The Michaels Companies Is A Pandemic Winner, And A Deep-Value

The Shorts Are Having A Hey-Day With The Michaels Companies

The pandemic-winner stocks are getting hammered. After months of steady gains, fear that dried-up stimulus money will cut into revenues has profit-takers and bears both pressuring shares lower. And stay-at-home winner The Michaels Companies (NASDAQ:MIK) is no exception. The company is the go-to center for all things craft trading 25% lower than it was just a day ago. What investors need to consider is that Michaels’ outlook for revenue and earnings is positive and underpinned by trends not-dependent on stimulus. American’s prefer social distancing to not and they need things to do with their time.

Michaels Is Another eCommerce Pandemic Winner

Looking at the chart you would think Michaels just announced an imminent bankruptcy but that is just not the case. The 25% fall in prices is the combination of high-expectations priced into the market and a comparably high short-interest. When the results came in the market was ready to take profits and with 35% short interest there just wasn’t enough support to keep prices from crashing.

Michaels reported $1.15 billion in quarterly revenue. That’s 11.7% growth on a YOY basis and beat consensus by a wide if not-unexpected margin, about 1400 basis points. The gains were driven by a `12% increase in comps that are in turn driven by eCommerce. Total revenue through eCommerce and omnichannel sources grew 353% from the previous year and are expected to remain strong in future quarters, a trend that management plans to take advantage of.

"We saw strong demand and customer engagement across our stores, and the multiple omnichannel touchpoints we introduced over the past few months. Looking ahead, we will continue to focus on serving our customers and executing to the pillars that underpin our Maker strategy: strengthening our retail foundation, modernizing our omnichannel experience, and establishing our position as the Expert for the Maker,” said CEO Ashley Buchannon.

The bottom-line results were equally impressive. The company reported a GAAP loss of -$0.05 but beat consensus by $0.13 and adjusted earnings are positive. On an adjusted basis EPS came in at $0.38 per share and $0.38 above consensus. The company was able to increase its cash position because of the earnings strength and pay down a revolving credit facility drawn for defensive purposes early in the pandemic. At the end of the quarter, total cash was $1.3 billion and is up $100 million on a sequential basis.

Michaels Stock Is A Deep Value

Michaels was a deep value before the 2Q report was released. It was trading at only 11X times this year’s earnings and that value has gotten better. Now, post-report, the stock is trading closer to 9X this year’s earnings and only 6X next which makes it more of a steal than a bargain. Other stay-at-home winners are trading in the range of 20X to 30X their earnings, the broad market S&P 500 about 22X, the only difference is Michaels doesn’t pay a dividend.

On a technical basis, despite the gravity of the giant red candle formed with the selloff, the chart is still fairly bullish. Price action fell hard but only down to the short-term moving average where bargain hunters are already scooping up shares. This support buying is consistent with a resistance point set after the Q1 release so I think it will be strong. Investors looking to get into this bargain-basement pandemic-winner may want to wait for additional confirmation of support before getting in. The but is that, at these prices, any entry looks like a good one to me.