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Will Tariffs & Margin Woes Hurt Michaels' (MIK) Q2 Earnings?
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The Michaels Companies, Inc. is slated to report second-quarter fiscal 2019 results on Sep 4, before the opening bell.
Notably, the company delivered in-line earnings in the fiscal first quarter and recorded a beat in the preceding three quarters. It has an average positive earnings surprise of 6.3% in the trailing four quarters.
Which Way Are Estimates Moving?
The Zacks Consensus Estimate for second-quarter earnings is pegged at 14 cents, indicating a decline of 6.7% from the figure reported in the year-ago quarter. Notably, the consensus mark has remained stable over the past 30 days.
For quarterly sales, the consensus estimate stands at $1 billion, implying a 3.8% decrease from the prior-year quarter’s reported number.
The Michaels Companies, Inc. Price and EPS Surprise
Michaels has been witnessing strained margins for the past few quarters due to higher expenses, which remains a concern in the to-be-reported quarter. In first-quarter fiscal 2019, the company reported the fifth straight quarter of gross margin decline, with the sixth consecutive quarter of operating margin contraction.
Rise in distribution-related costs and deleverage in occupancy expense along with adverse sales mix are hurting the company’s gross margin. Moreover, the company has been enduring the impact of tariffs on the cost of goods sold. Lower gross margin coupled with increase in SG&A expenses, as a percentage of sales, is weighing on the operating margin.
Quite apparent, second-quarter gross margin is likely to reflect higher distribution-related costs, occupancy deleverage and the impact of tariffs, offset by sourcing benefits and discount management. Adjusted operating income is estimated to be $65-$75 million driven by expectations of flat gross margin. For the to-be-reported quarter, comparable store sales (comps) are projected to be flat to down 1.5%. Moreover, adjusted earnings per share are envisioned to be 13-16 cents.
For fiscal 2019, management lowered its margin and earnings per share guidance to reflect the increase in tariffs and expectations of additional tariffs on List 4 goods. It is concerned about the recent increase in tariff on List 3 goods from 10% to 25%. Further, the potential imposition of List 4 China tariffs is likely to put significant cost pressure on the company.
Michaels expects about $400 million of product costs to be subject to higher duties in fiscal 2019. This, in turn, may hurt its performance in the to-be-reported quarter.
Nevertheless, Michaels’ efforts to enhance omni-channel experience and in-store operations might aid the top line in second-quarter fiscal 2019. Notably, its e-commerce platform is a significant growth driver. The company also continues to gain from omni-channel capabilities like “Buy Online Pick Up in Store”, which is a cost-effective way of fulfilling online orders as it eliminates shipping costs.
Furthermore, Michaels completed a major step in the evolution of its e-commerce business by exiting third-party fulfillment providers for online orders. All orders from Michaels.com are now fulfilled by its stores or owned distribution center. Elimination of third-party providers positions the company for improved e-commerce sales growth.
By improving in-store customer experience and incorporating customers’ requirements in its decisions at the store support centers, Michaels expects to become a more customer-centric company. Also, it is on track to fix issues with the pricing strategy and coupon distributions to enhance customer value perception and combat declining sales. Backed by the initial success of these actions, the company expects to improve value perception and sales trends going forward.
Earnings Whispers
Our proven model does not show that Michaels is likely to beat earnings estimates in second-quarter fiscal 2019. A stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Michaels has a Zacks Rank #4 and an Earnings ESP of 0.00%, which make surprise prediction difficult.
Stocks Poised to Beat Earnings Estimates
Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:
Dollar General (DG - Free Report) has an Earnings ESP of +2.64% and a Zacks Rank #3.
Costco Wholesale Corporation (COST - Free Report) has an Earnings ESP of +0.30% and a Zacks Rank #3.
Today's Best Stocks from Zacks
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This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
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Will Tariffs & Margin Woes Hurt Michaels' (MIK) Q2 Earnings?
The Michaels Companies, Inc. is slated to report second-quarter fiscal 2019 results on Sep 4, before the opening bell.
Notably, the company delivered in-line earnings in the fiscal first quarter and recorded a beat in the preceding three quarters. It has an average positive earnings surprise of 6.3% in the trailing four quarters.
Which Way Are Estimates Moving?
The Zacks Consensus Estimate for second-quarter earnings is pegged at 14 cents, indicating a decline of 6.7% from the figure reported in the year-ago quarter. Notably, the consensus mark has remained stable over the past 30 days.
For quarterly sales, the consensus estimate stands at $1 billion, implying a 3.8% decrease from the prior-year quarter’s reported number.
The Michaels Companies, Inc. Price and EPS Surprise
The Michaels Companies, Inc. price-eps-surprise | The Michaels Companies, Inc. Quote
Factors at Play
Michaels has been witnessing strained margins for the past few quarters due to higher expenses, which remains a concern in the to-be-reported quarter. In first-quarter fiscal 2019, the company reported the fifth straight quarter of gross margin decline, with the sixth consecutive quarter of operating margin contraction.
Rise in distribution-related costs and deleverage in occupancy expense along with adverse sales mix are hurting the company’s gross margin. Moreover, the company has been enduring the impact of tariffs on the cost of goods sold. Lower gross margin coupled with increase in SG&A expenses, as a percentage of sales, is weighing on the operating margin.
Quite apparent, second-quarter gross margin is likely to reflect higher distribution-related costs, occupancy deleverage and the impact of tariffs, offset by sourcing benefits and discount management. Adjusted operating income is estimated to be $65-$75 million driven by expectations of flat gross margin. For the to-be-reported quarter, comparable store sales (comps) are projected to be flat to down 1.5%. Moreover, adjusted earnings per share are envisioned to be 13-16 cents.
For fiscal 2019, management lowered its margin and earnings per share guidance to reflect the increase in tariffs and expectations of additional tariffs on List 4 goods. It is concerned about the recent increase in tariff on List 3 goods from 10% to 25%. Further, the potential imposition of List 4 China tariffs is likely to put significant cost pressure on the company.
Michaels expects about $400 million of product costs to be subject to higher duties in fiscal 2019. This, in turn, may hurt its performance in the to-be-reported quarter.
Nevertheless, Michaels’ efforts to enhance omni-channel experience and in-store operations might aid the top line in second-quarter fiscal 2019. Notably, its e-commerce platform is a significant growth driver. The company also continues to gain from omni-channel capabilities like “Buy Online Pick Up in Store”, which is a cost-effective way of fulfilling online orders as it eliminates shipping costs.
Furthermore, Michaels completed a major step in the evolution of its e-commerce business by exiting third-party fulfillment providers for online orders. All orders from Michaels.com are now fulfilled by its stores or owned distribution center. Elimination of third-party providers positions the company for improved e-commerce sales growth.
By improving in-store customer experience and incorporating customers’ requirements in its decisions at the store support centers, Michaels expects to become a more customer-centric company. Also, it is on track to fix issues with the pricing strategy and coupon distributions to enhance customer value perception and combat declining sales. Backed by the initial success of these actions, the company expects to improve value perception and sales trends going forward.
Earnings Whispers
Our proven model does not show that Michaels is likely to beat earnings estimates in second-quarter fiscal 2019. A stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Michaels has a Zacks Rank #4 and an Earnings ESP of 0.00%, which make surprise prediction difficult.
Stocks Poised to Beat Earnings Estimates
Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:
Burlington Stores, Inc. (BURL - Free Report) has an Earnings ESP of +0.17% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Dollar General (DG - Free Report) has an Earnings ESP of +2.64% and a Zacks Rank #3.
Costco Wholesale Corporation (COST - Free Report) has an Earnings ESP of +0.30% and a Zacks Rank #3.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>