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UNITED STATES

FORM 10-Q

Commission file number 001-09338

MICHAELS STORES, INC.

8000 Bent Branch Drive

(972) 409-1300

      Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x          No o

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes x          No o

      Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.

MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION

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MICHAELS STORES, INC.

MICHAELS STORES, INC.

See accompanying notes to consolidated financial statements.

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MICHAELS STORES, INC.

See accompanying notes to consolidated financial statements.

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MICHAELS STORES, INC.

See accompanying notes to consolidated financial statements.

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MICHAELS STORES, INC.

For the Quarter Ended May 1, 2004

      The consolidated financial statements include the accounts of Michaels Stores, Inc. and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and our consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

      The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items, as disclosed) considered necessary for a fair presentation have been included. Because of the seasonal nature of our business, the results of operations for the quarter ended May 1, 2004 are not indicative of the results to be expected for the entire year.

      The balance sheet at January 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

      All references herein to “fiscal 2004” relate to the 52 weeks ending January 29, 2005 and all references to “fiscal 2003” relate to the 52 weeks ended January 31, 2004. In addition, all references herein to “the first quarter of fiscal 2004” relate to the 13 weeks ended May 1, 2004 and all references to “the first quarter of fiscal 2003” relate to the 13 weeks ended May 3, 2003.

      The following table sets forth the computation of basic and diluted earnings per common share:

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For the Quarter Ended May 1, 2004

      Our purchase and subsequent retirement of 156,400 shares of our Common Stock in the first quarter of fiscal 2004 reduced the number of weighted average shares outstanding by 2,578 shares for the first quarter of fiscal 2004. In addition, our purchase and subsequent retirement of 1.0 million shares of our Common Stock in the first quarter of fiscal 2003 reduced the number of weighted average shares outstanding by 408,332 shares for the first quarter of fiscal 2003.

      We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related guidance in accounting for our employee stock options. The exercise price of our employee stock options equals the market price of the underlying stock on the date of grant and, as a result, we do not recognize compensation expense for stock option grants.

      Pro forma information regarding net income and earnings per common share, as required by the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, has been determined as if we had accounted for our employee stock options under the fair value method. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options’ vesting periods. Our pro forma information is as follows:

      In 2001, we issued $200 million in principal amount of 9 1/4% Senior Notes due July 1, 2009, which are unsecured and interest thereon is payable semi-annually on each January 1 and July 1. The Senior Notes due 2009 are first callable, in part or in full, in July 2005. The terms and conditions of the Senior

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For the Quarter Ended May 1, 2004

Notes due 2009 require us to comply with certain covenants, which primarily limit certain activities, including, among other things, levels of indebtedness, liens, investments, payments of dividends, Common Stock repurchases, mergers and acquisitions, and sales of assets. We are in compliance with all terms and conditions of the Senior Notes due 2009.

Credit Agreement

      Effective May 1, 2001, we signed a $200 million unsecured revolving bank credit facility with Fleet National Bank and other lending institutions, which expires on April 30, 2005. The Credit Agreement requires us to maintain certain financial covenants and limits certain activities, including, among other things, levels of indebtedness, liens, investments, payments of dividends, Common Stock repurchases, mergers and acquisitions, and sales of assets. We are in compliance with all terms and conditions of the Credit Agreement. We had no borrowings under our Credit Agreement during either the first quarter of fiscal 2004 or the first quarter of fiscal 2003 and no borrowings were outstanding under the Credit Agreement at the end of either quarter. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding under the Credit Agreement ($26.1 million as of May 1, 2004).

      Comprehensive income for the quarter ended May 1, 2004 and May 3, 2003 is as follows:

Stockholder Class Actions

      On various dates between February 4, 2003 and March 25, 2003, 10 purported class action lawsuits were filed in the United States District Court for the Northern District of Texas, Dallas Division, against Michaels Stores, Inc. and certain of the current and former directors and officers of Michaels. All of these lawsuits have been consolidated. The suits assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 related to actions prior to Michaels’ announcement on November 7, 2002, that, among other things, it had revised its outlook for the fourth fiscal quarter of 2002, adjusting downward its guidance for annual earnings per diluted share. The consolidated complaint charges that, prior to that announcement, Michaels and certain of the other defendants made misrepresentations and failed to disclose negative information about the financial condition of Michaels while the individual defendants were selling shares of Michaels common stock. We believe these claims are without merit and will vigorously contest them.

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For the Quarter Ended May 1, 2004

Derivative Claims

      On March 21, 2003, Julie Fathergill filed a purported stockholder derivative action, which is pending in the 192nd District Court for Dallas County, Texas. The lawsuit names certain former and current officers and directors, including all of Michaels current directors, as individual defendants and Michaels as a nominal defendant. In this derivative action, the plaintiff makes allegations of fact similar to those made in the purported securities class actions described above. The plaintiff asserts claims against the individual defendants for breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. All of these claims are asserted derivatively on behalf of Michaels. We believe this claim is also without merit and will vigorously oppose it.

      On September 11, 2003, Leo J. Dutil filed a purported stockholder derivative action, which is pending in the United States District Court for the Northern District of Texas, Dallas Division. The lawsuit names certain former and current officers and directors as individual defendants and Michaels as a nominal defendant. In this derivative action, the plaintiff makes allegations of fact similar to those made in the purported stockholder class actions and the Fathergill derivative lawsuit described above. The plaintiff asserts claims against the individual defendants for breach of fiduciary duty, misappropriation of confidential information, and contribution and indemnification. All of these claims are asserted derivatively on behalf of Michaels. We believe this claim is also without merit and will vigorously oppose it.

Cotton Claim

      On December 20, 2002, James Cotton, a former store manager of Michaels of Canada, ULC, our wholly-owned subsidiary, and Suzette Kennedy, a former assistant manager of Michaels of Canada, commenced a proposed class proceeding against Michaels of Canada and Michaels Stores, Inc. on behalf of themselves and current and former employees employed in Canada. The Cotton claim was filed in the Ontario Superior Court of Justice and alleges that the defendants violated employment standards legislation in Ontario and other provinces and territories of Canada by failing to pay overtime compensation as required by that legislation. The Cotton claim also alleges that this conduct was in breach of the contracts of employment of those individuals. The Cotton claim seeks a declaration that the defendants have acted in breach of applicable legislation, payment to current and former employees for overtime, damages for breach of contract, punitive, aggravated and exemplary damages, interest, and costs. We believe we have certain meritorious defenses and intend to defend this lawsuit vigorously.

General

      We are a defendant from time to time in lawsuits incidental to our business. Based on currently available information, we believe that resolution of all known contingencies is uncertain. There can be no assurance that future costs of such litigation would not be material to our financial position or results of operations.

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      The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion, as well as other portions of this Quarterly Report on Form 10-Q, contains forward-looking statements that reflect our plans, estimates, and beliefs. Any statements contained herein (including, but not limited to, statements to the effect that Michaels or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004. Specific examples of forward-looking statements include, but are not limited to, statements regarding our future cash dividend policy, forecasts of capital expenditures, working capital requirements, and stock repurchases. Our actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004, particularly in “Critical Accounting Policies and Estimates” and “Risk Factors,” and in our other Securities and Exchange Commission filings.

      All expressions of “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

General

      All references herein to “fiscal 2004” relate to the 52 weeks ending January 29, 2005 and all references to “fiscal 2003” relate to the 52 weeks ended January 31, 2004. In addition, all references herein to “the first quarter of fiscal 2004” relate to the 13 weeks ended May 1, 2004 and all references to “the first quarter of fiscal 2003” relate to the 13 weeks ended May 3, 2003.

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      The following table sets forth certain of our unaudited operating data (dollar amounts in thousands):

(1)	Opening store counts reflect a reclassification of our Los Angeles combination wholesale-retail store from a Michaels store to a Star Wholesale store. Beginning in fiscal 2004, our Los Angeles wholesale-retail store will be managed as part of our Star Wholesale concept.
(2)	Average inventory per Michaels store calculation excludes Aaron Brothers, ReCollections, and Star Wholesale stores.
(3)	Comparable store sales increase represents the increase in net sales for stores open the same number of months in the indicated period and the comparable period of the previous year, including stores that were relocated or expanded during either period. A store is deemed to become comparable in its 14th full month of operation in order to eliminate grand opening sales distortions.

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Results of Operations

      The following table sets forth the percentage relationship to net sales of each line item of our unaudited consolidated statements of income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes, contained herein.

Quarter Ended May 1, 2004 Compared to the Quarter Ended May 3, 2003

      Net sales for the first quarter of fiscal 2004 increased $69.5 million, or 11%, over the first quarter of fiscal 2003. At the end of the first quarter of fiscal 2004, we operated 818 Michaels, 158 Aaron Brothers, two ReCollections, and three Star Wholesale stores. The results for the first quarter of fiscal 2004 included sales from 51 Michaels, five Aaron Brothers, two ReCollections, and one Star Wholesale store that were opened during the 12-month period ended May 1, 2004, more than offsetting lost sales from the closure of four Michaels stores. Sales at the new stores (net of closures) during the first quarter of fiscal 2004 accounted for $31.1 million of the increase in net sales. Comparable store sales increased 6% in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003, which contributed $38.4 million to the net sales increase. Customer traffic increased approximately 4% in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. Average ticket increased approximately 3%, driven primarily by favorable pricing trends and a strengthening of the Canadian dollar (contributing 50 basis points). Comparable store sales growth was strongest in our scrapbooking, yarn, general crafts, and kids’ crafts categories. Our ability to continue to generate comparable store sales increases is dependent, in part, on our ability to continue to maintain store in-stock positions on the top-selling items, to properly allocate merchandise to our stores, to be successful in our sales promotion efforts, to anticipate customer demand and trends in the arts and crafts industry, and to respond to competitors’ activities.

      Cost of sales and occupancy expense, as a percentage of net sales, was relatively flat in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. The increase in cost of sales and occupancy expense was due, in part, to the continuation of our accelerated clearance markdown program in the first quarter of fiscal 2004. In addition, new store additions since the first quarter of fiscal 2003 and our comparable store sales increase of 6% contributed to the overall increase in cost of sales and occupancy expense.

      Selling, general, and administrative expense was $205.7 million, or 28.3% of net sales, in the first quarter of fiscal 2004 compared with $194.6 million, or 29.6% of net sales, in the first quarter of fiscal 2003. Advertising expense, as a percentage of net sales, decreased approximately 70 basis points as a result of adjustments we made to our advertising program in the first quarter of fiscal 2004 and a leveraging of

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      The effective tax rate was 38.25% for the first quarter of fiscal 2004 and 41% for the first quarter of fiscal 2003. The effective tax rate was reduced from 41% to 37.6% by the end of fiscal 2003 due to the resolution of certain tax issues that were pending with the Internal Revenue Service.

      As a result of the above, net income for the first quarter of fiscal 2004 increased 41% to $29.3 million, or $0.42 per diluted share, from $20.8 million, or $0.30 per diluted share, for the first quarter of fiscal 2003.

Liquidity and Capital Resources

      Our cash and equivalents increased $39.5 million, or 12%, from $341.8 million at the end of fiscal 2003. We require cash principally for day-to-day operations and to finance capital investments, inventory for new stores, and seasonal working capital needs. In recent years, we have financed our operations, new store openings, Common Stock repurchases, dividend payments, and other capital investments primarily with cash from operations and proceeds from stock option exercises. In addition, borrowings under our Credit Agreement may be an additional source of cash for us to finance future growth and other capital investments.

Cash Flow from Operating Activities

      Cash flow provided by operating activities during the first quarter of fiscal 2004 was $66.4 million compared to $31.0 million during the first quarter of fiscal 2003. The increase in cash provided by operating activities of $35.4 million was primarily attributable to an $8.5 million increase in net income and the timing of payments for income taxes and other obligations totaling $28.7 million.

      Inventories per Michaels store decreased 3.1% from May 3, 2003 to May 1, 2004. As a result of our implementation of perpetual inventory and automated merchandise replenishment systems and the corresponding improvement in inventory management, we now anticipate average inventory per Michaels store at the end of fiscal 2004 to decrease approximately 3 to 5% from the average inventory per Michaels store of $1.045 million we reported at the end of fiscal 2003.

Cash Flow from Investing Activities

      Cash flow used in investing activities was primarily the result of the following capital expenditure activities:

(1)	In the first quarter of fiscal 2004, we incurred capital expenditures related to the opening of 14 and the relocation of 12 Michaels stores and the completion of our New Lenox, Illinois distribution center.
(2)	In the first quarter of fiscal 2003, we incurred capital expenditures related to the opening of 18 Michaels and five Aaron Brothers stores and the relocation of five Michaels stores.

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      We anticipate capital expenditures for fiscal 2004 to total approximately $110.0 million. In fiscal 2004, we plan to open approximately 45 Michaels, seven Aaron Brothers, and seven ReCollections stores and relocate 31 Michaels and one Aaron Brothers store.

Cash Flow from Financing Activities

      Proceeds from the exercise of outstanding stock options have served as a source of cash for us, and we expect to receive proceeds from the exercise of outstanding stock options and options to be granted under our stock option plans in the future. Proceeds from the exercise of stock options were $14.2 million in the first quarter of fiscal 2004 and $1.3 million in the first quarter of fiscal 2003.

      Cash used for repurchases of our Common Stock decreased $18.2 million from $26.0 million in the first quarter of fiscal 2003 to $7.8 million in the first quarter of fiscal 2004. The following table sets forth information regarding our Common Stock repurchase plans as of May 1, 2004:

(1)	On December 5, 2000, our Board of Directors authorized the purchase of up to 2.0 million shares of our outstanding Common Stock. By later resolutions, our Board of Directors provided that proceeds from the exercise of stock options under our 2001 General Stock Option Plan may be used to repurchase additional shares under the 2000 repurchase plan and that the maximum number of shares authorized to be repurchased under the 2000 repurchase plan may be increased to the extent necessary to so use the proceeds from such stock option exercises. As of April 2003, we had repurchased and subsequently retired a total of 2.0 million shares under the 2000 repurchase plan at an average price of $22.25 per share and, as a result, we have used the entire fixed portion of the authority originally provided in the 2000 repurchase plan.
(2)	No repurchases have been made using proceeds from exercises of stock options granted under the 2001 General Stock Option Plan. The number of shares authorized for repurchase from those proceeds fluctuates with the market price of our Common Stock. The estimated 14,691 shares available for repurchase was calculated based on the $50.03 closing price of our Common Stock on April 30, 2004.
(3)	As of January 2004, we repurchased and subsequently retired the 1.0 million shares of our Common Stock authorized under the 2002 repurchase plan at an average price of $35.45 per share.
(4)	In the fourth quarter of fiscal 2003, we repurchased and subsequently retired 591,900 shares of our Common Stock authorized under the 2003 repurchase plan at an average price of $43.10 per share. In the first quarter of fiscal 2004, we repurchased and subsequently retired 156,400 shares of our Common Stock authorized under the 2003 repurchase plan at an average price of $49.85 per share and, as a result, we have 251,700 shares available for repurchase under the plan as of May 1, 2004.

      In May 2004, we have repurchased and subsequently retired 344,400 shares of our Common Stock at an average price of $47.51 per share. As of June 2, 2004, we have a total of 2,421,991 shares available for repurchase. We anticipate that we will continue to repurchase shares of our Common Stock during the remainder of fiscal 2004. Under the agreements governing our outstanding indebtedness, we can only repurchase shares of our Common Stock if we maintain or comply with specified financial ratios and other covenants. We may also be restricted by regulations of the Securities and Exchange Commission from making future repurchases during certain time periods.

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      On March 16, 2004, our Board of Directors approved a cash dividend of $0.12 per share, that was paid to stockholders of record at the close of business on April 15, 2004. This dividend reflects our strengthening financial position and our Board of Director’s commitment to encouraging long-term investment by a diverse stockholder base. We did not pay any dividends in the first quarter of fiscal 2003.

Debt

      In 2001, we issued $200 million in principal amount of 9 1/4% Senior Notes due July 1, 2009, which are unsecured and interest thereon is payable semi-annually on each January 1 and July 1. The Senior Notes due 2009 are first callable, in part or in full, in July 2005. Based on our current cash projections, we anticipate calling the Senior Notes due 2009 in July 2005. The terms and conditions of the Senior Notes due 2009 require us to comply with certain covenants, which primarily limit certain activities, including, among other things, levels of indebtedness, liens, investments, payments of dividends, Common Stock repurchases, mergers and acquisitions, and sales of assets. We are in compliance with all terms and conditions of the Senior Notes due 2009.

      Effective May 1, 2001, we signed a $200 million unsecured revolving bank credit facility with Fleet National Bank and other lending institutions, which expires on April 30, 2005. The Credit Agreement requires us to maintain certain financial covenants and limits certain activities, including, among other things, levels of indebtedness, liens, investments, payments of dividends, Common Stock repurchases, mergers and acquisitions, and sales of assets. We are in compliance with all terms and conditions of the Credit Agreement. We had no borrowings under our Credit Agreement during either the first quarter of fiscal 2004 or the first quarter of fiscal 2003 and no borrowings were outstanding under the Credit Agreement at the end of either quarter. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding under the Credit Agreement ($26.1 million as of May 1, 2004).

General

      We believe that our available cash, funds generated by operating activities, funds available under the Credit Agreement, and proceeds from the exercise of stock options will be sufficient to fund planned capital expenditures, working capital requirements, and any anticipated dividend payments or stock repurchases for the foreseeable future.

      We have market risk exposure arising from changes in interest rates. The interest rates on the Credit Agreement are repriced frequently, at market prices, which would result in carrying amounts that approximate fair value. We had no borrowings outstanding under the Credit Agreement at May 1, 2004. In July 2001, we issued $200 million of the Senior Notes due 2009 with a fixed interest rate of 9 1/4%. Generally, the fair market value of our fixed interest rate long-term debt will increase as interest rates fall and decrease as interest rates rise. Our market risk is described in more detail in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

      We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934). An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Executive Vice President— Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Executive Vice President— Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or

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Change in Internal Control Over Financial Reporting

      There has not been any change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the Securities and Exchange Commission under the Securities Act of 1934) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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MICHAELS STORES, INC.

Stockholder Class Actions

      On various dates between February 4, 2003 and March 25, 2003, 10 purported class action lawsuits were filed in the United States District Court for the Northern District of Texas, Dallas Division, against Michaels Stores, Inc. and certain of the current and former directors and officers of Michaels. All of these lawsuits have been consolidated. The suits assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 related to actions prior to Michaels’ announcement on November 7, 2002, that, among other things, it had revised its outlook for the fourth fiscal quarter of 2002, adjusting downward its guidance for annual earnings per diluted share. The consolidated complaint charges that, prior to that announcement, Michaels and certain of the other defendants made misrepresentations and failed to disclose negative information about the financial condition of Michaels while the individual defendants were selling shares of Michaels common stock. We believe these claims are without merit and will vigorously contest them.

Derivative Claims

      On March 21, 2003, Julie Fathergill filed a purported stockholder derivative action, which is pending in the 192nd District Court for Dallas County, Texas. The lawsuit names certain former and current officers and directors, including all of Michaels current directors, as individual defendants and Michaels as a nominal defendant. In this derivative action, the plaintiff makes allegations of fact similar to those made in the purported securities class actions described above. The plaintiff asserts claims against the individual defendants for breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. All of these claims are asserted derivatively on behalf of Michaels. We believe this claim is also without merit and will vigorously oppose it.

      On September 11, 2003, Leo J. Dutil filed a purported stockholder derivative action, which is pending in the United States District Court for the Northern District of Texas, Dallas Division. The lawsuit names certain former and current officers and directors as individual defendants and Michaels as a nominal defendant. In this derivative action, the plaintiff makes allegations of fact similar to those made in the purported stockholder class actions and the Fathergill derivative lawsuit described above. The plaintiff asserts claims against the individual defendants for breach of fiduciary duty, misappropriation of confidential information, and contribution and indemnification. All of these claims are asserted derivatively on behalf of Michaels. We believe this claim is also without merit and will vigorously oppose it.

Cotton Claim

      On December 20, 2002, James Cotton, a former store manager of Michaels of Canada, ULC, our wholly-owned subsidiary, and Suzette Kennedy, a former assistant manager of Michaels of Canada, commenced a proposed class proceeding against Michaels of Canada and Michaels Stores, Inc. on behalf of themselves and current and former employees employed in Canada. The Cotton claim was filed in the Ontario Superior Court of Justice and alleges that the defendants violated employment standards legislation in Ontario and other provinces and territories of Canada by failing to pay overtime compensation as required by that legislation. The Cotton claim also alleges that this conduct was in breach of the contracts of employment of those individuals. The Cotton claim seeks a declaration that the defendants have acted in breach of applicable legislation, payment to current and former employees for overtime, damages for breach of contract, punitive, aggravated and exemplary damages, interest, and costs. We believe we have certain meritorious defenses and intend to defend this lawsuit vigorously.

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General

      We are a defendant from time to time in lawsuits incidental to our business. Based on currently available information, we believe that resolution of all known contingencies is uncertain. There can be no assurance that future costs of such litigation would not be material to our financial position or results of operations.

      On December 5, 2000, our Board of Directors authorized the repurchase of up to 2.0 million shares of our outstanding Common Stock. By later resolutions, our Board of Directors provided that proceeds of the exercise of options under our 2001 General Stock Option Plan may be used to repurchase shares under the 2000 repurchase plan and that the maximum number of shares authorized to be repurchased under the 2000 repurchase plan may be increased to the extent necessary to so use the proceeds from such option exercises.

      On September 11, 2002, our Board of Directors authorized the repurchase of up to 1.0 million shares of our outstanding Common Stock. On June 18, 2003, our Board of Directors authorized the repurchase of up to 1.0 million shares of our outstanding Common Stock. On February 2, 2004, our Board of Directors authorized the repurchase of up to 2.5 million shares of our outstanding Common Stock.

      The following table sets forth our repurchases of Common Stock for each fiscal month in the first quarter of fiscal 2004.

Issuer Purchases of Equity Securities

(1)	Repurchased and subsequently retired under the 2003 repurchase plan.
(2)	Under our 2000 repurchase plan, the Board of Directors authorized us to repurchase up to 2.0 million shares of our outstanding Common Stock, with the ability to increase the maximum number of shares authorized to be repurchased under the plan to the extent necessary to use the proceeds from stock options exercised under our 2001 General Stock Option Plan to make repurchases. We have used the entire 2.0 million share fixed portion of the authority originally provided in the 2000 repurchase plan. No repurchases have been made using proceeds from exercises of stock options granted under the 2001 General Stock Option Plan. The number of shares authorized for repurchase from those proceeds fluctuates with the market price of our Common Stock. The estimated 14,691 shares available for repurchase under the variable portion of our 2000 repurchase plan was calculated based on the $50.03 closing price of our Common Stock on April 30, 2004. As of May 1, 2004, we had an estimated 14,691 shares available for repurchase under the variable portion of our 2000 repurchase plan, 251,700 shares available for repurchase under the 2003 repurchase plan, and 2.5 million shares available for repurchase under the 2004 repurchase plan.

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      (a) Exhibits:

	(b)	Reports on Form 8-K. The following reports were filed or furnished by the Registrant during the quarter ended May 1, 2004:

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MICHAELS STORES, INC.

      Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: June 9, 2004

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INDEX TO EXHIBITS