Forget V-neck sweaters, expensive perfume and sophisticated video game systems. The real money being made in retail these days is in needlepoint and crochet.
Well, not quite, but almost.
In the wake of the terrorist attacks, many retail outfits, from apparel companies to department stores, have seen their sales and margins squeezed as the economy sinks into recession. But purveyors of do-it-yourself home craft items have thrived.
And Wall Street is beginning to take notice.
, the industry leader, has seen its shares rise 142% this year, almost half of that since Sept. 11. During that time, the company has posted stellar same-store sales gains, hit an all-time high of around $30 a share and cut back on sales promotions at a time when the rest of retail has slashed prices at the expense of margins.
Yet even after this run, the stock remains a solid investment, say many on Wall Street, because of the company's impressive growth prospects and modest valuation. Still, the stock isn't widely followed by the largest brokerages -- despite having a market capitalization of about $2 billion -- perhaps because home crafts aren't an activity of choice among Wall Street types.
Eye of the Needle
Now, after a year of quiet excellence, Michael's is making a play to get noticed. On Wednesday, the company's shares began trading on the
New York Stock Exchange
, making the switch from the
. ("We think the NYSE is more prestigious," says Michael Rouleau, the company's chief executive.)
Raveled Sleeve of Care
Meanwhile, many of the brokerages that do follow the Dallas-based company have been raising earnings estimates for the company, partly because of better-than-expected margins stemming from the cutback in promotions. For example, CL King analyst William Armstrong raised his estimate for the fiscal fourth quarter, which ends in January, from 92 cents a share to 94 cents, after the company reported a same-store sales gain of 20% in November.
Michaels "is one of the very few retailers to actually beat its sales plans since September," Armstrong wrote in a report. "This likely reflects a cocooning trend among consumers following the terrorist attacks, as well as a renewed commitment to 'make instead of buy' in order to stretch the family budget in the current climate of uncertainty." (Armstrong has a strong buy rating on the stock, and his firm has not done underwriting for the company.)
Spinning a Yarn
In an interview, however, CEO Rouleau downplays the cocooning thesis, which has had Wall Street bullish on home-related retailers since the terrorist attacks. "Our performance really has little to do with 9/11," according to Rouleau, who says that fourth-quarter same-store sales are on track to meet the guidance of a 4% to 6% increase that was given prior to the attacks.
The company also has cut back in-store promotions and advertising, giving a boost to margins. "The truth is, we've seen such strong traffic," Rouleau says. "Our long-term strategy has been to reduce advertising." In 1997, he says, advertising costs ate up about 5% of sales, while today they are less than 3.5% of sales.
The company operates 839 stores in the U.S. and Canada, 702 of which are its trademark Michaels craft stores. The others are Aaron Brothers, an upscale picture frame chain. Long term, the company envisions 1,100 Michaels stores and potentially 600 Aaron Brothers locations. The average annual sales per store has grown from $2.9 million in 1996 to $3.7 million this year, a figure the company projects will eventually reach $5 million.
The outlook for earnings, meanwhile, is bright. The company recently raised full-year earnings guidance to $1.44 a share, which equates to 25% growth. For the next five years, the company is predicting about 15% annual growth in revenues and at least 20% growth in earnings.
The stock, which lately traded at $30.53, trades at around 17 times next year's projected earnings, a nice discount to its consensus growth rate of 21%, according to Thomson Financial/First Call.
So while most other retailers are fighting the recession doldrums, this company's prospects have never been brighter.
"We are on offense, not defense," Rouleau says.