The Michaels Cos. Inc.'s soft sales trends continued in the first quarter of fiscal 2023. The company's same-store sales declined by 8.3% during the quarter, led by a pronounced decline in the demand for technology products, which we expect will persist for the rest of the year. We forecast Michaels' revenue will fall by approximately 1% in 2023 as consumer spending remains constrained amid inflationary pressures. The company reduced its inventory by 23% through improved inventory management and lower costs, which we believe better positions it to weather the elevated promotional activity necessary to clear its excess merchandise.
We continue to view persistent inflation as a significant risk for highly discretionary categories because consumers will focus on essentials. We expect the demand for Michaels’ core arts and crafts product categories will remain soft this year. In addition, we believe consumer spending habits have changed since the post-pandemic reopening, given the wide range of entertainment options competing for consumer attention, which make a short-term rebound in the company's demand unlikely.
We project the company will generate about $130 million of free operating cash flow (FOCF) this year, supported by improvement in working capital. Michaels materially reduced its cash flow deficit year over year by approximately $300 million on easing supply chain pressures, lower freight costs, and favorable shifts in its product mix. In addition, the company expanded its operating margins in the first quarter supported by lower international transportation costs, inventory reserves, and payroll expenses. We expect Michaels will sequentially expand its operating margins over the next two years because of lower international freight rates. However, the company could face declining operating leverage due to lower sales volumes, a prolonged promotional environment, and elevated domestic transportation costs amid ongoing macroeconomic uncertainties that hamper its recovery.
We expect Michaels' S&P Global Ratings-adjusted leverage will be in the high-5x area in 2023 as it improves operating margins throughout the year. In the first quarter, the company's S&P Global Ratings-adjusted leverage was in the mid-6x area. Michaels drew on its asset-based lending (ABL) facility during the quarter to repurchase $28.5 million of its 7.875% unsecured notes for roughly $20 million in an open market transaction. We expect the company will further draw on the ABL through the first half as it deploys seasonal working capital to build its inventory, before it generates free cash flow in the back half of the year.
Ratings Score Snapshot
Recent Research
- Industry Top Trends 2023: Retail and Restaurants, Jan. 23, 2023
- The Michaels Cos. Inc. Downgraded To 'B-' From 'B' On Operating Performance And Elevated Leverage; Outlook Negative, Oct. 14, 2022
Company Description
Michaels is a specialty retailer with a leading market position in the arts and crafts industry. As of April 29, 2023, the company operated 1,294 stores with an average size of 18,000 square feet across the U.S. and Canada. After its leveraged buyout on April 15, 2021, Michaels became a private company and is owned by Apollo Global Management.
Outlook
The negative outlook reflects the possibility that we will downgrade Michaels in the next 12 months if it doesn't demonstrate a strong and sustainable improvement in its performance over the coming year, which would limit the recovery in its profitability and FOCF generation.
Downside scenario
We could lower our ratings on Michaels in the next 12 months if it fails to materially improve its operations and cash flow generation, which would leads us to view its capital structure as unsustainable. This could occur if:
- We do not believe the company is on track to repay the outstanding borrowings on its revolver in the coming quarters;
- We do not believe it will likely generate sustainable positive FOCF approaching $200 million or more; or
- It fails to significantly improve its profitability toward historic levels (such as a reported EBITDA margin of 10% or more), which could cause it to sustain S&P Global Ratings-adjusted leverage of 6x or more.
Upside scenario
We could revise our outlook on Michaels to stable if:
- The company maintains adequate liquidity and pays down the outstanding amounts under its revolver;
- We believe it will likely generate sustainable positive FOCF approaching $200 million or more; and
- It materially improves its profitability such that its leverage declines below 6x with prospects for further improvement.
Key Metrics
Michaels Cos. Inc.--Key Metrics* | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
2021a | 2022a | 2023e | 2024f | 2025f | ||||||||
Revenue growth (%) | 1.7 | (5.8) | (1.2) | 1.7 | 2.3 | |||||||
EBITDA margin (%) | 20.0 | 17.2 | 19.4 | 21.2 | 22.9 | |||||||
Debt to EBITDA (x) | 5.3 | 6.4 | 5.7 | 5.1 | 4.6 | |||||||
FFO to debt (%) | 10.9 | 7.5 | 9.3 | 11.1 | 12.9 | |||||||
EBITDA interest coverage (x) | 2.8 | 2.0 | 2.2 | 2.5 | 3.0 | |||||||
*All figures adjusted by S&P Global Ratings. a--Actual. e--Estimate. f--Forecast. FFO--Funds from operations. |
Environmental, Social, And Governance

Governance is a moderately negative consideration in our credit analysis of Michaels, as is the case for most rated entities owned by private-equity firms. Our highly leveraged assessment of the company's financial risk profile points to its corporate decision-making that prioritizes the interests of its controlling owners. This also reflects private-equity owners' generally finite holding periods and focus on maximizing shareholder returns.
Rating Component Scores | |
---|---|
Foreign currency issuer credit rating | B-/Negative/-- |
Local currency issuer credit rating | B-/Negative/-- |
Business risk | Fair |
Country risk | Very Low |
Industry risk | Intermediate |
Competitive position | Fair |
Financial risk | Highly Leveraged |
Cash flow/leverage | Highly Leveraged |
Anchor | b |
Diversification/portfolio effect | Neutral (no impact) |
Capital structure | Neutral (no impact) |
Financial policy | FS-6 (no impact) |
Liquidity | Adequate (no impact) |
Management and governance | Fair (no impact) |
Comparable rating analysis | Negative (-1 notch) |
Stand-alone credit profile | b- |
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Primary Contact: | Frederico Carvalho, San Francisco 1-415-371-5071; frederico.c@spglobal.com |
Secondary Contact: | Declan Gargan, CFA, San Francisco 1-415-371-5062; declan.gargan@spglobal.com |
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