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The Michaels Sale and October Retail Results

The CLN Newsbrief emailed to subscribers.

by Mike Hartnett (November 6, 2006)

MICHAELS IS SOLD, GOES PRIVATE

The Michaels merger/acquisition is complete. Shareholders will receive $44/share, with the total being $6+ billion. Bain Capital and The Blackstone Group now own equal stakes in Michaels; funds affiliated with Highfields Capital Management own a minority stake, and Michaels senior management will also acquire a minority stake. The current management team, led by Jeffrey Boyer and Gregory Sandfort, remains in place.

The deal required financing: a $1 billion asset-based revolver at 3% above LIBOR (London Inter-Bank Offered Rate, like the U.S. prime interest rate, a benchmark used to determine loan interest); a $2.4 billion term loan at LIBOR + 3%; a $700 million unsecured bridge loan facility; and a $700 million senior subordinated bridge loan facility.

"We are pleased with the successful outcome of this transaction," Boyer said. "We look forward to partnering with Bain Capital and Blackstone to take Michaels Stores to the next level, both operationally and financially, and to realize our Company's full long-term potential with the help of our dedicated employees."

"Our new partners share our vision of the significant growth opportunities at Michaels as we further accelerate our critical merchandising, marketing, strategic sourcing and operating initiatives," Sandfort stated. "We are focused on enhancing our business by attracting new customers and continuously improving the service we offer."

As of Oct. 31, Michaels has 919 Michaels stores in 48 states and Canada, 165 Aaron Brothers stores, 11 Recollections stores, and four Star Wholesale operations. The stock ceased trading on the New York Stock Exchange on Oct. 31. (Comment: The basic strategy of investment companies is to build up the company for five years or so and then take it public � sell stock � again. If that all goes according to plan, it will be interesting to see how many stores the company has in 2011.)

OCTOBER SALES FIGURES

Lower gas prices and cooler weather were supposed to boost October sales and they did � but only for some retailers. J.C. Penney, Kohl's, Limited Brands, Children's Place, and Nordstrom posted better than expected results, Reuters reported, but Costco, Chico's, Claire's Stores, and American Eagle Outfitters did not meet Wall Street expectations. Results for retailers related to our industry were grim.

Jo-Ann's net sales were $167.9 million, down 3.8% from a year ago. Same-store sales decreased 6.4%. For the third quarter ended Oct. 28, net sales were $461.9 million versus $474.2 million a year ago, and same-store sales have decreased 5.4%. The company will report its third-quarter earnings on Nov. 20.

Wal-Mart's U.S. stores had a same-store increase of only 0.3%, the smallest increase in six years. Only five days prior, the company had predicted the increase would be 0.5%, down from an earlier forecast of a 2%-4% increase. Analysts expected the increase to be 1.5%. Total sales rose 7.7% to $16.6 billion.

For the quarter, same-store sales are up 3.5% and overall sales have risen 8.3% to $162 billion. "The U.S. Wal-Mart stores that were not impacted by the 2005 hurricanes had comps of approximately 1.7%t in October," said Tom Schoewe, Exec VP/CFO. "Last year, we saw a positive impact on comps from customers who restocked their homes after the hurricanes and this continued through the end of the fiscal year. The impact on comps from hurricanes will continue, but will soften somewhat during the next three months.

"Our remodeling efforts in the Wal-Mart Stores division wrap up during the next two weeks to ensure there is no disruption for our customers during the holiday shopping period," Schoewe added. "Remodeling activities will begin again in late January and will continue into the next fiscal year."

Schoewe said sales of food and consumables outpaced general merchandise. Price cuts on key toys boosted sales and he promised similar efforts in consumer electronics would also be effective. Pharmacy sales were strong, too, but apparel sales, particularly women's apparel, were softer than expected.

Nevertheless, the company predicted November sales would be flat.

Meanwhile, Target rolled along, posting a 3.9% same-store sales increase and predicted the November increase would be 4%-7%.

Hancock's same-store sales declined 1.4%, while overall sales fell 7.3% to $34.3 million, due to having 41 fewer stores this year. For the quarter, same-stores sales are down 1.5% and overall sales are down 6.6% to $97 million.

CEO Jane Aggers said, "Our apparel and quilting/craft categories continued to be bright spots during October. However, the gains in those areas were more than offset by declines in the home decorating area."

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