Big Challenges Ahead for Michaels’ New CEO

Just a few months ago, Mark Cosby was defending his vision for a maker-focused Michaels after a disappointing third quarter in 2019. Three weeks later, Michaels Inc. put the CEO to pasture, announcing Cosby’s replacement would be Ashley Buchanan, who led U.S. ecommerce at Walmart.

Buchanan said what attracted him to the role was “Michaels has a strong and loyal customer base. Our brand is truly loved by our customers and they want us to win, and that’s an important differentiator versus many others in the retail landscape today.”

Both men were on the call announcing the underwhelming results for the fourth quarter and full year, putting forward a united front as the novel coronavirus was making retailers shake in their boots.

“Overall, 2019 was a challenging year from a results perspective, but we finalized and began executing our Maker growth strategy, which provides a clear roadmap for future growth,” Cosby said on the call.

“There are already some encouraging signs that our Maker strategy is starting to work,” Buchanan said. But he also acknowledged: “Michaels is late to the ecommerce game.”

Michaels’ overall sales for the 2019 fiscal year totaled just over $5 billion, down 3.8% from the previous year, and falling short of company estimates from just three months prior.

Cosby had been interim CEO of Michaels since February 2019 and the official CEO just since October. Buchanan will officially take the reins on April 1. Michaels CFO Denise Paulonis also left at the end of the fiscal year for Sprouts Farmers Market in Arizona, a chain with $5.6 billion in sales in 2019.

Coronavirus concerns

While manufacturing is starting to ramp up again in China, the Covid-19 outbreak has just started to have major effects on life in the U.S. and Canada.

On Wednesday, an internal memo leaked that said Michaels corporate employees would be able to work from home, while retail workers in states where the stores are still allowed to remain open would be expected to report to work. The stores are “essential,” Cosby and Buchanan wrote, for people “looking to take their minds off a stressful reality.”

In light of the rapidly changing conditions, Michaels isn’t making a full fiscal year 2020 projection as it usually would. “We do not expect to see any significant supply chain disruption or shortages due to the coronavirus outbreak. But it is now likely that we will see some negative impact from slowing customer demand,” Cosby said. “We currently expect the second half of fiscal 2020 to be stronger than the first. These expectations do not take into account any coronavirus-related impact.”

Buchanan did note that the store has seen an uptick in the core maker categories as people are staying home and looking for things to create with kids or for themselves.

Buchanan has been leading Michaels’ coronavirus crisis team. “We’re meeting multiple times each day given the rapidly changing news and environment,” he said.

“In addition to the store-level actions we’ve taken to protect the safety of our associates and our customers, we’ve taken aggressive steps to conserve liquidity over the past several weeks, including reducing and delaying discretionary spending and capital expenditures, while closely managing our working capital.”

One week after the 2019 results were released, Michaels reached into its revolving credit line for $600 million to help the company get through the coronavirus crisis.

Changes coming in 2020

Michaels tested an “enhanced rewards program” in two markets that garnered positive feedback and results; the program is to be rolled out nationwide in April.

Michaels’ first Maker prototype store opened this month in McKinney, Texas, just outside of Dallas, and the company plans to open a few more over the course of the year. Cosby noted that the maker strategy they have been implementing for the past nine months will be in full effect by the second half of 2020.

“I’m fully aligned with the core maker strategy,” Buchanan said on the call. “The categories we’ve touched are all showing positive improvement. We’re going to continue to double down the maker strategy.”

Buchanan aims to create a seamless omnichannel experience for Michaels shoppers and focus on customer service. “At the store level, we need to make sure our shelves are stocked, and our associates are engaged and available for customers to engage with and talk to,” he said. “I have not seen this consistently in my store business across the country.

The financials

A shorter holiday selling period, the closure of Pat Catan’s and Aaron Brothers stores in and a decrease in wholesale revenue were explanations for Michaels’ disappointing drop in sales in the fourth quarter of 2019.

Not taking the coronavirus outbreak into effect, Michaels anticipates sales in the first quarter of 2020 to reach $1.08 billion to $1.10 billion, with comparable store sales to be down up to -1.5%.