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Sales Slowdown Clouds Picture for Michaels Stores

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The comeback of Michaels Stores Inc., the only nationwide chain in the $10-billion industry of selling arts and crafts, is in danger of unraveling--or so investors seem to be saying.

Michaels this year expects to post its second straight annual profit, following two years of losses totaling more than $50 million. But now, sales growth at Michaels and at some of its rivals is slowing, which has Wall Street nervous about whether Michaels can maintain its resurgence.

And Michaels said this week that the slowdown is continuing. In reporting results for its fiscal third quarter ended Oct. 31, Michaels said it expects its same-store sales--those of stores open at least a year, and retailing’s benchmark indicator--to be “flat to slightly down” through the holiday season.

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That’s the key reason Michaels’ stock has plunged 36% so far in 1998, despite the company’s earnings gains and the market’s overall rebound. The stock closed Friday at $18.56, down 31 cents for the day, on Nasdaq.

“Investors are certainly viewing this company with caution and waiting to see what happens,” said Jason Klein, an analyst at Blackford Securities Corp. in Garden City, N.Y.

Worse, no one seems quite sure what’s causing fewer shoppers to buy fake flowers, sequins and other craft supplies, and whether it’s just a temporary lull or a long-term shift in consumer habits.

Michaels, whose executives declined to comment for this article, and other retailers “seem to be at a loss themselves” to explain it, Klein said.

Unseasonably warm or wet weather in various regions has been cited, but analysts said the problem is nationwide. Also, Michaels and the others are reporting that the dollar amount of their average sale is holding firm or rising. It’s simply that they’re getting fewer shoppers.

“It seems like no one really has a good answer for it,” said Ozarslan Tangun, an analyst at Southwest Securities Inc. in Dallas.

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Michaels operates 502 Michaels stores in 46 states, Canada and Puerto Rico--including more than 75 in California. The company also owns the Aaron Brothers art-supplies chain, which has 77 outlets, mostly in California and elsewhere on the West Coast.

The Michaels stores sell a panoply of crafts, silk and dried flowers, frames and other art materials, hobby and needle-craft items and a seemingly endless variety of goods and supplies aimed at specific seasons and holidays. Some 36,000 items fill the typical store.

Michaels had high expectations for 1998, and the company is unquestionably healthier than it was a few years ago. In its fiscal year ended Jan. 31, Michaels earned $30 million on sales of $1.5 billion, reversing a $31-million loss the prior year. And Michaels said Tuesday that in the first nine months of its current fiscal year, its profit nearly tripled to $13.4 million from $4.7 million a year earlier, even though sales rose only 9%, to $1.03 billion from $949 million.

But Michaels’ sales momentum has slowed since this summer. The retailer posted a 2% same-store sales drop in October and said this week that November’s sales will show a single-digit drop as well.

These announcements and other recent trends “lead us to believe that consumers are reining in their spending and that the arts-and-crafts industry may be in the early stages of a slowdown,” said analyst Dixon Yee of Credit Suisse First Boston.

Garden Ridge Corp., a Houston-based company that operates 27 crafts “megastores” east of the Rocky Mountains, also complained recently that “consumer demand softened in October” and that it “has not been pleased with the decline in customer traffic.”

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The slowdown couldn’t come at a worse time. The Thanksgiving and Christmas holidays are the peak season for retailers generally and are especially crucial for crafts peddlers such as Michaels that heavily stock seasonal merchandise.

And the arts-and-crafts industry is tough in any season. Big players such as Michaels not only face competition from mass-merchandisers that carry craft items but also from scores of mom-and-pop craft and hobby stores.

Indeed, another chain, Amber’s Stores Inc. of Mesquite, Texas, filed for bankruptcy protection three years ago. A.C. Moore Arts & Crafts Inc. of Blackwood, N.J., has seen its stock tumble 36% this year, and Garden Ridge’s shares and earnings have sagged badly this year as well.

Michaels got into trouble in the mid-1990s in good part because it lacked a modern way of monitoring exactly what items it was selling, or how many.

“Each store manager walked down the aisles and looked at the shelves” to estimate what shoppers were buying, Yee said. “So they would end up buying too much cloth, or too many buttons” based on those estimates, and slow-moving merchandise “got stale.”

The fuzzy controls also forced Michaels to slash prices to move out lackluster products--eroding its profit margins--and hobbled the chain’s ability to accurately make buying plans for seasonal merchandise.

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All that changed in 1996 when Michaels hired Michael Rouleau as president and chief executive. A former executive of Lowe’s Cos., the big home-products retailer, Rouleau’s first move was to install a “point-of-sale” computer system throughout Michaels that gave an accurate sales reading.

Michaels is now armed with the data that enable it to better position hot-selling items in its stores, buy the right amount of seasonal merchandise and reduce the number of profit-eating markdowns.

Trouble is, it’s unclear how many arts-and-crafts fans are ready to buy. “Now that we’re getting into the holiday season,” said analyst Klein, “the next four or five weeks are going to be telling.”

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Craft Woes

Arts-and-crafts retailer Michaels Stores has generated higher earnings this year, but its stock has slumped amid fears Michaels’ sales growth is slowing. Monthly closes and latest:

Friday close: $18.56

Source: Bridge

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