Why Michaels Companies, Inc. Stock Fell as Much as 19% Today

What happened

Shares of Michaels Companies (NASDAQ: MIK) fell as much as 19.1% lower on Thursday morning, following the release of solid first-quarter earnings with a side of modest next-period guidance. At 12:50 p.m. EDT, the stock had recovered only slightly to reach a 17.6% price drop.

So what

The retailer of arts and crafts materials saw top-line sales holding steady year over year at $1.16 billion, just ahead of Wall Street’s $1.15 billion target. Adjusted earnings rose 3% to land at $0.39 per diluted share, a hair above the $0.38 analyst target. So far, so good.

However, Michaels’ second-quarter guidance fell short of current analyst projections. The Street consensus pointed to next-quarter earnings near $0.19 per share, but the midpoint of the new guidance range sits at just $0.13 per share. Moreover, the company expects flat comparable store sales, which won’t impress retail industry investors much.

Image source: Getty Images.

Now what

Did Michaels deserve a 20% haircut for setting its second-quarter earnings targets 32% below the current Street view? Probably not, because the company also reaffirmed its full-year earnings and revenue targets, which means that management expects stronger results in the third and fourth quarters.

“We continue to operate from a position of financial strength, as the industry leader with healthy operating margins, strong cash flows and high returns on invested capital,” said Michaels CEO Chuck Rubin in a prepared statement. “We remain committed to leveraging these strengths to accelerate key initiatives in fiscal 2018 to drive future sales and earnings growth.”

In that light, some short-term weakness should be an acceptable speed bump as Michaels remodels stores and implements new business ideas to support a stronger future. Some investors won’t buy into that idea, though. Analyst firm Loop Capital reaffirmed its “hold” rating on Michaels today, saying that the stock “deserves to be cheap” because online rivals are stealing market share from the company.

I don’t see any reason to go along with that negative assumption, because a crumbling market position would force Michaels’ leadership to lower their longer-term expectations. But the full-year targets aren’t moving, which makes me think of this drop as a good-looking opportunity to buy the stock.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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