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 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OR 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 9, 1997
Common stock, par value $.10 per share 26,152,399
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)
ASSETS
May 3, February 1,
1997 1997
________ ________
Current assets:
Cash and equivalents $ 77,309 $ 59,069
Merchandise inventories 370,681 351,208
Income taxes receivable
and deferred income taxes 13,774 15,207
Prepaid expenses and other 13,305 12,059
________ ________
Total current assets 475,069 437,543
________ ________
Property and equipment, at cost 298,038 294,022
Less accumulated depreciation (113,673) (104,943)
________ ________
184,365 189,079
________ ________
Costs in excess of net assets of
acquired operations, net 139,729 140,697
Deferred income taxes 11,758 10,550
Other assets 3,383 6,566
________ ________
154,870 157,813
________ ________
$814,304 $784,435
________ ________
________ ________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $115,117 $104,966
Accrued liabilities and other 85,502 92,765
________ ________
Total current liabilities 200,619 197,731
________ ________
Senior notes 125,000 125,000
Convertible subordinated notes 96,940 96,940
Other long-term liabilities 31,107 31,962
________ ________
Total long-term liabilities 253,047 253,902
________ ________
453,666 451,633
________ ________
Commitments and contingencies
Shareholders' equity:
Common stock, 26,032,984 shares
outstanding 2,603 2,369
Additional paid-in capital 296,122 271,405
Retained earnings 61,913 59,028
________ ________
Total shareholders' equity 360,638 332,802
________ ________
$814,304 $784,435
________ ________
________ ________
See accompanying notes to consolidated financial statements.
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months
_______________________
May 3, April 28,
1997 1996
________ _________
Net sales $321,318 $301,875
Cost of sales and occupancy expense 220,128 205,067
Selling, general and administrative
expense 91,884 88,970
________ ________
Operating income 9,306 7,838
Interest expense 5,742 3,710
Other income, net (1,549) (267)
________ ________
Income before income taxes 5,113 4,395
Provision for income taxes 1,943 1,670
________ ________
Net income $ 3,170 $ 2,725
________ ________
________ ________
Earnings per common and common
equivalent share $.12 $.12
____ ____
____ ____
Weighted average common and common
equivalent shares outstanding 26,303 22,459
______ ______
______ ______
See accompanying notes to consolidated financial statements.
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months
_______________________
May 3, April 28,
1997 1996
________ _________
Operating activities:
Net income $ 3,170 $ 2,725
Adjustments:
Depreciation 9,945 7,763
Amortization 1,056 1,046
Other (60) 149
Change in assets and liabilities:
Merchandise inventories (19,473) (11,035)
Prepaid expenses and other (1,245) 727
Deferred income taxes and other 285 3,628
Accounts payable 10,151 5,895
Accrued liabilities and other (6,546) (9,304)
________ ________
Net change in assets and liabilities (16,828) (10,089)
________ ________
Net cash provided by (used in)
operating activities (2,717) 1,594
________ _________
Investing activities:
Additions to property and equipment (5,427) (7,779)
Net proceeds from sales of investments 3,386 -
________ ________
Net cash used in investing activities (2,041) (7,779)
________ ________
Financing activities:
Net borrowings under bank credit facilities - (13,700)
Payment of other long-term liabilities (996) -
Proceeds from issuance of common stock
and other 23,994 24,925
________ ________
Net cash provided by financing
activities 22,998 11,225
________ ________
Net increase in cash and equivalents 18,240 5,040
Cash and equivalents at beginning of year 59,069 2,870
________ ________
Cash and equivalents at end of period $ 77,309 $ 7,910
________ ________
________ ________
See accompanying notes to consolidated financial statements.
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended May 3, 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
months ended May 3, 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 months ended May 3, 1997 are not
indicative of the results to be expected for the entire year.
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
______
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 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. The Court certified a
class on March 24, 1997 and discovery is proceeding. 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
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 or about November 1, 1996 the
Company filed its petition for review with the California Supreme Court
requesting a review of the appellate decision. Review was granted on
December 23, 1996. Should the California Supreme 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, 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 D
______
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.
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, and the results of financing efforts.
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:
For the
Quarter Ended
___________________
May 3, April 28,
1997 1996
______ _________
Net sales 100.0% 100.0%
Cost of sales and occupancy
expense 68.5 67.9
Selling, general and
administrative expense 28.6 29.5
_____ _____
Operating income 2.9 2.6
Interest expense 1.8 1.2
Other income, net (0.5) (0.1)
_____ _____
Income before income taxes 1.6 1.5
Provision for income taxes 0.6 0.6
_____ _____
Net income 1.0% 0.9%
_____ _____
_____ _____
Three months ended May 3, 1997 compared to the
______________________________________________
three months ended April 28, 1996
_________________________________
Net sales in the first quarter of fiscal 1997 increased $19.4 million, or 6%,
over the first quarter of fiscal 1996. The results for the first quarter of
fiscal 1997 included sales from 7 new Michaels stores (net of 8 closures)
that were opened during the twelve month period ended May 3, 1997. During
the first quarter, sales of the new stores accounted for an increase of $4.7
million. Same store sales increased 4% in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996 which contributed $14.7 million
to the net sales increase. The improvement in same store sales performance
is due to strong performance in the Company's core categories as a result of
updated planograms put into place last summer and 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 quarter of fiscal 1997 increased by 0.6% compared to the first quarter
of fiscal 1996. This increase was due to higher occupancy costs and higher
distribution costs. The increase in occupancy costs is primarily
attributable to rent reserves established for the Company's 1997 store
relocation program and rent increases from the 1996 relocation and expansion
program. Distribution costs increased due to the Company's investment last
year in an upgraded warehouse network and the related systems. As the
Company improves its utilization of this increased capacity, return on the
investment will yield improved gross margins.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 0.9% in the first quarter of fiscal 1997 compared to the first
quarter of 1996. The Company saved $4 million in advertising costs versus
last year, as well as showed improved expense leverage in nearly all
categories of store operating expenses with the exception of depreciation
which reflects the impact of its increased investment in the POS system.
Liquidity and Capital Resources
_______________________________
Cash flow from operations of negative $2.7 million was used during the first
quarter of fiscal 1997 compared to positive $1.6 million of cash flow from
operations generated during the first quarter 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 decreased 3% to $793,000 at May 3, 1997 compared to $816,000 last year.
The Company's trade payable leverage improved to 31% from 28% last year
reflecting the fresher nature of the Company's inventory and the improved
utilization of terms through the centralization of payables. Borrowings
outstanding under the Company's bank credit agreement ("Credit Agreement"),
which expires in June 1999, were $73.5 million at the end of the first
quarter of fiscal 1996. There were no borrowings outstanding at May 3, 1997,
reflecting net proceeds of $120.9 million received during June 1996 from the
issuance of Senior Notes used to reduce the amount of borrowings under the
credit facility. The Company is in compliance with all covenants in the
Credit Agreement as of May 3, 1997.
The Company opened three Michaels stores and closed seven during the first
three months of fiscal 1997. Capital expenditures for the newly opened
stores amounted to approximately $400,000. Additional capital expenditures
of approximately $5.0 million during the quarter related primarily to the
relocation or remodelling of approximately 12 existing stores, and for
various systems enhancements. The Company expects capital expenditures
during the remainder of fiscal 1997 to total approximately $26 to $32
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
during the remainder of fiscal 1997 of up to $12 million for the relocation
in 1998 of one of its distribution centers.
At May 3, 1997, the Company had working capital of $274.5 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.
MICHAELS STORES, INC.
FORM 10-Q
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Separation Agreement effective January 21, 1997 between
Michaels Stores, Inc. and R. Don Morris.
Exhibit 10.2 - Michaels Stores, Inc. 1997 Stock Option Plan.
Exhibit 11 - Computation of Earnings Per Common Share for the Three
Months Ended May 3, 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.
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-
Chief Financial Officer
(Principal Financial Officer)
Dated: June 17, 1997
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
10.1 Separation Agreement effective
January 21, 1997 between Michaels
Stores, Inc. and R. Don Morris.
10.2 Michaels Stores, Inc. 1997 Stock
Option Plan.
11 Computation of Earnings Per Common
Share for the Three Months Ended
May 3, 1997.
27 Financial Data Schedule
EXHIBIT 11
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Three Months Ended May 3, 1997
(Unaudited)
Weighted
Average
Outstanding
Equivalent Shares
_______________________________________
Total Fully
Outstanding Primary Diluted
___________ __________ __________
Outstanding at beginning
of year 23,690,926 23,690,926 23,690,926
Shares issued during
quarter 2,342,058 1,538,208 1,538,208
__________ __________
Weighted average common
shares outstanding 25,229,134 25,229,134
Net shares to be issued upon
exercise of dilutive stock
options after applying treasury
stock method 842,269 1,074,347
__________ __________ __________
Total outstanding common shares 26,032,984 26,071,403 26,303,481
__________ __________ __________
__________ __________ __________
Earnings per common and
common equivalent share $.12 $.12
____ ____
____ ____