The Michaels Companies announced financial results for the third quarter ended October 29, 2016.
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Net sales increased 5.0% to $1.227 billion, from $1.168 billion in the third quarter of fiscal 2015
The increase was primarily a result of the acquisition of Lamrite West in February 2016 and sales from 19 additional stores (net of closures). Comparable store sales decreased 2.0% driven by a decrease in customer transactions, which was partially offset by an increase in average ticket.
Gross profit increased 0.2% to $466.6 million, from $465.6 million in the third quarter of fiscal 2015. As a percentage of net sales, gross profit was 38.0% compared to 39.8% in the third quarter of fiscal 2015.
The decrease, as a percentage of net sales, was due to a higher mix of sales from merchandise sold on promotion, the timing of distribution-related costs, and the acquisition of Lamrite West, including the impact of Lamrite West's wholesale business, which has a lower gross margin rate than the Michaels business. The decrease, as a percentage of sales, was partially offset by improved sourcing and pricing efficiencies.
Selling, general and administrative expense, including store pre-opening costs, ("SG&A") increased 3.4% to $320.3 million, or 26.1% of sales, from $309.7 million, or 26.5% of sales, in the third quarter of fiscal 2015. The increase in SG&A was primarily due to $17.3 million associated with the acquisition of Lamrite West, including $1.6 million of integration expenses; expenses associated with the operation of 19 additional stores (net of closures); and higher professional fees. The increase was partially offset by a decrease in incentive-based compensation and lower marketing expense.
Operating income was $146.3 million, compared to $155.9 million in the third quarter of fiscal 2015. As a percent of net sales, operating income was 11.9% compared to 13.3% in the third quarter of fiscal 2015.
Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted operating income was $148.6 million, or 12.1% of net sales.
Interest expense decreased $2.3 million to $31.5 million, from $33.8 million in the third quarter of fiscal 2015 due to a voluntary principal payment of $150.0 million on the term loan credit facility in the fourth quarter of fiscal 2015 and interest rate savings from the refinancing of the revolving credit facility.
The Company recorded a loss on the early extinguishment of debt of $6.9 million during the third quarter of fiscal 2016 related to the refinancing of the term loan credit facility in September 2016.
The effective tax rate was 29.0% for the third quarter of fiscal 2016, compared to 37.0% for the third quarter of fiscal 2015. The lower effective tax rate is primarily due to benefits realized from our direct sourcing initiatives, certain federal tax credits and a decrease in state taxes.
Net income was $76.5 million, compared to $76.8 million in the third quarter of fiscal 2015. As a percent of net sales, net income was 6.2% compared to 6.6% in the third quarter of fiscal 2015. Excluding net non-recurring, inventory-related purchase accounting adjustments, integration expenses associated with the acquisition of Lamrite West, and losses on early extinguishments of debt and refinancing costs, adjusted net income for the third quarter of fiscal 2016 was $82.1 million, or 6.7% of net sales.
Diluted earnings per common share was $0.37, flat with the third quarter of fiscal 2015. Excluding net non-recurring, inventory-related purchase accounting adjustments, integration expenses associated with the acquisition of Lamrite West, and losses on early extinguishments of debt and refinancing costs, adjusted diluted earnings per common share for the third quarter was $0.40.
During the third quarter of fiscal 2016, the Company opened 14 new Michaels stores, compared with 10 new Michaels store openings in the third quarter of 2015. At the end of the third quarter, the Company operated 1,221 Michaels stores, 112 Aaron Brothers stores, and 35 Pat Catan's stores.
The Company ended the third quarter of fiscal 2016 with $150.0 million in cash and cash equivalents, $2.8 billion in debt and $792.7 million in availability under its asset-based revolving credit facility.
Inventory at the end of the third quarter increased $117.0 million, or 9.2%, to $1.394 billion, compared to $1.277 billion at the end of the third quarter of fiscal 2015. The increase in inventory was due to $95.4 million in additional inventory from the acquisition of Lamrite West. Average Michaels inventory on a per store basis, inclusive of distribution centers, in transit and inventory for the Company's e-commerce site, was flat compared to average inventory per store at the end of the third quarter of fiscal 2015.
During the quarter, the Company purchased 1.2 million shares, or $29.5 million, under its share repurchase authorization, previously announced in March 2016. ■