MIK is a broken IPO that is down 11% from $17 pricing a month ago, with no news out other than the CEO & CFO both bought $170k worth of stock at $17. The sponsor, Bain, did not sell any stock on the IPO (100% primary to go to reducing debt). The stock trades at 9.2% 2014 FCF yield and 10.3x 2014 P/E.
MIK is a high quality industry leader that has shown stable and consistent growth and cash flow generation/deleveraging in a sub-sector of retail that has proven to be recession resistant and much less exposed to internet disintermediation.
Over the next year, MIK will generate ~$300mm of FCF, allowing it to pay down all of its remaining 7.5% holdco notes, which will allow it to save ~$16mm a year in interest expense on an after-tax basis, and drive double digit EPS growth in 2015.
As a very near-term catalyst, analysts will be able to publish on the name starting Tuesday, 8/5.
Company is recession resistant and has a long history of positive results
- Since the 2006 LBO, the company has grown EBITDA from $575mm to $772mm LTM and generated ~$1.8bn of FCF – net debt has declined from $3.9bn to $2.7bn
- Peak to trough EBITDA in the recession was ~20% (-5% comps in 2008), and the company recovered its EBITDA by 2010
- Comps have been positive in every year since 2008, including +2.9% in 2013 and +3.8% in the most recent Q114, which was very challenged for retailers
- Gross margins have been stable – between 38.5% - 40.3% in every year other than 2008, indicating that competition/promotional environment is stable
Industry leader in a sub-segment that is growing and relatively less exposed to internet disintermediation
- Michael’s is the largest player in a fragmented arts & crafts market, with ~10% share (other large competitors are Jo-Anns Stores & Hobby Lobby, but primarily mom & pop)
- MIK's e-commerce effort just launched and this industry has been very slow to go on-line for several reasons:
- Lack of national brands (MIK is ~50% private MIK brands, and the remainder are not well known)
- Low priced items, so customers less likely to price compare or research price extensively
- Need to look/feel/see selection – products are primarily mix and match inputs rather than finished goods
- Focus on in-store experience through classes and assistance by salespeople
Management is conservative – proceeds from IPO and subsequent FCF will go to deleveraging, driving EPS growth
- IPO is 100% primary shares that will generate a net ~$450mm, that will go to retire 7.75% holdco bonds and take leverage down from 5x -> 4x
- Very conservative growth plan of 1-3% square footage per year – not spending capital on a new concept, rapid acceleration of store growth, or international adventures
- Once leverage reaches an acceptable level (~3x?), FCF can then be deployed for a dividend or share repurchases
- Tough comps in back half of the year due to introduction of Rainbow Loom in Q314 – comps likely to be negative in Q314 and possibly Q414 facing a +8% comp in Q314 (we think this is understood by the market)
- Retail environment remains promotional – risk that Amazon shows more focus on this category driving lower gross margins – less likely for reasons explained above
- Lack of big growth story means harder to get equity guys interested/premium multiple
- Bain & Blackstone lockup expires in 180 days
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.
Analysts will be able to publish starting 8/5