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Is Michaels’ new strategy of focusing on core makers paying off? Michaels Stores Inc. saw sales decline again in the third quarter of 2019 and downgraded its overall outlook for the year. And yet the company reported progress on its e-commerce and community initiatives.

A condensed holiday season combined with ongoing changes to the core business has the craft retailer less optimistic about the fourth quarter. Michaels’ stock price dropped more than 15% to $6.06 on Thursday after the Q3 results were announced, though it’s since regained most of that value.

Since we last checked in with Michaels, interim CEO Mark Cosby was given the permanent top job officially in October. He blamed a few specific challenges for the company’s decline in sales:

  • A mixed performance from sales: Sales events supported by digital marketing, social media, PR and store teams performed well. But without that support, performance lagged expectations, Cosby said. Results from Black Friday were “solid” despite weather challenges.
  • A not-so-smooth seasonal transition: Michaels has defined clearer daily timelines for stores to expedite the time for getting merchandise from the distribution center to the shelf.
  • And underperformance in a few specific categories: Kids, food crafting, ready-made frames and stickers were disappointing in the third quarter.

After A.C. Moore

A.C. Moore’s exit from craft retail is a win for Michaels. Chief Financial Officer Denise Paulonis said the company purchased A.C. Moore intellectual property and the right to leases on up to 40 store locations for $58 million and has leased a New Jersey distribution facility. Cosby noted that Michaels also acquired the A.C. Moore customer files and website and hopes to transfer as much of the chain’s sales volume as possible.

Many of the stores are expected to be reopened under the Michaels brand name in fiscal 2020. Over 80% of the A.C. Moore stores are within 5 miles of a Michaels, which may lead to relocation of existing stores. “We believe this opportunistic transaction should enable us to enhance our position as the largest specialty arts and crafts retailer in North America,” Paulonis said.

Progress on the new maker strategy

“Our new purpose is: We’re here for the makers,” Cosby said in the Q2 earnings call. And this week he said, “We are laser-focused on executing our maker strategy to address the challenges that we face as a business and return the company to sustainable long-term growth.”

Focusing on the core maker’s needs means looking at overall value of what Michaels offers rather than strictly at price, though the company is keeping a close eye on competitors. “We’ve also put a lot more discipline around our competitive price monitoring, so we have tools in place that will tell us where we are priced versus our competition,” Cosby said.

To further reinforce their maker strategy, Michaels hired Vidya Jwala as Chief Customer Officer in the third quarter. Jwala comes most recently from Dicks Sporting Goods but also held management positions at Walmart and Joann Stores.

Cosby highlighted some progress on each of the three pillars of the strategy:

Build the business better:

Shifting retail workers’ focus from individual tasks to serving customers has led to “a 1% improvement in our overall shopping experience measure and a 1% improvement in customer conversion,” he said. Refining and refreshing product assortment in technology, craft storage and fine art drove “significant sales growth” in two of three categories.

Leverage digital and data:

In June, only 1,000 of Michaels’ emails to its 31 million active customer email addresses were personalized. “We are on track to reach a rate of 15% personalized emails by the end of December with plans to increase that number throughout 2020,” Cosby said. Michaels launched ecommerce in Canada this quarter, which Cosby expects to be a sales driver in the fourth quarter and contribute meaningfully to sales in 2020.

And personalized website generation based on a customer’s spending history just launched but has already shown a 20% conversion improvement.

An enhanced rewards program launched in two test markets in September, showing increased sales and a 20% increase in customer sign-ups. If it continues to perform well, Michaels plan to launch the enhanced loyalty program nationally in the first half of 2020.

cricut machines

Reposition the business:

This aspect focuses on building a Michaels community and a maker-centered store experience.

More than 650 stores participated in Cricut Week in October, which included sales, demos and the company’s first Facebook Live event. “Maker response was exceptional across our stores, with nearly 9,000 people signing up for these classes,” Cosby said.

Michaels is launching a new online calendar feature in December, enabling makers to schedule classes, meet-up, and parties. And Michaels is developing a “digital community platform,” which sounds like a social network, to launch in the middle of next year.

Michaels opened its first prototype lab store in Dallas on Nov. 14 with a curated assortment and enhanced services (similar to the JOANN concept store in Columbus). “We plan to open a few of these stores in 2020 and identify and expand best practices in a low-cost way across the system,” he said.

Cosby said the company is encouraged by early progress of the maker-centric strategy but warned that the path to success won’t necessarily be a linear one. But “we expect our initiatives to return Michaels to long-term sustainable growth as we move into 2020 and beyond,” he said.

Q3 results and Q4 outlook

Michaels’ overall sales in the third quarter of 2019 were $1.22 billion, down 3.9% from the same quarter of 2018. Same-store sales were down 2.2% from 2018. Gross profit for the quarter was $441.6 million, down from $479 million a year ago.

There were some bright spots. “From a category perspective, tools and technology, craft storage, and fine art supplies performed very well in the quarter. We saw solid growth in Halloween driven by décor and party,” Paulonis said.

For the full 2019 fiscal year, Michaels now expect total sales to be between $5.06 billion and $5.08 billion, a decidedly less optimistic estimate from the start of 2019, when it estimated full-year sales at $5.19 billion to $5.24 billion.

Michaels expects the fourth quarter, the most important time of year for retailers, to be difficult. There are just 26 days between Thanksgiving and Christmas this year, compared to 32 in 2018.

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