The Michaels Companies announced financial results for the second quarter ended July 30, 2016. Net sales increased 7.7%, or 8.1% on a constant currency basis, to $1,060.4 million, from $984.3 million in Q2 2015.
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The increase was primarily a result of the acquisition of Lamrite West in February 2016 and sales from 17 additional stores (net of closures) during the quarter.
Comparable store sales increased 0.7%, or 1.0% on a constant currency basis, driven by an increase in customer transactions.
The Michaels Companies gross profit increased 4.7% to $390.7 million, from $373.3 million in the second quarter of fiscal 2015.
As a percentage of net sales, gross profit was 36.8% compared to 37.9% in the second quarter of fiscal 2015.
The decrease, as a percentage of net sales, was due to 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 timing of distribution expenses; a higher mix of sales from merchandise sold on promotion; and the timing of profit recognition for the product Michaels buys through Lamrite West.
The decrease was partially offset by improved sourcing and pricing efficiencies and $1.4 million of net non-recurring, inventory-related purchase accounting adjustments related to the acquisition of Lamrite West.
Selling, general and administrative expense, including store pre-opening costs, (SG&A) increased 9.7% to $303.6 million, from $276.7 million in the second quarter of fiscal 2015.
As a percent of net sales, SG&A was 28.6%, compared to 28.1% in the second quarter of fiscal 2015. The increase in SG&A was primarily due to $17.4 million associated with the acquisition of Lamrite West, including: $1.9 million of integration expenses; expenses associated with operating 17 additional stores (net of closures); an unplanned credit card assessment of $2.9 million; and higher professional fees. The increase was partially offset by lower in-store signage expense.
Operating income was $87.1 million, compared to $96.6 million in the second quarter of fiscal 2015. As a percent of net sales, operating income was 8.2% compared to 9.8% in the second quarter of fiscal 2015.
Interest expense decreased $2.4 million to $32.0 million, from $34.3 million in the second quarter of fiscal 2015 due to a voluntary principal payment of $150.0 million on the Restated Term Loan Credit Facility in the fourth quarter of fiscal 2015 and interest savings from the refinancing of the Restated Revolving Credit Facility.
The company recorded a loss on the early extinguishment of debt of $0.4 million during the second quarter of fiscal 2016 related to the refinancing of the Restated Revolving Credit Facility in May 2016. The company recorded a loss on the early extinguishment of debt of $6.1 million during the second quarter of fiscal 2015 related to the redemption of the PIK Notes in May 2015.
The effective tax rate was 35.5% for the second quarter of fiscal 2016, compared to 36.6% for the second quarter of fiscal 2015.
Net income was $35.6 million, compared to $35.7 million in the second quarter of fiscal 2015. Diluted earnings per common share was $0.17, compared to $0.17 in the second quarter of fiscal 2015.
During the second quarter of fiscal 2016, the company opened five new Michaels stores and two new Pat Catan's stores and closed three Aaron Brothers stores, compared with nine new Michaels store openings in the second quarter of 2015.
At the end of the second quarter, the company operated 1,209 Michaels stores, 112 Aaron Brothers stores, and 35 Pat Catan's stores.
The company ended the second quarter of fiscal 2016 with $114.8 million in cash, $2.8 billion in debt and $597.1 million in availability under its asset-based revolving credit facility. ■