<PAGE>
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UNITED STATES
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 (NO FEE REQUIRED)
FOR THE QUARTERLY PERIOD ENDED MAY 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER 0-11822
------------------------
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
------------------------
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 REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AS OF
TITLE JUNE 9, 1999
- ------------------------------------------ ------------------------------------------
<S> <C>
Common Stock, par value $.10 per share 28,696,435
</TABLE>
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<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)
<TABLE>
<CAPTION>
MAY 1, 1999 JANUARY 30, 1999
----------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents........................................... $ 98,227 $ 96,124
Merchandise inventories........................................ 505,180 501,239
Income taxes receivable and deferred income taxes.............. 9,371 9,654
Prepaid expenses and other..................................... 16,894 14,911
----------- --------
Total current assets......................................... 629,672 621,928
----------- --------
PROPERTY AND EQUIPMENT, AT COST.................................. 401,571 381,289
Less accumulated depreciation.................................. (183,421) (171,829)
----------- --------
218,150 209,460
----------- --------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET........ 127,549 128,488
OTHER ASSETS..................................................... 2,705 2,774
----------- --------
130,254 131,262
----------- --------
Total assets..................................................... $978,076 $962,650
----------- --------
----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $135,998 $106,173
Income taxes payable........................................... 3,600 12,623
Accrued liabilities and other.................................. 104,162 111,905
----------- --------
Total current liabilities.................................... 243,760 230,701
----------- --------
SENIOR NOTES..................................................... 125,000 125,000
CONVERTIBLE SUBORDINATED NOTES................................... 96,940 96,940
DEFERRED INCOME TAXES............................................ 2,642 2,642
OTHER LONG-TERM LIABILITIES...................................... 22,133 26,388
----------- --------
Total long-term liabilities.................................... 246,715 250,970
----------- --------
490,475 481,671
----------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, 29,756,667 shares issued (29,706,760 shares
issued at January 30, 1999).................................. 2,976 2,971
Additional paid-in capital..................................... 368,068 367,308
Retained earnings.............................................. 136,929 131,072
Treasury stock, at cost, 1,145,000 shares...................... (20,372) (20,372)
----------- --------
Total stockholders' equity................................... 487,601 480,979
----------- --------
Total liabilities and stockholders' equity....................... $978,076 $962,650
----------- --------
----------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------
MAY 1, 1999 MAY 2, 1998
----------- -----------
<S> <C> <C>
NET SALES...................................................... $ 388,544 $ 335,770
Cost of sales and occupancy expense............................ 262,547 224,874
----------- -----------
GROSS PROFIT................................................... 125,997 110,896
Selling, general and administrative expense.................... 110,883 96,561
Store pre-opening costs........................................ 2,263 1,788
----------- -----------
OPERATING INCOME............................................... 12,851 12,547
Interest expense............................................... 5,438 5,703
Other (income) and expense, net................................ (963) (2,028)
----------- -----------
INCOME BEFORE INCOME TAXES..................................... 8,376 8,872
Provision for income taxes..................................... 3,183 3,371
----------- -----------
NET INCOME..................................................... $ 5,193 $ 5,501
----------- -----------
----------- -----------
EARNINGS PER COMMON SHARE:
Basic........................................................ $ 0.18 $ 0.19
Diluted...................................................... $ 0.18 $ 0.18
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------
MAY 1, 1999 MAY 2, 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................. $ 5,193 $ 5,501
Adjustments:
Depreciation.............................................................. 11,648 10,350
Amortization.............................................................. 1,041 1,070
Other..................................................................... 222 278
Change in assets and liabilities:
Merchandise inventories................................................. (3,941) (63,342)
Prepaid expenses and other.............................................. (1,983) 215
Deferred income taxes and other......................................... (2,661) 424
Accounts payable........................................................ 29,825 39,025
Income taxes payable.................................................... (8,900) 1,157
Accrued liabilities and other........................................... (7,572) (7,358)
----------- -----------
Net change in assets and liabilities.................................. 4,768 (29,879)
----------- -----------
Net cash provided by (used in) operating activities................... 22,872 (12,680)
----------- -----------
INVESTING ACTIVITIES:
Additions to property and equipment......................................... (20,008) (19,040)
Net proceeds from sales of property and equipment........................... 51 117
----------- -----------
Net cash used in investing activities................................. (19,957) (18,923)
----------- -----------
FINANCING ACTIVITIES:
Payment of other long-term liabilities...................................... (1,454) (1,200)
Proceeds from stock options exercised....................................... 679 4,813
Proceeds from issuance of common stock and other............................ (37) 6,163
----------- -----------
Net cash (used in) provided by financing activities................... (812) 9,776
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............................... 2,103 (21,827)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR..................................... 96,124 162,283
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD......................................... $ 98,227 $ 140,456
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended May 1, 1999
(Unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 30, 1999) 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 1, 1999 are not indicative of the
results to be expected for the entire year. Certain fiscal 1998 amounts have
been reclassified to conform to the fiscal 1999 presentation. These interim
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended January 30, 1999.
NOTE B--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per common share:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------
MAY 1, 1999 MAY 2, 1998
------------- -------------
(In thousands except per
share data)
<S> <C> <C>
NUMERATOR:
Net income..................................................................... $ 5,193 $ 5,501
------------- -------------
------------- -------------
DENOMINATOR:
Denominator for basic earnings per share-weighted average shares............... 28,584 29,321
Effect of dilutive securities:
Employee stock options....................................................... 655 1,956
------------- -------------
Denominator for diluted earnings per share-weighted average shares adjusted for
dilutive securities.......................................................... 29,239 31,277
------------- -------------
------------- -------------
BASIC EARNINGS PER COMMON SHARE.................................................. $ 0.18 $ 0.19
------------- -------------
------------- -------------
DILUTED EARNINGS PER COMMON SHARE................................................ $ 0.18 $ 0.18
------------- -------------
------------- -------------
</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.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 OUR ABILITY TO ADDRESS THE YEAR 2000
ISSUE, SUPPLY CONSTRAINTS OR DIFFICULTIES, THE RESULTS OF FINANCING EFFORTS AND
OTHER RISKS DETAILED IN OUR SECURITIES AND EXCHANGE COMMISSION FILINGS.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales of
each line item of our Consolidated Statements of Income. This table should be
read in conjunction with the following discussion and with our Consolidated
Financial Statements, including the related notes.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------
MAY 1, 1999 MAY 2, 1998
------------- -------------
<S> <C> <C>
NET SALES..................................................................... 100.0% 100.0%
Cost of sales and occupancy expense........................................... 67.6 67.0
----- -----
GROSS MARGIN.................................................................. 32.4 33.0
Selling, general and administrative expense................................... 28.5 28.8
Store pre-opening costs....................................................... 0.6 0.5
----- -----
OPERATING INCOME.............................................................. 3.3 3.7
Interest expense.............................................................. 1.4 1.7
Other (income) and expense, net............................................... (0.2) (0.6)
----- -----
INCOME BEFORE INCOME TAXES.................................................... 2.1 2.6
Provision for income taxes.................................................... 0.8 1.0
----- -----
NET INCOME.................................................................... 1.3% 1.6%
----- -----
----- -----
</TABLE>
QUARTER ENDED MAY 1, 1999 COMPARED TO THE QUARTER ENDED MAY 2, 1998
Net sales in the first quarter of fiscal 1999 increased $52.8 million, or
16%, over the first quarter of fiscal 1998. The results for the first quarter of
fiscal 1999 included sales from 58 Michaels and 6 Aaron Brothers stores that
were opened during the 12-month period ended May 1, 1999, more than offsetting
lost sales from 7 Michaels and 1 Aaron Brothers store closures. During the first
quarter, sales at the new stores (net of closures) accounted for an increase of
$37.9 million. Same-store sales increased 5% in the first quarter of fiscal 1999
compared to the first quarter of fiscal 1998, which contributed $14.9 million to
the net sales increase. The improvement in same-store sales was due to a strong
performance in our core categories of framing, general crafts,
6
<PAGE>
art supplies and floral, more than offsetting the performance in apparel crafts,
needlecrafts and party. Going forward, we expect to achieve same-store sales
increases for the remainder of fiscal 1999, taken as a whole. Our ability to
generate same-store sales increases is dependent, in part, on our ability to
continue to improve store in-stock positions on the top-selling items, to
properly allocate seasonal merchandise to the stores based upon anticipated
sales trends utilizing POS rate of sale information and the success of our sales
promotion efforts.
Cost of sales and occupancy expense, as a percentage of net sales, for the
first quarter of fiscal 1999 was 67.6%, an increase of 0.6% compared to the
first quarter of fiscal 1998. This increase was primarily attributable to larger
investments in information systems infrastructure and occupancy costs associated
with new stores.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 0.3% in the first quarter of fiscal 1999 compared to the first
quarter of fiscal 1998. This decrease resulted from improved expense leverage in
advertising and depreciation.
Store pre-opening costs, as a percentage of net sales, increased by 0.1% in
the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998,
as we opened or relocated 26 Michaels and 2 Aaron Brothers stores compared to 14
Michaels and 2 Aaron Brothers stores in the prior year.
Interest expense (net of interest income), as a percentage of net sales,
increased by 0.1% compared to the prior year. The increase was due to lower
invested cash balances in the first quarter of fiscal 1999 compared to the first
quarter of fiscal 1998, primarily as a result of capital expenditures for newly
opened stores, information systems enhancements, and the MJDesigns, Inc.
("MJDesigns") store leases acquired in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities during the first quarter of
fiscal 1999 was $22.9 million as compared to $12.7 million of cash flow used in
operating activities during the first quarter of fiscal 1998. These results are
indicative of our plan to improve inventory control and reduce average store
inventories in fiscal 1999. Inventories per Michaels store increased just 2%
over the prior year in the first quarter of fiscal 1999, and our plans are to
have a decrease of over 5% on our fiscal year-end 1999 inventory levels.
We opened 19 Michaels and 2 Aaron Brothers stores and relocated 7 Michaels
stores during the first quarter of fiscal 1999. In March 1999 we acquired leases
for 16 stores (not included in the 19 Michaels stores noted above), formerly
operated by MJDesigns. Capital expenditures for the newly opened stores and the
MJDesigns leases amounted to approximately $14.6 million. Additional capital
expenditures of approximately $5.4 million during the first quarter of fiscal
1999 related primarily to existing stores and for various information systems
enhancements. We expect additional capital expenditures during the remainder of
fiscal 1999 to total approximately $62.0 million, related primarily to costs for
new stores, store relocations and remodeling, information systems, and various
other projects.
7
<PAGE>
We believe that our available cash, funds generated by operating activities,
funds available under a bank credit agreement, lease financing and proceeds from
the sale of stock should be sufficient to finance continuing operations and
sustain current growth plans. We believe that we can finance annual store
expansion at a rate of 15% from internally generated cash flow.
At May 1, 1999, we had working capital of $385.9 million, compared to $391.2
million at January 30, 1999. We currently have a bank credit agreement providing
for an unsecured revolving line of credit of $100 million, which may be
increased to $125 million under specific conditions. There were no borrowings
outstanding under the current bank credit agreement during the first quarter of
fiscal 1999 or under the previous revolving line of credit at any time during
the first quarter of 1998.
IMPACT OF THE YEAR 2000
We are highly dependent on our internal information systems for tracking
inventory and sales information and on our vendors' systems for assuring
accurate and timely deliveries of goods to our distribution centers and stores.
Because we have invested substantial amounts of money and effort in updating
internal systems in recent years, we believe such systems are already
substantially Year 2000 compliant.
We have implemented a comprehensive plan designed to make our operations
fully Year 2000 compliant, utilizing both internal and external resources. A
corporate project office has been established to oversee, monitor and coordinate
the Company-wide Year 2000 efforts. An experienced consulting firm has been
engaged to provide objective project management and technical expertise to
assist us in the completion of the project.
Our information systems include proprietary and third party application
systems and related hardware, software and data and telephone networks.
Approximately 75% of our application systems are presently believed to be Year
2000 compliant. Remediation or replacement of the majority of our remaining
systems is in process, with substantial completion anticipated by mid-1999. The
testing and certification stage for these areas is targeted to be largely
completed by the end of the third quarter 1999. We believe that we are on
schedule to complete Year 2000 compliance plans with respect to our information
systems.
We are currently assessing business equipment and systems, such as elevators
and security systems, which contain embedded computer technology. Based on our
preliminary assessment and assurances from third parties, we believe these
systems present little Year 2000 exposure or risk.
We have surveyed our "mission critical" merchandise and service vendors to
determine their Year 2000 status and are in the process of obtaining appropriate
assurances from these vendors. In addition, we are conducting more detailed
assessments of the progress of our electronic data interchange trading partners.
In fiscal 1998, our top ten vendors accounted for approximately 21% of total
purchases, with no single merchandise vendor accounting for more than 4.5% of
total purchases; thus, we do not believe any single vendor poses a significant
risk. We have completed the assessment phase with respect to vendors' systems.
8
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We are developing contingency plans, such as alternative sourcing, and
identifying what actions would need to be taken if critical systems or service
providers are not Year 2000 compliant. We expect these plans to be finalized by
mid-1999. Currently, we do not expect that substantial increases in inventory
will be required as a contingency measure. We have begun, but not yet completed,
a comprehensive analysis of the operational problems and costs (including loss
of revenues) that would be reasonably likely to result from our failure or the
failure of certain third parties to complete efforts to achieve Year 2000
compliance on a timely basis. A contingency plan has not been developed for
dealing with the most reasonably likely worst-case scenario, and such scenario
has not yet been clearly identified. We currently plan to complete such analysis
and contingency plan by mid-1999.
Despite significant efforts to make our systems and facilities Year 2000
compliant, the ability of third party service providers, vendors and certain
other third parties, including governmental entities and utility companies, to
be Year 2000 compliant is beyond our control. Accordingly, we can give no
assurances that the systems of other parties on which our systems or operations
rely will be timely converted or compatible with our systems. The failure of
these entities to comply on a timely basis could have a material adverse effect.
At the present time, however, we do not expect Year 2000 issues to materially
affect our products, services, competitive position, or financial performance or
condition.
Total external non-capitalizable costs related to the Year 2000 effort
(exclusive of the costs of planned development of new systems) are estimated to
be approximately $2.5 million, of which approximately $2.1 million has been
incurred through April 1999. In addition, we have accelerated the planned
development of new information systems with improved business functionality to
replace systems that were not Year 2000 compliant. The cost of these new
information systems will approximate $4.0 million, of which approximately $3.0
million has been incurred through April 1999. Our Year 2000 costs, including the
acceleration of development of new systems already planned, have been, and are
expected to be, funded with cash flow from operating activities. We do not
separately track internal direct costs associated with the utilization of our
officers and employees in Year 2000 compliance efforts. No significant
information system projects have been deferred because of the Year 2000 effort.
The foregoing statements as to cost and timetables relating to the Year 2000
effort are forward looking and are made in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. They are
based on our best estimates, which may be updated as additional information
becomes available. Forward looking statements are also based on assumptions
about many important factors, including the technical skills of employees and
independent contractors, the representations and preparedness of third parties,
the ability of vendors to deliver merchandise or perform services required by us
and the collateral effects of the Year 2000 issues on our business partners and
customers. While we believe our assumptions are reasonable, we caution that it
is impossible to predict the impact of certain factors that could cause actual
costs or timetables to differ materially from those expected.
9
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
PART II--OTHER INFORMATION
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 during the quarter ended May 1, 1999.
10
<PAGE>
MICHAELS STORES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 15, 1999
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ---------------------------------------------------------------------------------------- -----------
<C> <S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL
QUARTER ENDED MAY 1, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 98,227
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 505,180
<CURRENT-ASSETS> 629,672
<PP&E> 401,571
<DEPRECIATION> 183,421
<TOTAL-ASSETS> 978,076
<CURRENT-LIABILITIES> 243,760
<BONDS> 221,940
0
0
<COMMON> 2,976
<OTHER-SE> 484,625
<TOTAL-LIABILITY-AND-EQUITY> 978,076
<SALES> 388,544
<TOTAL-REVENUES> 388,544
<CGS> 262,547
<TOTAL-COSTS> 375,693
<OTHER-EXPENSES> (963)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,438
<INCOME-PRETAX> 8,376
<INCOME-TAX> 3,183
<INCOME-CONTINUING> 5,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,193
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
