|Shares Out. (in M):||178||P/E||7.0||8.0|
|Market Cap (in $M):||2,926||P/FCF||9.1||11.3|
|Net Debt (in $M):||2,572||EBIT||658||612|
|Borrow Cost:||General Collateral|
Our original intent was to post this report one full trading day prior to the company’s third quarter 2018 earnings release scheduled for tomorrow, Thursday, December 6. However, due to President George H.W. Bush’s passing, the market was closed today. Nevertheless, our core thesis would remain valid in any case other than a severe washout (a possible but unlikely event) in the stock on Thursday.
The Michaels Companies is North America’s largest specialty retailer of arts, crafts, framing, floral, wall décor, and seasonal merchandise. The company owns and operates more than 1,200 stores in 49 states and Canada under the Michaels and Pat Catan’s banners.
Michaels is a compelling short at current prices given its premium valuation, high leverage profile, numerous headwinds, and the likelihood for a U.S. recession in the coming 18-24 months. Management has prioritized stock repurchase over greater debt pay down for a considerable period of time, positioning the company poorly for a likely economic downturn. Furthermore, the company’s sponsors have owned the name for more than 10 years and represent an overhang (and a ceiling) on the stock. We believe the company has for the most part managed to resist e-commerce competition but is increasingly threatened by online rivals, and to compete with those players will suffer margin deterioration from its e-commerce sales. At 7.5x our fiscal year 2019 EBITDA estimate, MIK trades at more than two multiple points richer than its comps which trade at 5.2x and would decline by 24% based on a single turn multiple contraction and 49% based on a 2x turn compression, valuations that would be likely in a recession. As such, we see a compelling opportunity to short the stock at current levels.
Exhibit 1: The Michaels Companies
Source: Company presentation