Michel's standing is lowered following Q3 results revealing a 'deteriorating' market position
In a recent development, S&P Global has downgraded Michaels Companies' rating from BB- to B+, signalling concerns about the retailer's financial health. This downgrade comes amidst a challenging period for Michaels, with the company's sales and income in decline since fiscal 2018.
Mark Cosby, the new permanent CEO of Michaels, who took over in October, acknowledged the challenges the company is facing and emphasised the need to return to sustainable long-term growth. He attributed the decline in Q3 comparable sales to underlying business trends, underperforming sales events, and product categories, as well as a choppy seasonal transition.
S&P analysts share similar concerns, expressing belief that Michaels' competitive standing is weakening. The company is facing stiff competition from established players like Hobby Lobby, Joann, Amazon, and Walmart in the crafting category.
In an effort to address these challenges, Michaels is adapting to market changes. The company is hosting maker classes, developing a digital community platform, and opening a "maker-centered" test store. Michaels also announced in March 2020 the acquisition of rights to lease up to 40 stores from A.C. Moore and a distribution center in New Jersey, with plans to reopen the stores under the Michaels name the following year.
The acquisition is intended to expand Michaels' presence in strategic markets and better serve customers both online and in stores. Michaels also plans to open "a few" more of the lab stores next year. The company expects to reopen some of the acquired A.C. Moore stores under its name next year.
However, S&P analysts expect Michaels' business to remain pressured over the next year. Operating income for Michaels fell by 44.6% to $76 million in Q3, and discounting, tariffs, and a change in sales mix hurt Michaels' merchandise margins.
Despite these challenges, Michaels' Q3 sales fell 4% year over year to $1.2 billion, and Q3 comparable sales fell 2.2%. GlobalData Managing Director Neil Saunders has noted that Michaels is losing market share in the crafting category.
The test store opened in November and features an easier shopping experience, a curated assortment, enhanced service experience, full omnichannel capabilities, and brings the community experience to life. This initiative is part of Michaels' strategy to adapt to the changing retail landscape and regain its competitive edge.
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