The Michaels Companies announced financial results for the second quarter ended July 29, 2017.
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Net sales increased 1.2%, or 1.3% on a constant currency basis, to $1,072.6 million, from $1,060.4 million in the second quarter of fiscal 2016. The increase was primarily a result of the operation of 10 additional stores (net of closures) during the quarter.
Comparable store sales increased 0.6%, or 0.8% on a constant currency basis, driven by an increase in customer transactions, which was partially offset by a decline in average ticket.
Gross profit increased 3.0% to $402.5 million, from $390.7 million in the second quarter of fiscal 2016. As a percentage of net sales, gross profit increased 70 basis points to 37.5% compared to 36.8% in the second quarter of fiscal 2016.
The increase, as a percentage of net sales, was due to higher merchandise margin and distribution-related costs.
These benefits were partially offset by higher inventory shrinkage and a $1.4 million benefit associated with net non-recurring, inventory-related purchase accounting adjustments in the second quarter of fiscal 2016 related to the acquisition of Lamrite West.
Selling, general and administrative expense, including store pre-opening costs, (SG&A) increased 3.6% to $314.5 million, or 29.3% of sales, from $303.6 million, or 28.6% of sales, in the second quarter of fiscal 2016.
The increase in SG&A was primarily due to an increase in performance-based compensation, along with expenses associated with the operation of 10 additional stores (net of closures), marketing investments and higher health care expenses.
The increase was partially offset by lower professional fees and a comparison against $1.9 million of integration expenses recorded in the second quarter of fiscal 2016 related to the acquisition of Lamrite West.
Operating income increased 1.0% to $88.0 million, or 8.2% of sales, compared to $87.1 million, or 8.2% of sales, in the second quarter of fiscal 2016.
Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted operating income for the second quarter of fiscal 2016 was $87.6 million.
Interest expense decreased $0.9 million to $31.1 million, from $32.0 million in the second quarter of fiscal 2016 due to interest rate savings from the refinancing of the term loan credit facility in the third quarter of fiscal 2016.
The effective tax rate was 36.0% for the second quarter of fiscal 2017, compared to 35.5% for the second quarter of fiscal 2016.
The higher effective tax rate is primarily due to a $1.4 million charge related to the reduction of certain federal tax credits in the second quarter of fiscal 2017, which was partially offset by benefits realized from our direct sourcing initiatives.
Net income was $35.6 million, flat with the second quarter of fiscal 2016. Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted net income for the second quarter of fiscal 2016 was $35.9 million.
Diluted earnings per share increased 11.8% to $0.19, from $0.17 in the second quarter of fiscal 2016. Diluted weighted-average common shares outstanding for the quarter were 187.9 million compared with 207.5 million in the second quarter of fiscal 2016.
Excluding net non-recurring, inventory-related purchase accounting adjustments and integration expenses associated with the acquisition of Lamrite West, adjusted diluted earnings per share in the second quarter of fiscal 2016 was $0.17.
During the second quarter of fiscal 2017, the Company opened five new Michaels stores and closed three Aaron Brothers stores, compared with five new Michaels store openings and three Aaron Brothers closings in the second quarter of fiscal 2016.
At the end of the second quarter, the Company operated 1,230 Michaels stores, 101 Aaron Brothers stores, and 35 Pat Catan's stores.
The Company ended the second quarter of fiscal 2017 with $134.1 million in cash, $2.8 billion in total debt and $681.4 million in availability under its asset-based revolving credit facility.
Average Michaels inventory on a per store basis, inclusive of distribution centers, in transit and inventory for the Company's e-commerce site, increased 2.1% to $864,000, compared to $846,000 at the end of the second quarter of fiscal 2016.
Inventory at the end of the second quarter was $1,195.5 million, an increase of 4.4% compared to $1,145.4 million in the second quarter of fiscal 2016.
The increase in inventory was primarily due to additional inventory associated with the operation of 10 additional stores (net of closures) and earlier receipt of inventory to support key merchandising initiatives in the second half of fiscal 2017.
During the quarter, the Company purchased 5.4 million shares, or $101.4 million, under its share repurchase authorization.
The total remaining authorization for future repurchases is approximately $398.6 million.
The share repurchase program does not have an expiration date, and the timing and number of repurchase transactions under the program will depend on market conditions, corporate considerations, debt agreements, and regulatory requirements. ■