Don't Be Fooled by Michaels Stock's Deceivingly Low Price

This specialty retailer stock grew over 1000% in less than 12 months

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The Michaels Companies Inc (NASDAQ:MIK) is North America's largest arts & crafts specialty retailer. The company provides arts, crafts, framing, floral & wall décor, and merchandise for home decoration. The Dallas-based company owns and operates more than 1,250 Michaels stores in 49 US states and Canada. In addition to operating stores, The Michaels Companies operates other craft related brands such as Aaron Brothers Custom Framing, Artistree, and Darice.

Last month the company set the date for its fourth quarter and fiscal year of 2020 earnings report. Michaels will release its financial results on Thursday, March 4, before the market open. Analysts are estimating Michaels reporting an earnings per share (EPS) of $1.41 for its upcoming earnings report. So far, MIK has managed to beat earnings expectations on three of its last four quarters.

For the fourth quarter of 2019, MIK beat expectations by a margin of $0.01 and reported earnings of $1.26 per share. For the first quarter of 2020, Michaels stock decreased its EPS down to -$0.43 and failed to meet analyst estimates by a decent margin of $0.57. For the second quarter of 2020, MIK increased its EPS to $0.30 and beat expectations by a margin of $0.38. In its most recent quarter, Michaels stock had another big increase in earnings, reporting an EPS of $0.86 and beating expectations by a margin of $0.27.

Furthermore, MIK has seen some extraordinary stock growth over the past year. Michaels stock has grown exponentially in the last 12 months, with an increase of over 1,400% from its all-time low of $1.00. In addition, MIK stock price is currently up 16.3% year-to-date. Nonetheless, the recent weakness in the market has triggered MIK to drop 16% from its two-year high of $17.90.

Looking at its price-earnings ratio of 10.2 and its forward price-earnings ratio of 6.21, Michaels stock will seem like an ideal value investment at first glance. However, upon closer inspection MIK has many clear fundamental issues.

For starters, the company last reportedly had a total equity of -$1.44 billion and a debt of $4.33 billion. It has also seen a slow and steady revenue decline over the past few years, with its biggest decrease happening in 2020. Michaels’ revenues have fallen by nearly $300 million in the past 12 months, bringing its total revenue to $5.08 billion. Moreover, the rate at which its bottom-line figures are falling seems to be much faster. Michaels’ net income has decreased by more than $100 million over the past year, which is a 40% decline. Additionally, its net profits have fallen by roughly $220 since 2018, bringing its total net income to $171 million. In general, the company seems to be on a downward trajectory. At best, Michaels stock is a speculative turnaround play.

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