4 Factors That Make Michaels Companies Stock A Solid Pick

The Michaels Companies Inc. (NASDAQ:MIK) has gathered momentum in recent months, backed by its robust store growth and omni-channel initiatives, as well as efficient expense management, which have been aiding quarterly performance. Notably, the company reported bottom-line beat for three consecutive quarters while sales topped estimates in three of the last four quarters.

Clearly, this Zacks Rank #2 (Buy) stock has surged 3.5% in the past three months against the industry’s decline of 1.3%.

Let’s get a closer look at the factors that position Michaels Companies for more growth in the year ahead.

Focus on Store Operations

Michaels Companies remains committed to store-expansion and remodeling efforts to elevate margins and boost profitability. This will also lead to higher comparable store sales (comps), thus, generating greater sales and capturing market share. The company has been focused on expanding its store base and introducing technological advancements to enhance services for its patrons.

Additionally, the company is remodeling stores to feature flexible merchandising areas (or FMA), where seasonal and other merchandise are showcased, providing better access to customers. At the end of the fiscal third quarter, the company had more than 700 stores with FMA layout compared with 420 in the last year. Moreover, Michaels Companies is closer to expanding this layout to 1,256 company stores.

Omni-Channel — A Key Focus Area

Michaels Companies is keen on integrating its e-commerce and in-store operations to enhance the omni-channel experience. The company nearly doubled its e-commerce sales in the fiscal third quarter, driven by enhanced ability to search and expanded assortments, which led to double-digit increases in traffic and higher conversion rates.

Further, the company continues to gain from omni-channel capabilities like “Buy Online Pick-up In Store” (BOPIS), which accounted for nearly a third of e-commerce transactions. It also doubled the number of stores in its ship-from-store program, with more than 450 stores now available to fulfill e-commerce orders during the holiday season. This should enable the company to leverage store level inventories, deliver online orders quickly and control fulfillment costs.

Improving Supply Chain — Margins to Benefit

The company is focused on expanding its in-house order fulfillment system for e-commerce sales. For this, it expanded its Dallas-Fort Worth distribution center to support e-commerce fulfillment, thereby, reducing dependence on third-party providers to fulfill online orders this holiday season. Moreover, the company is also putting together additional data analytics into its supply chain, inventory and marketing programs, which should help expand operating margin over time.

Robust Outlook Indicates Further Growth

Michaels Companies expects the momentum witnessed in the fiscal third quarter to continue in the fourth quarter. Consequently, it provided an upbeat outlook for the fiscal fourth quarter. Management expects comps for the fiscal fourth quarter between negative 0.5% and positive 0.5%. Earnings are envisioned to be $1.42-$1.47 per share.

Backed by strong fiscal third-quarter results and visibility into the fourth quarter, the company lifted sales and comps view for fiscal 2018, and tightened its earnings forecast. It now expects net sales of $5,261-$5,278 million in fiscal 2018, with comps estimated to increase 0.7-1.1%. Earnings per share for the fiscal year are anticipated to be $2.35-$2.39.

Bottom Line

Though the company remains concerned about challenges that the Arts and Crafts channel is facing due to stagnant growth and increased distribution points, we believe that the aforementioned initiatives should address these shortcomings. Further, strong view suggests more upside potential for the stock. This is further supported by a VGM Score of A and long-term earnings growth rate of 8.7%.

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