Back to GetFilings.com

Table of Contents

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 þ          No o

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          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

2

Table of Contents

MICHAELS STORES, INC.

MICHAELS STORES, INC.

See accompanying notes to consolidated financial statements.

3

Table of Contents

MICHAELS STORES, INC.

See accompanying notes to consolidated financial statements.

4

Table of Contents

MICHAELS STORES, INC.

See accompanying notes to consolidated financial statements.

5

Table of Contents

MICHAELS STORES, INC.

For the Nine Months Ended October 30, 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 and nine months ended October 30, 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.

      Share and per share data (except par value) presented for all periods reflect the effect of a two-for-one Common Stock split, which was effected in the form of a stock dividend on October 12, 2004, to stockholders of record as of the close of business on September 27, 2004.

      Certain reclassifications have been made to prior periods to conform to current presentations.

      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 third quarter of fiscal 2004” and “the first nine months of fiscal 2004” relate to the 13 and 39 weeks ended October 30, 2004, respectively, and all references to “the third quarter of fiscal 2003” and “the first nine months of fiscal 2003” relate to the 13 and 39 weeks ended November 1, 2003, respectively.

6

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Nine Months Ended October 30, 2004

Note 2.     Earnings Per Share

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

      Our purchase and subsequent retirement of 3.6 million shares of our Common Stock in the first nine months of fiscal 2004 reduced the number of weighted average shares outstanding by 2.7 million and 1.4 million shares for the third quarter and first nine months of fiscal 2004, respectively. In addition, our purchase and subsequent retirement of 2.5 million shares of our Common Stock in the first nine months of fiscal 2003 reduced the number of weighted average shares outstanding by 2.2 million and 1.7 million shares for the third quarter and first nine months of fiscal 2003, respectively.

      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.

7

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Nine Months Ended October 30, 2004

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:

9 1/4% Senior Notes due 2009

      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 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.

      In October 2004, we signed an extension to our existing $200 million unsecured revolving bank credit facility with Fleet National Bank and other lending institutions, which now expires on April 30, 2006. 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. In addition to extending the term of the Credit Agreement, we obtained the consent of the lenders to permit the prepayment of the Senior Notes due 2009 when they become callable in July 2005, if we have “liquidity” (defined as cash and equivalents

8

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Nine Months Ended October 30, 2004

plus unused availability under the Credit Agreement) of at least $300 million. We are in compliance with all terms and conditions of the Credit Agreement. We had no borrowings under our Credit Agreement during either the third quarter of fiscal 2004 or the third 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 October 30, 2004).

      Our comprehensive income 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. We are unable to estimate a range of possible loss, if any, in these 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 these claims are also without merit and will vigorously oppose them.

9

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Nine Months Ended October 30, 2004

      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 these claims are also without merit and will vigorously oppose them.

      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. We are unable to estimate a range of possible loss, if any, in this claim.

      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.

      In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, Inventory Costs, as an amendment to ARB No. 43. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are evaluating the provisions of SFAS No. 151 to determine the impact on our consolidated operating results or financial position.

10

Table of Contents

      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.

Disclosure Regarding Forward-Looking Information

      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:

	•	our ability to remain competitive in the areas of merchandise quality, price, breadth of selection, customer service, and convenience;
	•	our ability to anticipate and/or react to changes in customer demand and preferences for products and supplies used in creative activities and the related financial impact;
	•	changes in consumer confidence resulting in a reduction in consumer spending on items perceived to be discretionary;
	•	the execution and management of our store growth, including new concepts, and the availability of acceptable real estate locations for new store openings;
	•	the effective maintenance of our perpetual inventory and automated replenishment systems and related impacts to inventory levels;
	•	the identification and implementation of improvements to our supply chain to achieve efficiencies and cost reductions;
	•	delays in the receipt of merchandise ordered from our suppliers due to delays in connection with either the manufacture or shipment of such merchandise;
	•	transportation delays (including dock strikes and other work stoppages) and increases in transportation costs due to fuel surcharges and transportation regulations;
	•	restrictive actions by foreign governments or changes in United States laws and regulations affecting imports or domestic distribution;
	•	material increases in inflation or commodity prices, such as petroleum, steel, and paper;
	•	changes in political, economic, and social conditions;
	•	significant fluctuations in exchange rates;
	•	financial difficulties of any of our key vendors, suppliers, and service providers;
	•	the design and implementation of new management information systems as well as the maintenance and enhancement of existing systems, particularly in light of our continued store growth and the addition of new concepts;

11

Table of Contents

	•	our ability to comply with the terms and restrictions of our Credit Agreement and our Senior Notes due 2009;
	•	the seasonality of the retail business; and
	•	other factors as set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004, particularly in “Critical Accounting Policies” and “Risk Factors,” and in our other Securities and Exchange Commission filings.

      We intend these forward-looking statements to speak only as of the time of filing this Quarterly Report on Form 10-Q and do not undertake to update or revise them as more information becomes available.

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 third quarter of fiscal 2004” and “the first nine months of fiscal 2004” relate to the 13 and 39 weeks ended October 30, 2004, respectively, and all references to “the third quarter of fiscal 2003” and “the first nine months of fiscal 2003” relate to the 13 and 39 weeks ended November 1, 2003, respectively.

      Unless otherwise noted, discussions relating to our Common Stock reflect the effects of a two-for-one Common Stock split effected in the form of a stock dividend on October 12, 2004, to stockholders of record as of the close of business on September 27, 2004.

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

12

Table of Contents

(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 is being 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 month of operation in order to eliminate grand opening sales distortions.

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.