We expect U.S.-based arts and crafts specialty retailer Michaels Cos. Inc.'s profitability to be pressured this year due to slowing consumer demand and elevated operating costs. We forecast S&P Global Ratings-adjusted leverage approaching 6x in 2022 and expect negligible levels of free operating cash flow (FOCF) this year, before a substantial improvement in 2023. We revised our rating outlook on the company to negative from stable and affirmed all of our ratings, including our 'B' issuer credit rating on the company. The negative outlook reflects the potential for a lower rating over the next 12 months if Michaels is unable to reverse declining sales and margin trends, straining FOCF generation and causing adjusted leverage to be sustained at about 6x.
