THE MICHAELS COMPANIES, INC. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company (and the related notes thereto included elsewhere in this quarterly report), the audited consolidated financial statements of the Company (and the related notes thereto) and the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 ("Annual Report") filed with theSecurities and Exchange Commission ("SEC") pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") onMarch 19, 2019 . All of the "Company", "us", "we", "our", and similar expressions are references toThe Michaels Companies, Inc. ("Michaels") and our consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires. We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday closest toJanuary 31 . All references to fiscal year mean the year in which that fiscal year began. References to "fiscal 2019" relate to the 52 weeks endingFebruary 1, 2020 and references to "fiscal 2018" relate to the 52 weeks endedFebruary 2, 2019 . In addition, all references to "the third quarter of fiscal 2019" relate to the 13 weeks endedNovember 2, 2019 and all references to "the third quarter of fiscal 2018" relate to the 13 weeks endedNovember 3, 2018 . Finally, all references to "the nine months endedNovember 2, 2019 " relate to the 39 weeks endedNovember 2, 2019 and all references to "the nine months endedNovember 3, 2018 " relate to the 39 weeks endedNovember 3, 2018 . Because of the seasonal nature of our business, the results of operations for the 13 and 39 weeks endedNovember 2, 2019 are not indicative of the results to be expected for the entire year. Overview We are the largest arts and crafts specialty retailer inNorth America (based on store count) providing materials, project ideas and education for creative activities under the Michaels retail brand. We also operate a wholesale business under the Darice brand name and a market-leading, vertically-integrated custom framing business under the Artistree brand name. As ofNovember 2, 2019 , we operated 1,274 Michaels stores. Net sales for the third quarter of fiscal 2019 decreased 4.1% compared to the same period in the prior year. The decrease in net sales was due primarily to a 2.2% decrease in comparable store sales and the closure of ourPat Catan's stores in fiscal 2018. The decrease was partially offset by net sales related to 18 additional Michaels stores opened (net of closures) sinceNovember 3, 2018 . Gross profit as a percent of net sales decreased 150 basis points to 36.1% during the third quarter of fiscal 2019 due to an increase in promotional activity, the impact of tariffs on inventory we purchase fromChina , a change in sales mix and deleveraging occupancy and distribution related costs. The decrease was partially offset by benefits from our ongoing pricing and sourcing initiatives and a decrease in inventory reserves. Operating income as a percent of net sales decreased to 6.2% for the third quarter of fiscal 2019 compared to 10.8% in the same period in the prior year. The decrease in operating income was due to a$40.1 million impairment charge recorded during the third quarter of fiscal 2019 as a result of lower than expected operating performance in our wholesale business and lower retail sales. Certain products that we import fromChina have been impacted by tariffs. During the first nine months of fiscal 2019, we successfully mitigated a substantial amount of the financial impact of these tariffs. Our mitigation efforts included, among other things, selectively increasing prices on certain of our products, sourcing products from alternative countries and negotiating lower prices with our suppliers inChina . If additional tariffs are implemented, we cannot provide any assurances that our mitigation efforts will be successful and, as a result, such tariffs could have a material impact on our business. 20 Table of Contents Comparable Store Sales Comparable store sales represents the change in net sales for stores open the same number of months in the comparable period of the previous year, including stores that were relocated or expanded during either period, as well as e-commerce sales. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than two weeks is not considered comparable during the month it is closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes comparable in its 14th month of operation after its reopening. Operating Information
The following table sets forth certain operating data:
13 Weeks Ended 39 Weeks Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Michaels stores:
Open at beginning of period 1,262 1,251 1,258 1,238
New stores 13 6 21 21
Relocated stores opened 5 4 13 20
Closed stores (1) (1) (5) (3)
Relocated stores closed (5) (4) (13) (20)
Open at end of period 1,274 1,256 1,274 1,256
Aaron Brothers stores:Open at beginning of period -
- - 97 Closed stores - - - (97) Open at end of period - - - -Pat Catan's stores:
Open at beginning and end of period - 36 - 36 Total store count at end of period 1,274 1,292 1,274 1,292 Other Operating Data: Average inventory per Michaels store (in thousands) (1)$ 1,069 $ 1,039 $ 1,069 $ 1,039 Comparable store sales (2.2) % 3.8 % (1.7) % 1.4 % Comparable store sales, at constant currency (2.1) % 4.3 % (1.4) % 1.4 %
(1) The calculation of average inventory per Michaels store excludes our Aaron
Brothers and Pat Catan's stores.
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Results of Operations
The following table sets forth the percentage relationship to net sales of line
items in our consolidated statements of comprehensive income. This table should
be read in conjunction with the following discussion and with our consolidated
financial statements, including the related notes.
13 Weeks Ended 39 Weeks Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Net sales 100.0 % 100.0 % 100.0 % 100.0 %Cost of sales and occupancy expense 63.9 62.4 63.4 62.4 Gross profit 36.1 37.6 36.6 37.6 Selling, general and administrative 26.4 26.7 27.9 27.9 Restructure and impairment charges 3.4 -
1.4 1.3
Store pre-opening costs 0.1 0.1 0.1 0.1
Operating income 6.2 10.8 7.2 8.3
Interest expense 3.2 3.0 3.5 3.1
Losses on early extinguishments of debt and
refinancing costs - - - 0.1
Other expense (income), net - - 0.1 (0.1)
Income before income taxes 3.0 7.8 3.6 5.2
Income taxes 0.7 1.2 0.9 1.3
Net income 2.3 % 6.6 % 2.7 % 4.0 %
13 Weeks Ended
Net Sales . Net sales decreased$52.0 million in the third quarter of fiscal 2019, or 4.1%, to$1,222.0 million compared to the third quarter of fiscal 2018. The decrease in net sales was primarily due to a$26.8 million decrease in comparable store sales, a$26.7 million decrease related to the closure of ourPat Catan's stores during the fourth quarter of fiscal 2018 and a$10.4 million decrease in wholesale revenue. The decrease was partially offset by an$11.7 million increase related to 18 additional Michaels stores opened (net of closures) sinceNovember 3, 2018 . Comparable store sales decreased 2.2%, or 2.1% at constant exchange rates, compared to the third quarter of fiscal 2018 due to a decrease in customer transactions, partially offset by an increase in average ticket. Gross Profit. Gross profit was 36.1% of net sales in the third quarter of fiscal 2019 compared to 37.6% in the third quarter of fiscal 2018. The 150 basis point decrease was primarily due to an increase in promotional activity, the impact of tariffs on inventory we purchase fromChina , a change in sales mix and deleveraging occupancy and distribution related costs. The decrease was partially offset by benefits from our ongoing pricing and sourcing initiatives and a decrease in inventory reserves. Selling, General and Administrative. Selling, general and administrative ("SG&A") was 26.4% of net sales in the third quarter of fiscal 2019 compared to 26.7% in the third quarter of fiscal 2018. SG&A decreased$17.8 million to$322.8 million in the third quarter of fiscal 2019. The decrease was primarily due to a$9.9 million decrease in performance-based compensation and other payroll-related costs and a$7.4 million decrease related to the closure of ourPat Catan's stores during the fourth quarter of fiscal 2018. The decrease was partially offset by$2.4 million associated with operating 18 additional Michaels stores (net of closures) sinceNovember 3, 2018 . Restructure and Impairment Charges. We recorded an impairment charge of$40.1 million in the third quarter of fiscal 2019 as a result of lower than expected operating performance in our wholesale business. In addition, we recorded a$1.3 million restructure charge in the third quarter of fiscal 2019 related to the closure of ourPat Catan's stores during the fourth quarter of fiscal 2018. Interest Expense. Interest expense increased$1.0 million to$38.8 million in the third quarter of fiscal 2019 compared to the same period in the prior year. The increase was primarily due to$2.4 million related to a higher interest rate associated with our senior notes issued inJuly 2019 . The increase was partially offset by a$1.1 million decrease 22
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related to reduced borrowings on our senior secured asset-based revolving credit facility ("Amended Revolving Credit Facility").
Losses on Early Extinguishments of Debt and Refinancing Costs. We recorded a
loss on the early extinguishment of debt of
Income Taxes. The effective tax rate was 22.5% in the third quarter of fiscal 2019 compared to 15.8% in the third quarter of fiscal 2018. The effective tax rate in the third quarter of fiscal 2019 was higher than the same period in the prior year primarily due to$7.1 million of tax benefits recognized in the third quarter of fiscal 2018 associated with the enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Act").
39 Weeks Ended
Net Sales . Net sales decreased$133.4 million in the first nine months of fiscal 2019, or 3.8%, to$3,349.4 million compared to the first nine months of fiscal 2018. The decrease in net sales was primarily due to an$88.4 million decrease related to the closure of ourPat Catan's andAaron Brothers stores during fiscal 2018, a$55.3 million decrease in comparable store sales and a$19.1 million decrease in wholesale revenue. The decrease was partially offset by$29.9 million of net sales related to 18 additional Michaels stores opened (net of closures) sinceNovember 3, 2018 . Comparable store sales decreased 1.7%, or 1.4% at constant exchange rates, compared to the first nine months of fiscal 2018 due to a decrease in customer transactions, partially offset by an increase in average ticket.
Gross Profit. Gross profit was 36.6% of net sales in the first nine months of fiscal 2019 compared to 37.6% in the first nine months of fiscal 2018. The 100 basis point decrease was primarily due to the impact of tariffs on inventory we purchase fromChina , a change in sales mix, an increase in promotional activity and deleveraging occupancy and distribution related costs. The decrease was partially offset by benefits from our ongoing pricing and sourcing initiatives. Selling, General and Administrative. SG&A was 27.9% of net sales in the first nine months of fiscal 2019 and fiscal 2018. SG&A decreased$36.7 million to$933.5 million in the first nine months of fiscal 2019. The decrease was primarily due to a$24.8 million decrease related to the closure of ourPat Catan's andAaron Brothers stores during fiscal 2018, a$19.9 million decrease in performance-based compensation and other payroll-related costs and a$4.4 million decrease in marketing expenses. The decrease was partially offset by$6.8 million associated with operating 18 additional Michaels stores (net of closures) sinceNovember 3, 2018 and$5.6 million of CEO severance expense. Restructure and Impairment Charges. We recorded an impairment charge of$40.1 million in the third quarter of fiscal 2019 as a result of lower than expected operating performance in our wholesale business. In addition, we recorded a restructure charge of$8.2 million in the first nine months of fiscal 2019 related to the closure of ourPat Catan's stores during the fourth quarter of fiscal 2018 and a restructure charge of$44.3 million in the first nine months of fiscal 2018 primarily related to the closure of ourAaron Brothers stores during the first quarter of fiscal 2018. Interest Expense. Interest expense increased$6.8 million to$116.3 million in the first nine months of fiscal 2019 compared to the same period in the prior year. The increase was primarily due to$7.0 million related to higher interest rates associated with our term loan credit facility and our senior notes issued inJuly 2019 and$1.7 million of interest paid on our senior subordinated notes during the period between the issuance of our senior notes and the redemption of the senior subordinated notes. The increase was partially offset by a$1.0 million decrease related to reduced borrowings on our Amended Revolving Credit Facility and a$0.5 million decrease in settlement payments associated with
our interest rate swaps.
Losses on Early Extinguishments of Debt and Refinancing Costs. We recorded a loss on the early extinguishment of debt of$1.3 million during the first nine months of fiscal 2019 related to the redemption of our senior subordinated notes and the refinancing of our Amended Revolving Credit Facility. We recorded a loss on the early extinguishment of debt of$1.8 million during the first nine months of fiscal 2018 related to the refinancing of our term loan credit facility.
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Other Expense (Income), Net. Other expense (income), net increased $5.6 million
in the first nine months of fiscal 2019 compared to the same period in the prior
year. The increase was primarily due to a $5.0 million charge related to the
write-off of an investment in a liquidated business.
Income Taxes. The effective tax rate was 23.9% in the first nine months of
fiscal 2019 compared to 24.0% in the first nine months of fiscal 2018. The
effective tax rate in the first nine months of fiscal 2019 was slightly lower
than the same period in the prior year primarily due to a tax benefit associated
with a state income tax settlement in fiscal 2019 and a $1.0 million charge in
fiscal 2018 associated with the enactment of the Tax Act, partially offset by
the vesting and expiration of share-based compensation awards.
Liquidity and Capital Resources
We require cash principally for day-to-day operations, to finance capital investments (including possible acquisitions), purchase inventory, service our outstanding debt and for seasonal working capital needs. We expect that our available cash, cash flow generated from operating activities and funds available under our Amended Revolving Credit Facility will be sufficient to fund planned capital expenditures, working capital requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable future. Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely affected by the occurrence of any of the events described under "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 or our failure to meet our debt covenants. Our Amended Revolving Credit Facility provides senior secured financing of up to$850 million , subject to a borrowing base. As ofNovember 2, 2019 , the borrowing base was$850.0 million , of which we had$82.0 million of outstanding standby letters of credit and$768.0 million of unused borrowing capacity. Our cash and cash equivalents totaled$118.4 million atNovember 2, 2019 . OnNovember 22, 2019 , the Company entered into an asset purchase agreement withA.C. Moore Incorporated , and certain of its affiliates, to acquire intellectual property and the right to lease up to 40 store locations for$58 million , subject to certain purchase price adjustments. In connection with the acquisition we also leased a distribution facility inNew Jersey . The store locations are expected to be reopened under the Michaels brand name in fiscal 2020 and will include the relocation of certain existing Michaels stores. The transaction is intended to expand our presence in strategic markets and better serve our customers both online and in stores. We had total outstanding debt of$2,689 million atNovember 2, 2019 , of which$2,189 million was subject to variable interest rates and$500 million was subject to fixed interest rates. InApril 2018 , we executed two interest rate swaps with an aggregate notional value of$1 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The swaps replaced the one-month LIBOR with a fixed interest rate of 2.7765%. OnAugust 30, 2019 ,Michaels Stores, Inc. ("MSI"), as borrower, andMichaels Funding, Inc. and certain of MSI's subsidiaries, as guarantors, entered into an amended and restated credit agreement withWells Fargo Bank, National Association and other lenders. The amendment extends the maturity date of the Amended Revolving Credit Facility toAugust 30, 2024 , subject to an earlier springing maturity date if certain of our outstanding indebtedness has not been repaid, redeemed, refinanced or cash collateralized or if the necessary availability reserves have not been established prior to such time. MSI is required to pay a commitment fee on the unutilized commitments under the Amended Revolving Credit Facility which is 0.25% per annum, subject to reduction to 0.20% when excess availability is less than 50% of the loan cap. The loan cap is defined as the lesser of the commitment amount and the borrowing base. All other significant terms of the Amended Revolving Credit Facility have remained unchanged. OnJuly 8, 2019 , MSI issued$500 million in principal amount of 8% senior notes maturing in 2027 ("2027 Senior Notes"). The 2027 Senior Notes were issued pursuant to an indenture among MSI, certain subsidiaries of MSI, as guarantors, andU.S. Bank National Association , as trustee (the "2027 Senior Notes Indenture"). The 2027 Senior Notes mature onJuly 15, 2027 and bear interest at a rate of 8% per year, with interest payable semi-annually onJanuary 15 andJuly 15 of each year, beginning onJanuary 15, 2020 . The net proceeds from the offering and sale of the 2027 Senior Notes, together with cash on hand, were used to redeem MSI's outstanding senior subordinated notes. 24 Table of Contents
The 2027 Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of MSI's subsidiaries that guarantee indebtedness under the Amended Revolving Credit Facility and the senior secured term loan facility ("Amended and Restated Term Loan Credit Facility") (collectively defined as the "Senior Secured Credit Facilities").
The 2027 Senior Notes are general, unsecured obligations of MSI, and the guarantees of the 2027 Senior Notes are general, unsecured obligations of the guarantors. They (i) rank equally in right of payment with all of MSI's and the guarantors' existing and future senior debt, including the Senior Secured Credit Facilities, (ii) are effectively subordinated to any of MSI's and the guarantors' existing and future secured debt to the extent of the value of the assets securing such debt, including the Senior Secured Credit Facilities, (iii) are structurally subordinated to all of the liabilities of MSI's subsidiaries that are not guaranteeing the 2027 Senior Notes, and (iv) are senior in right of payment with all of MSI's and the guarantors' existing and future subordinated debt. At any time prior toJuly 15, 2022 , MSI may redeem (a) up to 40% of the aggregate principal amount of the 2027 Senior Notes with the gross proceeds from one or more Equity Offerings, as defined in the 2027 Senior Notes Indenture, at a redemption price of 108% of the principal amount plus accrued and unpaid interest thereon to, but excluding, the redemption date and/or (b) all or part of the 2027 Senior Notes at 100% of the principal amount plus any accrued and unpaid interest thereon to, but excluding, the redemption date plus a make-whole premium. Thereafter, MSI may redeem all or part of the 2027 Senior Notes at the redemption prices set forth below (expressed as percentages of the principal amount of the 2027 Senior Notes to be redeemed) plus any accrued and unpaid interest thereon to, but excluding, the applicable date of redemption, if redeemed during the twelve month period beginning onJuly 15 of each of the years indicated below: Year Percentage 2022 104 % 2023 102 % 2024 and thereafter 100 % Upon a change in control, MSI is required to offer to purchase the 2027 Senior Notes at 101% of the aggregate principal amount, plus any accrued and unpaid interest thereon to, but excluding, the date of purchase.
Subject to certain exceptions and qualifications, the 2027 Senior Notes Indenture contains covenants that, among other things, limit MSI's ability and the ability of its restricted subsidiaries, including the guarantors, to:
? incur additional indebtedness or issue certain disqualified stock or preferred
stock; ? create liens;
? pay dividends on MSI's capital stock or make distributions or redeem or
repurchase MSI's capital stock;
? prepay subordinated debt or make certain investments, loans, advances, and
acquisitions;
? transfer or sell assets;
? engage in consolidations, amalgamations or mergers, or sell, transfer or
otherwise dispose of all or substantially all of their assets; and
? enter into certain transactions with affiliates.
The 2027 Senior Notes Indenture also provides for customary events of default which, if any of them occurs, would require or permit the principal of and accrued interest on the 2027 Senior Notes to become or to be declared due and payable. As ofNovember 2, 2019 , MSI was in compliance with all covenants.
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Our substantial indebtedness could adversely affect our ability to raise
additional capital, limit our ability to react to changes in the economy or our
industry, expose us to interest rate risk and prevent us from meeting our
obligations. Management reacts strategically to changes in economic conditions
and monitors compliance with debt covenants to seek to mitigate any potential
material impacts to our financial condition and flexibility.
In September 2018 , the Board of Directors authorized a new share repurchase
program for the Company to purchase $500 million of the Company's common stock
on the open market or through accelerated share repurchase transactions. 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. Shares repurchased under the program are held as treasury shares
until retired. During the nine months ended November 2, 2019 , we repurchased
11.6 million shares for an aggregate amount of $105.1 million . As of November 2,
2019 , we had $293.5 million of availability remaining under our current share
repurchase program.
We intend to use excess operating cash flows to invest in growth opportunities
(including possible acquisitions), repurchase outstanding shares and repay
portions of our indebtedness, depending on prevailing market conditions,
liquidity requirements, contractual restrictions and other factors. As such, we
and our subsidiaries, affiliates and significant shareholders may, from time to
time, seek to retire or purchase our outstanding debt (including publicly issued
debt) through cash purchases and/or exchanges, in open market purchases,
privately negotiated transactions, by tender offer or otherwise. If we use our
excess cash flows to repay our debt, it will reduce the amount of excess cash
available for additional capital expenditures.
Cash Flow from Operating Activities
Cash flows provided by operating activities were$106.4 million in the first nine months of fiscal 2019 compared to$25.8 million in the first nine months of fiscal 2018. The increase in cash provided by operating activities was primarily due to additional collections of outstanding receivables and lower tax payments. Inventory at the end of the third quarter of fiscal 2019 decreased$17.5 million , or 1.2%, to$1,423.4 million , compared to$1,440.9 million at the end of the third quarter of fiscal 2018. The decrease in inventory was primarily related to the closure of ourPat Catan's stores in the fourth quarter of fiscal 2018. The decrease was partially offset by tariffs enacted on product that we purchase fromChina , lower sales and additional inventory associated with the operation of 18 additional Michaels stores (net of closures) sinceNovember 3, 2018 . Average inventory per Michaels store (inclusive of distribution centers, in-transit and inventory for the Company's e-commerce site) increased 2.9% to$1,069,000 atNovember 2, 2019 from$1,039,000 atNovember 3, 2018 .
Cash Flow from Investing Activities
The following table includes capital expenditures paid during the periods
presented (in thousands):
39 Weeks Ended
November 2, November 3,
2019 2018
New and relocated stores including stores not yet opened (1) $ 10,787 $ 27,399
Existing stores 23,257 32,694
Information systems 40,132 43,602
Corporate and other 15,456 15,858
$ 89,632 $ 119,553 (1) In the first nine months of fiscal 2019, we incurred capital expenditures
related to the opening of 34 Michaels stores, including the relocation of 13
stores. In the first nine months of fiscal 2018, we incurred capital
expenditures related to the opening of 41 Michaels stores, including the
relocation of 20 stores.
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Non-GAAP Measures
The following table sets forth certain non-GAAP measures used by the Company to
manage our performance and measure compliance with certain debt covenants. The
Company defines "EBITDA" as net income before interest, income taxes,
depreciation and amortization. The Company defines "Adjusted EBITDA" as EBITDA
adjusted for certain defined amounts in accordance with the Company's Senior
Secured Credit Facilities.
The Company has presented EBITDA and Adjusted EBITDA to provide investors with
additional information to evaluate our operating performance and our ability to
service our debt. Adjusted EBITDA is a required calculation under the Company's
Senior Secured Credit Facilities that is used in the calculations of fixed
charge coverage and leverage ratios, which, under certain circumstances
determine mandatory repayments or maintenance covenants and may restrict the
Company's ability to make certain payments (characterized as restricted
payments), investments (including acquisitions) and debt repayments.
As EBITDA and Adjusted EBITDA are not measures of liquidity calculated in
accordance with U.S. generally accepted accounting principles ("GAAP"), these
measures should not be considered in isolation of, or as substitutes for, net
cash provided by operating activities as an indicator of liquidity. Our
computation of EBITDA and Adjusted EBITDA may differ from similarly titled
measures used by other companies.
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The following table shows a reconciliation of EBITDA and Adjusted EBITDA to net income and net cash provided by operating activities (in thousands):
13 Weeks Ended 39 Weeks Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Net cash provided by operating activities
(81,397) - (244,258) -
Depreciation and amortization (31,295) (30,879) (94,025) (89,933)
Share-based compensation (6,658) (8,446) (18,664) (20,780)
Debt issuance costs amortization (970) (1,237) (3,509) (3,759)
Loss on write-off of investment - - (5,036) -
Accretion of long-term debt, net (67) 129 195 385
Restructure and impairment charges (41,376) - (48,332) (44,278)
Deferred income taxes 10,023 (6,940) 9,984 (7,710)
Losses on early extinguishments of debt and
refinancing costs (161) - (1,316) (1,835)
Changes in assets and liabilities 72,131 18,766 389,537 280,238
Net income 28,705 83,769 90,943 138,142
Interest expense 38,781 37,798 116,274 109,493
Income taxes 8,324 15,719 28,615 43,557
Depreciation and amortization 31,295 30,879 94,025 89,933
Interest income (297) (137) (2,012) (2,385)
EBITDA 106,808 168,028 327,845 378,740
Adjustments:
Losses on early extinguishments of debt and
refinancing costs 161 - 1,316 1,835
Share-based compensation 6,658 8,446 18,664 20,780
Restructure and impairment charges 41,376 - 48,332 44,278 Severance costs 1,683 - 10,744 902 Store pre-opening costs 1,402 1,196 4,370 3,995 Store remodel costs 174 1,325 242 5,079 Foreign currency transaction losses (gains) 192 (149) 659 (950) Store closing costs 478 (328) (469) 3,321 Other (1) 1,788 754 4,489 2,035 Adjusted EBITDA$ 160,720 $ 179,272 $ 416,192 $ 460,015
(1) Other adjustments primarily relate to items such as moving and relocation
expenses, franchise taxes, sign-on bonuses, directors fees and CEO search
costs.
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Disclosure Regarding Forward-Looking Information
The above discussion, as well as other portions of this Quarterly Report on Form 10-Q, contains forward-looking statements that reflect our plans, estimates and beliefs. Statements regarding sufficiency of capital resources and planned uses of excess cash flow as well as any other statements contained herein (including, but not limited to, statements to the effect that Michaels or its management "anticipates", "plans", "estimates", "expects", "believes", "intends" and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our Annual Report. Such forward-looking statements are based upon management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance or achievements to be materially different from anticipated results, prospects, performance or achievements expressed or implied by such forward-looking statements. Most of these factors are outside of our control and are difficult to predict. Such risks and uncertainties include, but are not limited to the following:
? risks related to the effect of economic uncertainty;
? risks related to our substantial indebtedness;
? restrictions in our debt agreements that limit our flexibility in operating our
business;
? changes in customer demand could materially adversely affect our sales, results
of operations and cash flow;
? competition, including internet-based competition, could negatively impact our
business;
? a weak fourth quarter would materially adversely affect our results of
operations;
unexpected or unfavorable consumer responses to our promotional or
? merchandising programs could materially adversely affect our sales, results of
operations, cash flow and financial condition;
? evolving foreign trade policy (including tariffs imposed on certain
foreign-made goods) may adversely affect our business;
? our reliance on foreign suppliers increases our risk of obtaining adequate,
timely and cost-effective product supplies;
? our results may be adversely affected by serious disruptions or catastrophic
events, including geo-political events and weather;
our failure to adequately maintain security and prevent unauthorized access to
? electronic and other confidential information, which could result in an
additional data breach, could materially adversely affect our financial
condition and operating results;
we may be subject to information technology system failures or network
? disruptions, or our information systems may prove inadequate, resulting in
damage to our reputation, business operations and financial condition;
? our failure to increase comparable store sales and open new stores could impair
our ability to improve our sales, profitability and cash flows;
? damage to the reputation of the Michaels brand or our private and exclusive
brands could adversely affect our sales;
risks associated with the suppliers from whom our products are sourced and
? transitioning to other qualified vendors could materially adversely affect our
revenue and profit growth;
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? changes in regulations or enforcement, or our failure to comply with existing
or future regulations, may adversely impact our business;
significant increases in inflation or commodity prices such as petroleum,
? natural gas, electricity, steel, wood, and paper may adversely affect our
costs, including cost of merchandise;
? improvements to our supply chain may not be fully successful;
? we are exposed to fluctuations in exchange rates between the
dollar, which is the functional currency of our Canadian subsidiaries;
? the Company's ability to execute its strategic initiatives could be impaired if
it fails to retain its senior management team;
any difficulty executing or integrating an acquisition, a business combination
? or a major business initiative could adversely affect our business or results
of operations;
our marketing programs, e-commerce initiatives and use of consumer information
? are governed by an evolving set of laws and enforcement trends and unfavorable
changes in those laws or trends, or our failure to comply with existing or
future laws, could substantially harm our business and results of operations;
product recalls and/or product liability, as well as changes in product safety
? and other consumer protection laws, may adversely impact our operations,
merchandise offerings, reputation, results of operation, cash flow, and
financial condition;
changes in estimates or projections used to assess fair value of intangible
? assets, goodwill and property and equipment may cause us to incur impairment
charges that could adversely affect our results of operations;
? disruptions in the capital markets could increase our costs of doing business;
? our real estate leases generally obligate us for long periods, which subjects
us to various financial risks;
we have co-sourced certain of our information technology, accounts payable,
? payroll, accounting and human resources functions, and may co-source other
administrative functions, which makes us more dependent upon third parties;
failure to attract and retain quality sales, distribution center and other team
? members in appropriate numbers as well as experienced buying and management
personnel could adversely affect our performance;
affiliates of, or funds advised by,
? outstanding shares of our common stock and as a result will have the ability to
strongly influence our decisions, and they may have interests that differ from
those of other stockholders; and
our holding company structure makes us, and certain of our direct and indirect
? subsidiaries, dependent on the operations of our, and their, subsidiaries to
meet our financial obligations.
For more details on factors that may cause actual results to differ materially
from such forward-looking statements see the Risk Factors section of our Annual
Report. Except as required by applicable law, we disclaim any intention to, and
undertake no obligation to, update or revise any forward-looking statement.
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