The craft store giant blames the drop in sales on closing Pat Catan’s and Aaron Brothers stores. Michaels’ new CEO is pushing e-commerce and concerned about ongoing tariff disputes with China.
The Michaels Companies, North America’s largest craft retailer, reported a 5.3% slump in sales in the first quarter of 2019, dropping from $1,155.5 million in the first quarter of 2018 to $1,093.7 million in the same time period this year, all but ensuring its full-year sales result will be less than 2018.
The company blames the drop in sales primarily on its closing 36 Pat Catan’s and 94 Aaron Brothers stores over the past year. Michaels also reported $5.6 million of expenses in the first quarter could be attributed to the departure of former CEO Chuck Rubin, who left that role Feb. 28.
“While our first quarter results were within our range of expectations for the quarter, we are not satisfied and are taking steps to improve our performance,” said interim CEO Mark Cosby.
Rubin made a sudden but “mutually agreed” exit, according to the company, and board member Cosby stepped up to take the reins for the interim. Fortune notes that the former CEO had not so long ago played down the threat of e-commerce to the chain, and Michaels only launched its own online store in 2014. E-commerce grew last year by 77%, but still only accounted for $210 million of last year’s $5.2 billion in sales — just 4%.
Cosby made improving the company’s e-commerce capabilities a major goal of his work this year. The company’s annual report noted the intention of bringing e-commerce fulfillment in-house in 2019.
But that doesn’t mean the bricks-and-mortar stores are going away any time soon. At the end of March, Michaels had 1,260 retail outlets in operation after opening four new stores, closing two stores and relocating seven stores in the first quarter. By the end of 2019, Michaels expects to open 20 new stores, including as many as 12 former Pat Catan’s retail outlets that will be rebranded and reopened, and relocate 13 Michaels stores.
Michaels also took a $5 million write-off of investment in Darby Smart, a project kit company that shifted to how-to videos, after the company was sold this spring.
The impact of tariffs
In its 2018 annual report, Michaels noted the threat of additional tariffs as a real risk to the business. The Trump administration is pushing to raise taxes on some consumer goods imported to the U.S. from China from 10% to 25%. If that happens, “our costs could increase, and we may be required to raise our prices, which could result in the loss of customers and adversely affect our operating performance,” the company wrote. To mitigate that risk, Michaels might move production outside of China, which would raise costs and disrupt operations.
President Donald Trump is expected to decide his next move after talks with China’s premier later in June. Retailers across the United States are increasingly worried about the impact tariffs would have on the holiday retail season. For most retailers, including Michaels, the fourth quarter is the most important of the year. For the rest of the 2019 fiscal year, Michaels expects total sales to reach $5.19 billion to $5.24 billion, slightly less than 2018.