The Michaels Companies, Inc. owns and operates arts and crafts specialty retail stores for Makers and do-it-yourself home decorators in North America. It operates Michaels stores, Aaron Brothers stores and Pat Catan's stores.
Michaels reported their first-quarter earnings report last week. Due to COVID-19 comparable sales fell 27.6%, and the company reported an operating loss of $60.7 million. Like most retailers, during the shutdown, Michaels had to reinvent themselves. The company implemented curbside pickup and same-day delivery, which helped drive e-commerce sales. But what got investors excited was comparable sales were up 11% at stores that had reopened.
Michaels got more good news late last week when the unemployment rate fell from 14.7% in April to 13.3% in May and the economy added 2.5 million jobs in May. Because Michaels is still a brick and mortal retailer at heart, the more jobs that are created, the more discretionary income consumers have, the more shopping those consumers will do online and physically in the stores.
Speaking of physical stores, in Novermber, Nicole Crafts which owns A.C Moore announced they will are getting out of the retail business. A.C Moore has over 100 locations spanning the East Coast from Maine to Florida. Michaels immediately took advantage of the news and leased about 40 locations and leased a one of their distribution facility. But the kicker is most of A.C. Moore stores are within a 10 minute drive of a Michaels’ location.
The other day, Michaels was upgraded by a JP Morgan analyst citing attractive valuation, improved margins and positive comparable sales.
J.P. Morgan analyst Christopher Horvers upgraded the stock to overweight with a share price target of $13, up from a previous $7 target. The analyst believes the arts and crafts retailer has the best upside potential from current prices in the group of retailers that were forced to close stores because of COVID-19.
Horvers said the boost in optimism on the economy as states have begun to reopen has created a value opportunity. Michaels said in its first-quarter earnings report last week that about 1,000 of its 1,273 stores have been reopened, including more than 500 in just the last month.
In the earnings report, Buchanan expressed optimism in sales trends as stores reopen. He added, "we significantly accelerated Michaels' transformation into an omnichannel retailer by introducing a robust set of customer facing digital and fulfillment capabilities."
The entire retail sector has come back from the ashes with vengeance. While some retailers might be offer attractive valuations, others are value traps.
Seth Sigman, Credit Suisse analyst doesn’t share the same enthusiasm for Michaels like Christopher Horvers of JP Morgan does. Seth stated the momentum of consumers getting out of the house needs to be monitored for clues on demand and store conversions as that will be the deciding factor where the stock heads next. Seth is neutral on the Michaels with a $5 price target.
I personally think the chart looks ugly and although the chart suggests price could move up to the $11 level, I wouldn't touch this stock with a 10 ft pole as the easy money has already been made with the reopening of the economy sentiment.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advice. Do your own research before making investment decisions.
