The Michaels Cos. Inc.

Overview Key strengths Key risks Largest arts and crafts specialty retailer, providing the company with scale benefits and good brand recognition. Competes in the mature, highly fragmented, and competitive arts and crafts industry and sells highly discretionary products. Dedicated core customer base contributes to relatively steady product demand and history of consistent cash generation. Inventory challenges and elevated freight costs due to ongoing supply chain disruptions. Balance sheet cash, asset-based revolver availability, and forecasted positive funds from operations (FFO) supports Michaels? adequate liquidity position. Substantial debt burden and financial policy that we believe prioritizes shareholder returns over debt reduction. Comparable store sales declined 11% during the fiscal fourth quarter-ended Jan. 29, 2022, as port congestion delayed the flow of seasonal

...We expect softer demand and elevated supply chain costs to weigh on operating results in fiscal 2022. Comparable store sales declined 11% during the fiscal fourth quarter-ended Jan. 29, 2022, as port congestion delayed the flow of seasonal merchandise to Michaels' stores and the company lapped a strong sales period in 2020. Ongoing supply chain disruptions are contributing to higher transportation costs that we expect will persist this year and pressure its gross margin. In response, the company plans to partially mitigate these costs through pricing actions and expense management. In our view, the current inflationary environment and lower consumer confidence heighten the execution risk of Michaels' pricing strategy as the risk of slowing consumer spending grows. Still,...

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