities (12,680) (2,717)
________ ________
Investing activities:
Additions to property and equipment (19,040) (5,427)
Net proceeds from sales of property
and equipment 117 -
Net proceeds from sales of investments - 3,386
________ ________
Net cash used in investing activities (18,923) (2,041)
________ ________
Financing activities:
Payment of other long-term liabilities (1,200) (996)
Proceeds from stock options exercised 4,813 23,994
Proceeds from issuance of common stock
and other 6,163 -
________ ________
Net cash provided by financing
activities 9,776 22,998
________ ________
Net (decrease) increase in cash and equivalents (21,827) 18,240
Cash and equivalents at beginning of period 162,283 59,069
________ ________
Cash and equivalents at end of period $140,456 $ 77,309
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended May 2, 1998
(Unaudited)
Note A - Basis of Presentation
The accompanying consolidated financial statements are unaudited (except
for the Consolidated Balance Sheet as of January 31, 1998) and have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Because of the
seasonal nature of the Company's business, the results of operations for the
quarter ended May 2, 1998 are not indicative of the results to be expected for
the entire year. Certain fiscal 1997 amounts have been reclassified to
conform to the fiscal 1998 presentation. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended January 31, 1998.
Note B - Supplemental Cash Flow Information
Investing and financing activities not affecting cash during the three
months ended May 2, 1998 included additions to property and equipment through
capital lease obligations of $2,026,000 related to the acquisition of new
computer equipment.
Note C - Contingencies
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, and discovery is proceeding.
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.
<PAGE>
Note D - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
Quarter Ended
_____________________
May 2, May 3,
1998 1997
______ ______
(In thousands except per share amounts)
<S> <C> <C>
Numerator:
Net income $ 5,501 $ 3,170
_______ _______
_______ _______
Denominator:
Denominator for basic earnings
per share-weighted average
shares 29,321 25,229
Effect of dilutive securities:
Employee stock options 1,956 957
_______ _______
Denominator for diluted
earnings per share-adjusted
weighted average shares and
assumed conversions 31,277 26,186
_______ _______
_______ _______
Basic earnings per common share $0.19 $0.13
_____ _____
_____ _____
Diluted earnings per common share $0.18 $0.12
_____ _____
_____ _____
</TABLE>
The convertible subordinated notes were not included in the diluted
earnings per common share calculation because they were antidilutive for the
periods presented. The convertible subordinated notes could potentially
affect diluted earnings per common share in the future.
Note E - Store Pre-Opening Costs
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
Reporting the Costs of Start-Up Activities, which requires that costs related
to start-up activities be expensed as incurred. Prior to fiscal 1998, the
Company deferred store pre-opening costs until the fiscal year in which the
store opened. The Company adopted the provisions of SOP 98-5 in its financial
statements for the first quarter of fiscal 1998, and as a result began
expensing pre-opening costs as incurred.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
_________________________________________________________
Condition and Results of Operations
___________________________________
General
Certain statements contained in this discussion and analysis 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 effectiveness of advertising
strategies, the availability of acceptable real estate locations for new
stores, difficulties with respect to new information system technologies and
the Company's ability to address the Year 2000 Issue, supply constraints or
difficulties, the results of financing efforts, and other risks detailed in
the Company's Securities and Exchange Commission filings.
Results of Operations
The following table sets forth the percentage relationship to net sales
of each line item of the Company's Consolidated Statements of Operations.
This table should be read in conjunction with the following discussion and
with the Company's Consolidated Financial Statements, including the related
notes.
<TABLE>
<CAPTION>
Quarter Ended
_____________________
May 2, May 3,
1998 1997
______ ______
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales and occupancy expense 67.0 68.5
Selling, general and administrative
expense 28.8 28.6
Store pre-opening costs 0.5 -
_____ _____
Operating income 3.7 2.9
Interest expense 1.7 1.8
Other income, net (0.6) (0.5)
_____ _____
Income before income taxes 2.6 1.6
Provision for income taxes 1.0 0.6
_____ _____
Net income 1.6% 1.0%
_____ _____
_____ _____
</TABLE>
In the discussion below, all percentages given for expense items are
calculated as a percentage of net sales.
<PAGE>
Quarter ended May 2, 1998 compared to the
quarter ended May 3, 1997
Net sales in the first quarter of fiscal 1998 increased $14.5 million,
or 5%, over the first quarter of fiscal 1997. The results for the first
quarter of fiscal 1998 included sales from 17 Michaels and 3 Aaron Brothers
stores that were opened during the 12-month period ended May 2, 1998. During
the first quarter, sales at the new stores (net of 11 closures) accounted for
an increase of $8.1 million. Same-store sales increased 2% in the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997, which
contributed $6.4 million to the net sales increase. The improvement in
same-store sales performance was lower than expected, which we believe was the
result of new advertising concepts tested in the months of March and April
which were not as effective as previous advertising methods. By utilizing
the information provided by our point-of-sale system to continue to improve
our store in-stock position in top-selling items, properly allocating
seasonal merchandise to the stores based upon anticipated sales trends, and
returning to our previous advertising strategy, we expect an improvement in
same-store sales increases.
Cost of sales and occupancy expense, as a percentage of net sales, for
the first quarter of fiscal 1998 was 67.0%, a decrease of 1.5% compared to
the first quarter of fiscal 1997. Significant merchandise gross margin
improvements were primarily attributable to better initial markup on
beginning-of-year inventories. Occupancy expense decreased, as a percentage
of net sales, principally due to a charge taken in the first quarter of
fiscal 1997 to establish rent reserves for the Company's 1997 store
relocation program.
Selling, general and administrative expense, as a percentage of net
sales, increased by 0.2% in the first quarter of fiscal 1998 compared to the
first quarter of fiscal 1997. This increase was due to increased advertising
expense as a percentage of net sales, driven principally by increased grand
openings and higher costs associated with changes in format and distribution
methods, offset in part by improved expense leverage in depreciation and
administrative expenses.
Store pre-opening costs of $1.8 million, or 0.5% as a percentage of net
sales, were recognized in the first quarter of fiscal 1998 as the Company
adopted a change in accounting rules requiring that store pre-opening costs
be expensed as incurred. See Note E in the notes to consolidated financial
statements.
<PAGE>
Liquidity and Capital Resources
Cash flow used by operating activities during the first three months of
fiscal 1998 was $12.7 million compared to $2.7 million of cash flow used by
operating activities during the first three months of fiscal 1997. These
results are consistent with the Company's plan to build inventory and open
and relocate stores early in the fiscal year. Inventories per Michaels store
increased 17% to $925,000 at May 2, 1998 compared to $793,000 last year as a
result of increasing the number of items replenished by the Company's
distribution centers from approximately 6,200 in the prior year to
approximately 10,000 in fiscal 1998, increases in inventory at the
distribution centers caused by the purchase of additional basic merchandise
to support the transition to the new California facility, and to an earlier
receipt of basic fall product compared to the previous year.
The Company opened 11 Michaels stores and relocated 3 Michaels stores
during the first three months of fiscal 1998. Capital expenditures for the
newly opened stores amounted to approximately $9.1 million. Additional
capital expenditures of approximately $9.9 million during the first three
months of fiscal 1998 related primarily to existing stores, and for interim
construction costs for the relocation in the second quarter of fiscal 1998 of
the Company's California distribution center and various systems enhancements.
The Company has negotiated a sale/leaseback transaction for the California
distribution facility and the transaction is scheduled to close on June 20,
1998 with gross proceeds to be received by the Company amounting to $13.0
million. The Company expects additional capital expenditures during the
remainder of fiscal 1998 to total approximately $60 to $65 million (net of
the sale/leaseback transaction), relating primarily to costs for new stores,
store relocations and remodeling, merchandising and other information systems
and various other projects.
At May 2, 1998, the Company had working capital of $366.7 million
compared to $358.7 million at January 31, 1998. The Company currently has a
bank credit agreement which provides for an unsecured revolving line of
credit of up to $100 million. There were no borrowings outstanding on the
revolving line of credit at any time during fiscal 1997 or the first quarter
of fiscal 1998. Management believes that the Company's available cash, funds
generated by operating activities, funds available under the bank credit
agreement, IBM capital lease financing and proceeds from the sale of stock
through the stock purchase plan, should be sufficient to finance continuing
operations and sustain current growth plans. Management believes that the
Company can finance an annual store expansion at a rate 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 C 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 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: June 16, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-02-1998
<CASH> 140,456
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 448,922
<CURRENT-ASSETS> 614,713
<PP&E> 351,327
<DEPRECIATION> 147,472
<TOTAL-ASSETS> 960,903
<CURRENT-LIABILITIES> 247,980
<BONDS> 221,940
0
0
<COMMON> 2,956
<OTHER-SE> 458,422
<TOTAL-LIABILITY-AND-EQUITY> 960,903
<SALES> 335,770
<TOTAL-REVENUES> 335,770
<CGS> 224,874
<TOTAL-COSTS> 323,223
<OTHER-EXPENSES> (2,028)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,703
<INCOME-PRETAX> 8,872
<INCOME-TAX> 3,371
<INCOME-CONTINUING> 5,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,501
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>
