The Michaels Companies announced financial results for the third quarter 2014 ended November 1, 2014. Net sales increased by 1.1% to $1.13 billion from $1.12 billion in Q3 2013.
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Comparable store sales decreased by 0.8% or down 0.2% on a constant currency basis. This anniversaries the comparable store sales increase of 7.9% in the third quarter of fiscal 2013, which was significantly impacted by the success of the Rainbow Loom product.
Gross profit decreased 50 basis points to 40.0% of net sales compared to 40.5% of net sales in the third quarter of fiscal 2013. The decline was driven by slightly lower product margins, higher occupancy costs, and investments in e-commerce, partially offset by favorable shrink and damage costs.
Selling, general and administrative expense, including share-based compensation, related party and store pre-opening costs ("SG&A") as a percent of net sales decreased 100 basis points to 27.4% versus 28.4% during the third quarter last year. SG&A decreased $8 million to $310 million compared to $318 million in the third quarter of fiscal 2013 due to $7 million lower performance based compensation and payroll taxes partially offset by increased advertising and new store payroll.
Operating income grew 5.2% to $142 million from $135 million in the third quarter of fiscal 2013. As a percent of net sales, operating income increased 50 basis points to 12.6%.
Interest expense decreased to $41 million from $62 million in the third quarter of fiscal 2013 due to the debt refinancing and the pay down of $439 million of the 7.50%/8.25% PIK Toggle Notes from proceeds of the Initial Public Offering (IPO) during the second quarter of fiscal 2014.
The effective tax rate was 36.0% for the third quarter of fiscal 2014 compared to 35.6% for the third quarter of fiscal 2013. This was lower than the expected 37.5% effective tax rate due to higher tax credits recognized in the third quarter fiscal 2014.
Net income increased 36.2% to $64 million in the third quarter of fiscal 2014 compared to $47 million in the same quarter last year. In the third quarter of fiscal 2014, diluted earnings per share increased 19.2% to $0.31 from diluted earnings per share of $0.26 in the third quarter of fiscal 2013.
Adjusted net income, which excludes related party/sponsor fees and reflects the future interest expense based on the Company's debt refinancing ("adjusted net income") grew 16.4% to $64 million compared to $55 million for the third quarter of fiscal 2013. Diluted adjusted earnings per share increased 14.8% to $0.31 compared to $0.27 in the third quarter of fiscal 2013.
The Company opened 19 new Michaels stores, relocated three Michaels stores, opened 5 new Aaron Brothers stores and closed one Aaron Brothers store during the third quarter of fiscal 2014, compared with 19 new Michaels stores, six Michaels relocations and one Michaels closure in the third quarter of 2013. At the end of the third quarter, the Company operated 1,166 Michaels stores and 121 Aaron Brothers stores. ■