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

Considerations

• 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