Dive Brief:
- S&P Global Ratings upgraded Michaels’ corporate credit rating to B- from CCC+ the agency said in a Friday statement. S&P cited the retailer’s significant improvement in operating margin and cash generation in fiscal 2023, strengthening the company’s credit metrics beyond expectations.
- Despite ongoing sales pressures, S&P expects the arts and crafts specialty retailer to generate relatively steady adjusted EBITDA in fiscal 2024, through product and labor cost savings. S&P’s latest outlook for Michaels is stable.
- S&P also forecasts continued positive free operating cash flow generation. Additionally, lower transportation costs, higher product margins, and reduced store labor enabled Michaels to expand its S&P Global Ratings-adjusted EBITDA margin by more than 350 basis points in 2023.
Dive Insight:
Michaels’ initiatives to improve store-level operations have helped inventory management by reducing the weight of clearance merchandise on profitability,’ S&P analysts Frederico Carvalho and Declan Gargan said in their report. The retailer’s growing mix of high-margin private brand products adds to profitability.
The specialty craft retailer generated free operating cash flow of $136 million in 2023, up from a cash deficit of $255 million in 2022. “In our view, the company’s ability to navigate a challenging sales environment by implementing process improvements and managing costs will continue to support relatively steady EBITDA and FOCF generation in 2024,” Carvalho and Gargan said.
Those improvements include self-checkout kiosks, which are now installed across 40% of Michaels’ stores. The company plans to complete the rollout across most of its footprint later this year, S&P’s analysts noted.
However, after a pandemic-era boom in crafts spending, “we expect topline trends will remain soft in 2024 as consumer demand for arts and crafts remains muted,” S&P’s analysts said. The analysts noted that same-store sales declined 6.4% in 2023. They cited a continuation of the ongoing post-COVID decline in demand for the arts and crafts category as the driving factor of that change.
S&P also expects Michaels to boost promotional activity this year as its works to convey value to customers. However, “we expect demand trends will continue to be weak, due to constrained discretionary income and consumers continuing to favor experiences over goods. We forecast revenue declining about 1% in 2024, as new store openings offset negative same-store sales,” Carvalho and Gargan said.
Consumers remain price-conscious and value-focused. In response, S&P said, Michaels is adding new product offerings, lowering prices on selective merchandise, and opening new stores to drive customer traffic.
In contrast, Michaels’ main rival, Joann, filed for Chapter 11 last month. It has a restructuring plan in place to cut $500 million in debt and exit bankruptcy as a private company. All of its more than 800 stores remain open through bankruptcy. Joann has said it doesn’t intend to close any stores. Because Joann stores are expected to stay open, S&P said the bankruptcy will likely have minimal impact on Michaels, which has about 1,300 stores in 49 states and Canada.
Michaels’ S&P rating could rise further if the company demonstrates sustained improvement in operating performance, including positive comparable sales growth and EBITDA expansion, and if credit metrics strengthen. Conversely, the rating could fall on weakening operating performance, a drop in liquidity or if it can’t readily refinance or extend its asset-based lending agreement.
Private equity firm Apollo Global Management acquired Michaels in a $5 billion deal three years ago. Last summer, the retailer launched a brand identity refresh during its 50th anniversary. More recently, Michaels launched a marketplace for third-party sellers and it also introduced in-store birthday parties and classes.
