the michaels companies\' (mik) ceo, chuck rubin on q3 2017 results - earnings call transcript
Third Quarter 2017 Earnings conference call at 9: 00 a. m. on November 30, 2017
Chairman and President OfficerDenise Paulonis-
Chief Financial Officer Rawlins-
Vice President of Investor Relations and Communications
Forbes Goldman Sachs
Guggenheim Stock Exchange
Morgan stanicott Nagel
Bank of America Baker
Credit SuisseDan Wewer-
Raymond jamesland Rifkin
My name is Rachel. I will be your conference operator today.
At this time, we welcome everyone to attend the third quarter earnings conference call of Michaels.
All lines are muted to prevent any background noise.
If you need help during the conference call, please press star and then zero, the operator will help you.
Please note that this activity is being recorded. Thank you.
Now, I want to transfer the call to your host, Kiley Rawlins, vice president of investor relations and communications. Ms.
Rawlins, you can start the meeting.
Thank you, Rachel.
Good Morning, everyone. thank you for joining us today.
Earlier this morning, we released our third-quarter financial results.
A copy of the press release can be found in the Investor Relations section of our website at www. michaels. com.
Before we start the discussion, let me remind you that today\'s press release and the statements made by our executives on this call may be forward --
The outlook statement was issued in accordance with the safe harbor provisions of the revised 1995 Private Securities Litigation Reform Act.
While these statements relate to plans or events that we expect will or may occur in the future, some of the factors raised in our SEC documents and press releases may lead to significant differences in actual results from our expectations.
We present to you and include in particular the warnings and risk statements contained in today\'s press release and our SEC documents.
Please note that do not rely too much on these advances --
A forward-looking statement that was not made until today, November 30, 2017.
We have no obligation to update or modify our forwarding-
You should not expect us to do so other than the legal requirements.
In today\'s earnings release, we show that
Adjusted operating income, adjusted net income and adjusted diluted earnings per share and other GAAP financial indicators.
Adjusted operating income, adjusted net income and adjusted diluted earnings per share for the comparable period of 2016 have been submitted to reflect our views on ongoing operations by adjusting last year\'s non-
Related Procurement accounting adjustment and non-
Recurring consolidation costs and benefits related to the acquisition of Lamrite West in February 2016, as well as early repayment of debt and refinancing cost losses minus related tax adjustments.
The reconciliation of these measures with the corresponding GAAP measures can be found in today\'s earnings release.
Our conference call today will begin with the wonderful content of chairman and CEO Chuck Rubin and Denise Paulonis, and our CFO will review our financial results and prospects in more detail.
After we have prepared our speech, we will begin to ask questions.
As a reminder, we would appreciate it if participants were able to limit themselves to one question and one follow-up questionup.
I\'m transferring the call to Chuck now. Chuck?
Thank you, Keeley.
Good Morning, everyone. happy holidays.
This morning, I will review some of the highlights of our third-quarter results and then update on our fourth-quarter plans.
Starting in the third quarter, this morning we reported sales and operating revenue that was within our quarterly guidance when we adjusted the disruption of Hurricanes Harvey and Irma, and the diluted earnings per share slightly higher than our initial guidance.
We estimate the negative impact of the hurricane on net sales to be around $10 million and diluted earnings per share to be around $0. 01.
Comparable store sales increased by 1% or 0 year on year this quarter.
5% on the basis of the constant currency, including sales losses caused by the hurricane.
We estimate that the hurricane affected more than 100 stores and caused a loss of more than 400 store days, with an estimated impact on the overall comps 80 basis points for the quarter.
Excluding the estimated impact of the hurricane, comparable store sales increased by 1 year on year. 8% or 1.
Increase by 3% on the basis of constant currency.
In addition to the impact on sales, Hurricane Irma has also caused disruption at our distribution center in Jacksonville, Florida, whether it\'s receiving goods from the factory or shipping inventory to the store.
Our team responded quickly and tried to get back on track.
Thankfully, our team members are safe and our store suffers the least loss of property.
I am very proud of the way our team members work together to support our clients in the hurricane-affected community.
Our store has held many free events to provide interesting disruption to families displaced by the hurricane, and our staff difficulties fund Michaels Cares offers for more than 400 affected Michaels team members
I am most deeply grateful to the dedicated team members and the on-site leadership team for their tireless efforts to reopen the store and help the local community recover from the storm.
Geographically, Canada is the best performing region in the quarter, with a stable currency exchange rate of around 5%.
This strong performance includes the impact of the adverse factors we experienced at the end of the quarter, which we believe is related to the Sears Canada clearing process.
Recently, we have seen some stability, but sales trends may continue to fluctuate until the Sears liquidation is completed.
When Target pulled out of the Canadian market in 2015, we did see a similar sales trend.
In the United States, in addition to the areas affected by the hurricane, comp performed fairly consistently in various regions.
From a product category perspective, seasonality, paper making and children are the highest in sales this quarter.
Driven by novelty and exclusivity, Halloween sales are strong compared to last year.
We also saw some benefits from our response to our Christmas assortment of goods that were sold in stores and online earlier than last year.
Sales results for the paper craft category continue to reflect the popularity of new technologies, including the recent launch of Cricut manufacturers in Easy Press and Bright Pad, and the strong growth in Project materials used with these devices, including our expanded varieties of iron. ons and vinyls.
Planning and warehousing also performed well in the first quarter.
Driven by the continued popularity of school programs and slime molds, our children\'s class also received positive returns this quarter.
As expected, the custom framework did not perform well this quarter.
This quarter, we updated the design collection and introduced a more tiered pricing that makes it easier for customers to achieve the price they want.
In addition, we continue to test various management and production models that focus more on the nature of sales for this high-exposure transaction.
It\'s too early, but we\'re starting to see some positive impact from these changes.
Now talk about our online sales and while our overall business is still small, our growth continues to accelerate as expected.
Driven by increased traffic and higher conversion rates, online sales in the third quarter were about twice the level of online sales in the third quarter of last year.
As we said before, we continue to believe that e-commerce is unlikely to grow to double digits of sales in this channel as many other retail formats do.
The touch of the product, the general lack of national brands, the average price is low, making this channel less attractive to the pure play online platform;
However, we do believe that e-commerce is an important addition to our physical experience, and while our current penetration rate is still low, we still believe that in the coming years, our e-commerce penetration rate will grow in the middle to the upper single digit range of our total sales.
Overall, we are very pleased with our performance in the third quarter.
We have achieved positive comp growth in Michaels physical stores, and our Michaels have doubled.
It is important that we achieve higher operating profit mainly by increasing the profit margin of our products.
According to our guidance, operating income for the quarter increased by 5% to $0. 154 billion and diluted EPS increased by 19% to $0.
44, slightly higher than we expected.
Dennis will provide more colors for profit and loss in a few minutes.
Now moving to the fourth quarter, we will continue to maintain this momentum.
We have the largest and strongest holiday categories we offer online and in stores.
We have a compelling marketing plan to communicate the value and solutions we offer, and we have made tangible improvements to better connect our physical stores, integrate digital storefronts and digital apps into a more complete shopping experience, making it easier for customers to shop.
Starting with our holiday classification, we make it easier for customers to celebrate the season with fresher and unique products
Stores and online demos that make it easier to shop, as well as powerful and clear value information.
We have expanded the selection of holiday decorations and gifts, creating the largest and strongest holiday classification we offer online and in stores.
We have expanded the selection of Christmas trees to include more pencil trees, more mini trees and an artificial tree that actually grows.
We have increased the variety of glass, collectibles and DIY decorations, and we have increased the variety of home and desktop decorations to reflect the exclusive design provided only at Michaels.
We have also enhanced the choice of creative gifts for children and adults, which we believe will encourage customers to unplug from their devices and express their ideas in new ways. On Michaels.
Com, we have expanded our range of products by nearly 30%, including more seasonal and core essential products available in our physical stores, as well as more online products
Only SKUs as part of our tireless efforts.
It is also important to note that behind the scenes, we have been diversifying the way we deliver our products to our customers to improve the customer experience and ultimately reduce the cost of fulfillment.
Let me provide more details.
When we launched e-commerce in 2014, our top priority was speed.
In order to improve the functionality quickly, we focus on the limited classification and the implementation of outsourcing to third parties.
Over the past few years, we have increased shipments from all Michaels distribution centers and introduced more vendor shipments.
This year, when we launched shipping from the store in hundreds of geographically different Michaels stores, we have expanded our capabilities to enable us to take advantage of the store
Provide customers with online orders faster and better control of our fulfillment costs.
For those customers who want to buy faster, we have increased-
Check out the store inventory for Michaels.
Com, currently testing online purchases
There are sales in many markets.
Our study of BOPIS will support the chain during this holiday
It was widely launched in all stores in 2018.
Finally, customers can buy online and can go back to any Michaels store today.
With all these enhancements, we are reducing our reliance on third-party fulfillment services and are fulfilling more than 50% of online orders through our own channels.
Again, this will reduce our fulfillment costs and provide faster delivery to our customers.
In addition to expanding our range of decor and gifts, we have improved our interior decor
Store demos make it easier for customers to shop and make it easier for our team to stock and recover.
Focusing on clarity and simplification, we have more key project presentations, cleaner signage, more streamlined packaging, and fixtures for the customer to touch the product.
Online, we have invested to make it easier for customers to navigate, search, and final purchases on Michaels.
Com, which includes new searches when typing features, improved filtering features, and new messaging suggested by the product.
We know that value is still important to our customers, especially during the holiday season, and we have taken additional steps to strengthen the value we offer.
In addition to providing our low price guarantee and daily value plan, during this holiday, we are also taking advantage of more dollar price points on Lane fixtures and end caps to clearly communicate what we offer this year, and we have introduced a variety of gifts with purchase plans.
To communicate all of these improvements to our customers, we are leveraging the TV, print and digital platforms with a focus on delivering solutions to our customers while continuing to strengthen our value, trend leadership and full range of services
A year ago, we launched Make, an integrated brand campaign designed to leverage the growing consumer trends of DIY and personalizing, while also positioning Michaels with a more modern eye.
Our goal is to differentiate the Michaels brand, expand our reach and drive customer engagement.
We have created eight brands since the third quarter of last year.
Video Entertainment with celebrity producers exceeds 65 million viewers.
We have released 33 live Facebook videos using our own experts and key influencers to highlight trends and Michaels exclusive coverage, we have hosted 13 integrations with the ABC morning project good morning, USA shows that production can be fun and fast.
Our brand metrics and customer data suggest that initial results are being made in these investments.
Our highest awareness and independent awareness has improved, and our CRM analysis shows that we are successfully working with our core existing customers to increase the frequency of shopping, thus bringing a lot to the customers of this group
As we progress, we know we have the opportunity to attract and retain more new customers.
Recognizing that holidays are a great opportunity to attract these new customers, we are launching new marketing tools and expanding our revenue
Store experience to enhance customer engagement.
We continue to expand our extensive customer database, and today we can identify 70% transactions to specific customers, compared to 65% a year ago.
The growth of our Michaels rewards program has made an indispensable contribution to this growth.
Today, more than 21 million customers registered with Michaels Rewards, compared with 10 million at the end of last year\'s third quarter.
As we enter the holiday season, we intend to use the insights of this data to customize our information and targeted promotional offers to drive sales while protecting gross profit.
This holiday season, we have introduced new marketing tools to attract new and new customers, including a new guide to holiday decoration
Make Decoration series and project ideas for customers who like DIY.
We have also introduced new gifts, including buying promotions to drive traffic and average transaction value, and we have also increased the use of digital search to drive michael\'s traffic.
Support our festival message.
We are also expanding our exclusive sales opportunities in the store, giving more customers the opportunity to try simple projects and create more opportunities for themselves.
So far this year, more than 1.
3 million customers attended children\'s clubs, breaks or more structured classes, all of which represented a 56% increase in the number of customers participating in some kind of event in the first nine months of 2016
Basic courses in the Michaels store.
Finally, the progress we have made in connecting physical stores, the continuous improvement of digital storefronts and digital applications in a more integrated shopping experience, and we believe we can make good use of the momentum of the third quarter.
In August, we launched the new Michaels app to connect our entities and online experiences more effectively.
With this update, we make it easier for customers to organize projects, manage shopping lists, manage coupons, join Michaels rewards and finally make purchases.
With more than 50,000 SKUs in a separate store, we know it can be difficult to find a specific item for a particular item.
Use the app store-
The specific approach is that we can now direct the customer to an aisle in her particular store to help her find what she needs to complete the project.
We have recently added information about inventory availability, so if the item she is looking for is not in her store, she can search the nearby store to determine the additional inventory
This new feature has also been welcomed by members of the Michaels team who have access to the app internally
Enable them to help more customers and drive more conversions.
We have also recently added beacons to all stores to support more personalized interaction with our customers.
When in store mode, the app will welcome customers to the store and automatically update the information to reflect the layout, classification and inventory levels of a particular store.
The customer responded very well to this new feature and provided good feedback.
Our weekly app downloads are more than twice as fast as last year on average, and the number of unique users we use the app every week compared to last year is almost twice as fast as last year.
We are particularly excited that more customers show interest in shopping and projects, not just coupons.
Even when we were positioning for the Michael store and the Michael.
For a good holiday, we have also invested in other platforms based on our industry.
Leading ability and creating new opportunities to engage with customers.
Two examples of these efforts are framerspoint.
Com and consumer crafts. com.
At the end of the third quarter, we launched framerspoint. com.
This online framework solution is for entry-level custom framework customers who want to frame digital assets in a low-cost, easy way, including personal photos or options from our library of over 10,000 art works.
With the efficiency provided by our art department, our integrated custom frame manufacturer framerspoint.
Com provides customers with a unique set of frameworks in a simple, competitive, daily low price manner.
We updated it recently.
EDLP consumer com
Facing the website we acquired as part of the acquisition of Lamrite West.
Focus on the core process category, consumer process.
Com provides us with a more powerful platform to compete with other EDLP competitors in the online field.
Taking advantage of our product development capabilities, we doubled the range of products on the site, added new Darice and Michaels developed products, and refreshed the look and feel,
In addition, we are investing in new digital marketing support to drive traffic to the site.
Although we do not expect consumption.
Com is as big as Michaels.
Com, we are encouraged by the customer\'s response to the improvements we have made.
Finally, I would like to update you on the status of our Lamrite West operations.
When we acquired Lamrite West in 2016, we said the deal supported our Vision 2020 strategy from three key aspects: first, darice\'s strong product development capabilities will enable us to increase our exclusive products and expand the overall portfolio of our private brand products;
Second, in China, although our procurement infrastructure is small, we will speed up our direct procurement work to improve quality and reduce costs;
In the last three, the increase in the wholesale business of Pat Catan store and Darice will support our efforts to develop new business.
In the 18 months since we completed the acquisition, we have made progress in every area.
We launched a new exclusive partnership with Martha Stewart and Disney and expanded our relationship with David tutra\'s wedding.
Whether it\'s Martha Stewart or David tutra variety, you\'ll see the expanded variety in the Michaels chain in 2018.
We have expanded our sourcing business, including more than 100 team members in China, Hong Kong and Dallas to leverage our scale and scale in new ways to support our direct sourcing efforts
We use Pat Catan to test new categories and presentations in selected categories including fabrics and parties, with minimal risk and customer disruption, in B2B terms, we continue to expand and diversify our customer base by adding new customers.
However, as we discussed in our last conference call, the sales cycle of this B2B business is longer than we originally wanted, and we have seen the expected erosion of some legacy accounts.
We are still very focused on getting new customers outside of the big box crafts channel and we are using new tools and processes to improve the way we manage these efforts.
To sum up, the third quarter is a good quarter, excluding the noise caused by the hurricane.
Our investment to support Vision 2020
Long-term growth strategies are gaining momentum and results.
We are satisfied with the momentum we have seen in our business and we are excited about our holiday plans.
Now, let me transfer the call to Dennis and let him discuss our financial performance and the outlook for the fourth quarter in more detail. Denise?
Thank you. good morning.
Net sales in the third quarter increased by 1. 1% to $1. 24 billion.
As we noted in our earnings report, we estimate net sales affected by the hurricane to be around $10 million.
Comp store sales increased by 1% or 0 year on year.
5% on a monetary basis, including the impact of the hurricane on some 80 basis points.
When adjusting for this impact, our overall comp sales performance is 1. 8% or 1.
3% is within our initial Q3 guidance.
The increase in net sales was mainly due to the increase in comparable store sales and the operation of the three net out-of-home stores opened since 2016.
The growth in comparable store sales was driven by the increase in average tickets, which was partially offset by a slight decline in customer transactions.
We believe that the destruction of the hurricane had a negative impact on the number of transactions in the quarter.
Excluding the impact of the hurricane, we estimate that the transaction is slightly positive.
The number of the net new store includes 18 new Michael\'s store, 1 new Aaron Brothers store and 1 new Pat Catan store, this was offset by the closing of 15 Aaron Brothers stores and two Michael stores in the 12 months since the third quarter of fiscal 2016.
The decline in wholesale revenue, as expected, partially offset these increases.
As Chuck discussed, the decline in revenue from our wholesale business reflects the time difference associated with new customer acquisitions and anticipated churn of legacy customers.
Although the sales cycle is longer than we expected, we are encouraged by the situation in the sales channel.
Gross profit in the quarter increased by 4% to $0. 484 billion, and our gross profit margin for the quarter increased by 100 basis points to 39% of sales, compared with 38% in the third quarter of last year.
The increase in gross profit margin in the third quarter is mainly due to the benefits of our continuous procurement efforts that have driven the improvement of product profit margins.
In addition, our time from distribution-related costs and net non with $700,000
Last year recorded the purchase accounting adjustments related to the acquisition of Lamrite West.
The increase in inventory shrinkage partially offset these benefits.
Our sourcing efforts, including our work to reduce the cost of our products, as well as our efforts to take advantage of our China Office and our direct purchase of more products from the factory, are all saving material costs.
We believe that the 2017 benefits of our sourcing work will be at the low end of the $40 million to $50 million range we shared at the beginning of the year, mainly driven by the sales mix and seasonality.
When we sell through stock, we recognize the benefits of these savings and we expect the remaining benefits to be transferred to 2018.
As a reminder, similar to our sourcing interests, we recognize supply chain costs when products are sold.
Moderate gains in distribution time during this quarter-
The associated costs were driven by lower international freight charges negotiated last year.
It is worth noting that in the second half of this year, we experienced some supply chain headwinds, which we expect to pass through our profit and loss in early 2018.
As Chuck mentioned, we generated some unexpected supply chain costs in terms of hurricane damage to our Jacksonville DC.
In addition, we experienced higher domestic and international transportation costs due to tight capacity.
Overall, our inventory is reduced as the percentage of sales is still low;
However, we saw a shrinking growth this year compared to last year.
As we discussed earlier, we are taking steps to address this trend, including investments in new equipment and fixtures, but embedded in our annual guidance it is expected that the contraction will continue to be
Total store rental spending for the quarter was $100 million, compared to $98 million last year, mainly due to a net increase of 16 Michaels stores.
Sales, general and administrative expenses for the quarter, including pre-store
Compared with $ 3% in the first quarter of last year, opening costs increased by 0. 33 billion to $0. 32 billion.
SG & a expenses increased by 50 basis points as a percentage of sales to 26 basis points.
6% of sales, compared to 26.
Sales in the third quarter of last year were 1%.
The increase in SG & A expenses compared to last year is mainly due to the increase in cumulative incentives --
Based on compensation.
In retrospect, in the third quarter of last year, we saw a $14 million reduction in pay based on Accrued incentives.
In addition, this year we have incremental marketing investments and higher health care costs associated with higher claims.
These increases were partially offset by revenue of about $1.
6 million fiscal year the third quarter record of 2016 of integration cost and acquisition lamrite West about.
As a result, operating income increased by 5% to $0. 154 billion or 12.
According to our initial guidance for the quarter, sales accounted for 4%.
Interest expenditure for the quarter was $33 million, about $1 million higher than in the third quarter of last year.
This increase is mainly due to the higher interest rates of our ABL and regular loan credit institutions, as well as the higher average balance of our ABL for the quarter.
The effective tax rate for this quarter is 34.
3%, 29% in the third quarter of last year.
The increase in the effective tax rate is mainly due to the fact that anifsarin benefited from an independent program related to a federal tax credit in the third quarter of last year.
In the first quarter of this year, we also experienced higher state taxes.
Our global procurement program has reduced our comprehensive effective tax rates, which partially offset these increases.
As we discussed before, our global sourcing business gives us more control over the manufacturing process and the opportunity to start reducing costs and delivering more value to our customers.
Reflecting the impact of these factors, we achieved net income in the quarter of $80 million or $0.
44 shares of diluted common stock per share, based on 0. 182 billion shares of diluted weighted average issued common stock.
We estimate the negative EPS impact caused by the hurricane to be around $0. 01.
Now looking at the balance sheet, the total inventory of goods at the end of this quarter is $1.
4 billion, up slightly from the end of last year\'s third quarter. On a per-
Compared with last year, the store inventory level fell by about 1%.
We feel good about our joining.
Inventory levels during the holiday season.
Our liquidity is still strong.
As of the end of the quarter, cash on the balance sheet was $0. 177 billion and total debt was $2.
9 billion. our revolver costs US $0. 676 billion.
Capital expenditure for the quarter was $30 million, bringing our total capital expenditure for the first nine months of this year to $73 million.
Depending on the time of the project, we now expect capital expenditures for 2017 to be around $0. 12 billion.
Finally, we continue to use our strong cash flow and balance sheet to create value for our shareholders.
We bought 2 in the third quarter.
About 4 million shares of $48.
6 million as part of our previously announced share repurchase program.
Please note that the third quarter cash flow statement includes approximately $11 million of shares purchased in the second quarter of the third quarter settlement.
Considering the time of purchase, EPS earnings were the smallest in the third quarter.
At the end of the quarter, according to the current repurchase authorization, we have about $0. 35 billion left.
As a reminder, the share repurchase plan does not have a due date, and the time and quantity of repurchase transactions under the plan will depend on market conditions, company considerations, debt agreements and regulatory requirements.
When we talked about the rest of the year, we updated the guidance to reflect our results for the third quarter and our expectations for the fourth quarter, including a more favourable Canadian exchange rate.
For modeling purposes, we now expect the average exchange rate in Canada to be $1.
A whole year.
Any change in this assumption will have an impact on our results.
We have tightened sales guidance for fiscal 2017 and now expect net sales to increase between 2. 9% and 3. 2%.
This guidance is based on expectations that comp store sales will increase by 0. 6% to 0. 9%, or 0. 4% to 0.
Increase by 7% on the basis of constant currency.
It should be reminded that fiscal 2017 is 53-
Sales impact of anniversary and 53 weeks, non-
It is planned to provide compensation weeks of approximately $80 million.
We now expect operating income to be between $0. 735 billion and $0. 745 billion.
This guide now includes the expected benefits of approximately $40 million in procurement benefits, which I have discussed before, and is also the headwinds of the $46 million decline in anifsarin\'s cumulative performance
Compensation for 2016.
We continue to plan to spend about $0. 13 billion on interest for the full year, with an effective tax rate of between 34% and 35%.
Based on these expectations, we expect the diluted earnings per share to be within the range of $2. 13 to $2.
16 based on approximately 0. 186 billion Diluted weighted average ordinary shares throughout the year.
As mentioned earlier, this guide does not take into account any potential changes in the business of Aaron Brothers.
Now moving to the fourth quarter, we expect sales in the comp store to increase between 1. 5% and 2.
5%, or 1% to 2% on a fixed currency basis.
We also plan to open a new Michaels store in the fourth quarter and close four Aaron Brothers stores.
We expect operating income for the quarter to be between $0. 354 billion and $0. 364 billion.
This guidance reflects our expectations of continuing to benefit from our procurement efforts.
It is also a reminder that SG & a benefited from a donation in the fourth quarter of last year --
Approximately $28 million related to Accrued performance
Based on compensation.
Based on these expectations, our fourth-quarter guidance on fully diluted earnings per share of common stock is $1. 15 to $1.
18, diluted weighted average number of common shares based on 0. 182 billion.
Finally, we are pleased with our performance this quarter.
Excluding the interference of the hurricane, we have seen good momentum in both online and store business, we strive to increase direct procurement, reducing product costs and managing promotions helps offset the expected resistance to cumulative incentive pay and additional marketing investments.
The result is good operating margin and EPS growth.
With this, I would like to call to answer your question. Rachel? Question-and-
The first question comes from Matt Fassler of Goldman Sachs.
Thank you so much Matt FasslerThanks, good morning.
Good morning, Matt.
The main problem with Matt FasslerMy involves some omni-
Channel innovations you are implementing, especially online purchasesUp In-Store.
After some peers in different vertical industries have implemented this strategy, you can do so.
Can you talk about what this will look like compared to a typical store?
Based on the transaction, as well as your thinking about your ticket and margin structure, etc.
Is this profit growth diluted relative to the basic business?
Chuck RubinMatt, there are a lot of nodes to provide customers with online purchases, so today we use third-party fulfillment arms in some of them and our own DCs in some, part of it is drop shipping, part of it is shipped from the store and now is the BOPUS you describe.
BOPUS, we believe this will be the most profitable among those nodes that ship online orders.
That being said, because there are additional options in the store, the profit may be less than the physical purchase that the customer goes in to serve himself.
But we are excited about BOPUS, because today it will be a more profitable node when you see our online sales and growth rates, given the price points of our goods, it eliminates the cost of fulfillment of just a difficult number.
It\'s a hard number for us to absorb, so its profit will be lower than the physical transaction, but it will be the most profitable for e-commerce.
Matt FasslerMy attention-
Chuck, up has something to do with incentive comp.
You quantify the reversal or decline in your incentive pay in the third quarter of last year.
How much did you recover from $14 million, and I think you had a figure of $26 million or $28 million in the fourth quarter of last year, in the budget that pushed you to give us guidance here, how many have been put back into the budget?
Denise paullonisso Matt, included in the figure for the third quarter, the incentives increased by $5 million
Based on compensation.
As this number changes, we have shared this number on a quarterly basis, and we have accumulated this number based on our current business results and the entire EBIT we plan for this year, so the third quarter was $5 million.
Guide Matt FasslerAnd Q4, regardless of the number, is it the whole 28 or 26, or is it part of it, let\'s find the guide for the fourth quarter?
Paulpaulloniswe did not share this level of precision, but on a side note, we took back most of the feedback from last year.
Matt FasslerSuper is very helpful.
Thank you so much, guys.
The next question comes from Steve Forbes of Guggenheim Securities.
Good morning, Steve.
Good morning, Steve.
Steve ForbesYou refers to marketing expenses as headwinds, and I think we all know that it will be headwinds;
But as you prepare for the upcoming holiday, I know you mentioned some new marketing tools, but when you think of the opportunity to take advantage of some of the marketing investments and merchandise sales changes you \'ve made this year, such as day-to-day value, what you\'re most excited about, the holidays are about growing travel, it\'s about pushing new customer acquisitions, right?
I mean, really, how good is this opportunity when you think about the upcoming holiday?
Chuck RubinSteve, I\'m excited about our plan.
I am very enthusiastic about many things.
I think we have some great holiday products here.
Our business team in the seasonal business is very strong, we have achieved a good balance in trends, key projects and values are put together, so far we are very excited about our results, we are also excited about the future.
We hope the weather will improve this year.
We are also excited about our efforts with our core customers.
We saw very good growth from them.
We \'ve talked a lot about CRM efforts and we \'ve said it before and now I\'m going to state again that it\'s a long process
Long-term efforts to collect customer data and get more improvements in the way we talk to that customer, but we see very good performance from them.
This is the new customer part of our continued efforts.
Crafting can be a very daunting activity, whether online or online, shopping in our store or any of our competitors
The store, could also be very scary, so we have done a lot of things, both digital and internal
Try to make it easier.
I am not sure if we have been there all the time, but we are excited about the progress we are making and the fourth quarter is usually a very good place for us, because we have become very good in seasonal products, we do see a lot of customers coming in, they are not very afraid of decorating their home for Christmas, for example, more than they might be in knitting or painting, so our opportunity this quarter is to try to attract more new customers and provide them with good service when they are in our store or online, then pick them up in 2018 and try to convince them to come back more.
As a follow up, you give some color on the building
These resources come from Lamrite West in mainland China, Hong Kong and Dallas.
I don\'t know if you quantified the expense drag associated with that build --
But can you share it if you can?
Then is there any more investment here, or is the team basically in place, and it\'s really time to take advantage of those assets, infrastructure, etc?
Chuck RubinWell we haven\'t calculated the cost of building a team yet, but keep in mind that when we build a team, our spending on third-party agents is also reduced.
We are using the team now.
We have imported very little direct. -
In 18 months, most of what we did was direct import, so the team did a great job of scaling up in China and Hong Kong, as well as Dallas.
We think we\'re still trying to improve something extra, but we\'re using it now.
Denise paullonisand I will add a little note on the profit and loss, that is, the cost of the office and building in China --
Out is included in our gross profit margin.
The next question comes from Christopher Horvers of JPMorgan Chase.
Thank you. good morning.
A few questions.
First of all, can you talk about what you think about gross margin? How is the promotion environment for one year? over-
Will the annual base associated with $40 million in procurement benefits benefit from gross margin benefits for the fourth quarter, taking into account the seasonality and weight of sales for the fourth quarter?
Chuck RubinChris, we talked about it before in terms of promotion, which is a very promotional industry.
We haven\'t seen it upgrade yet, though.
I know our promotion has not increased yet.
We are trying to make the promotion smarter so that not all customers see the same promotion at the same time.
We also try to sell promotions smarter, so sometimes we do an event to make them look bigger, but in fact, compared to what we did in the past, this may be a narrower product launched in the promotion.
So in general, we don\'t see a lot of changes in the industry, and I know from our perspective we continue to make some progress in managing discount dollars more intelligently, but we didn\'t have more publicity in the third quarter.
I want to remind you that when we talked about the benefits of these purchases in the past, we did say that this gave us some momentum to be able to go out and actively work on pricing in the third quarter, this is evidenced by our increased profit margin.
We can balance all our goals well.
In response to the second part of your question, that is, the impact of fourth-quarter procurement on third-quarter procurement, we will not go into great detail about what this will look like, but from a side up, you will expect it to be consistent with the third quarter.
Christopher horvers of interest rate benefits?
From an interest rate perspective, Dennis bowlonis is right.
Can you talk? -
As far as the capital structure is concerned, can you talk about how you view the economics of debt repayment and stock repurchase?
This is one of the problems we sometimes have in terms of business leverage.
Is it expensive? indiscernible]
Would the economics of the stock repurchase you hold make more sense?
Thank you, but the whole process of thinking will help.
Denise paullonisso Chris, I will take us one step back and go back to what we talked about on the phone before.
When we consider capital allocation as a whole, our main focus is on investing in businesses that we think are rewarding.
In the first few years of openness, during that time, we have significantly reduced our debt, and we think it\'s a smart move to get us into the debt level area, in which, we feel very comfortable sleeping at night.
I think you are well aware of our numbers, but our annual cash flow generation makes us very comfortable in paying interest payments.
Very simple, when you look at the stock price that exists today and the value that we think the company exists, we believe that the efficiency of buying back the stock is a good choice for us.
There are a lot of Christopher HorversThanks.
The next question comes from Simon Gutman, who works with Morgan Stanley.
Good morning Joshua Seber, today is Joshua Seber going to Simon.
Josh, Chuck RubinMorning.
Good morning, Joshua Siebel.
In the purchase plan outside of the initial savings of $40 million to $50 million, you think the potential long-term
Is there a chance?
Denise paullonisjosh, the process is an ongoing one for us when we think about it.
We have completed the first wave of many procurement categories, including some process changes and the use of the China office.
We believe there is still a lot of room to run and are using these strategies and strategies to re-examine and continue to squeeze costs out of the business.
We\'re also trying some new ways to see where else we can create opportunities, so it\'s a great pipeline for us to keep going into 2018.
With regard to conservation, Joshua sibeland, do you want to use this more for promotion and attention to value, or do you actually extend the gross profit margin to 40%?
Chuck RubinYou knows, Josh, we \'ve talked about it before, and it gives us a lot of flexibility, so we\'re going to use it to grow our business.
Now, we see a very stable promotion environment, and in the third quarter, we are able to achieve a lot of purchasing benefits.
We hope this will continue, but it does give us a lot of flexibility and we are very happy with it.
Joshua siberlock, as a follow-up
As for Steve\'s previous problems, marketing costs have risen in the past three quarters.
Have you seen the rewards you want to get in marketing?
Yes, Chuck RubinWell.
I mean, some. -
First of all, marketing spending is increasing, so this is not a substantial increase --
I want to clarify.
When you see it, we are very good at measuring the return on our marketing spending, but in the long run, we have to invest in some of these parts, for example, when we are building these digital assets, when we build the search function, we spend more money on this, and we think there will be a longer tail in terms of returns.
Overall, we are happy with our spending, but for every recent return of a dollar spent, in some parts of it, we realize that you can\'t measure it the day after you spend it, look at the return.
It will be a long term effort, especially as we continue to try to attract new customers, trying to explain to them that Michaels can make it easier for them.
This will involve part of what we spend in return for the long term.
Joshua siberlock, thank you very much.
Again, remember to limit yourself with a follow-up questionup question.
If you have any other questions, you can re-
Enter the problem queue.
The next question comes from Elizabeth Suzuki of Bank of America.
Curt NagleHi, this is Curt nagleon of Liz.
Just a quick project in the loyalty program.
I think you have increased by about 2 million members over the quarter.
It still accounts for about 50% of total sales due to the plan, and from penetration, where do you think the plan will go in the next few years?
Chuck RubinIt is somewhere in the middle. 50 range.
I\'m from a company where loyalty accounts for 90% of sales, so I\'m not quite sure it\'s that high for us, but we still see a lot of room for growth here.
Okay, Curt nagleget.
This is my only question.
Thank you very much.
Chuck RubinThank you.
The next question comes from Mike Baker of Deutsche Bank.
Thank you, Mike Baker.
In your press release, you talked about--
I can\'t remember the exact offer and am happy with the start of the holiday.
Can you provide some colors?
About Black Friday, or we know that you made a very simple comparison earlier in the last month, when we were riding a bike for last year\'s election, so could you please give us more about the color of what you saw in November? Thanks.
I don\'t want to let you down, Mike.
We will not give more colors, but we have now entered a month and we are happy with what we have seen so far.
I think it is widely reported that Black Friday weekends across the retail industry are generally good and we are satisfied with that-
Including Cyber Monday, we are happy with the results of all this, but our guidance is based on what we saw four weeks before this quarter.
Meat is still ahead of us this quarter.
I can\'t stress that, so Black Friday is usually not a good predictor for the whole quarter, but we do feel satisfied with what we saw in the first quarter, we are satisfied with our plans and the control we have.
However, our sales share is still ahead of us.
Thank you, Mike Baker.
Then as an follow-up
Well, just now I talked about tickets and traffic, tickets, what impact your promotion has on your tickets;
In other words, what drives higher fares?
We think your price is low as your promotion is a little bit more.
Does this mean that mixing will affect tickets?
Chuck RubinI I\'m not sure I heard you correctly.
We are not more propaganda.
I think you said we were,--
I apologize if I hear you wrong.
We are not more propaganda.
Tickets are affected by our existing portfolio, so seasonal ---
You know, we have very good seasonal business in the third quarter, and seasonal business tends to run at a slightly higher price.
In addition, the technical project, Cricut is one of the suppliers we sell the big ticket technology project, the big ticket is defined as a Cricut machine may need several hundred dollars, we are between the machine and the accessories that come with it, this is a blade scene for us.
We did a very good job in this and believe--
I think we are the number one retailer for Cricut at this point, so this will push the ticket up.
Thank you, Mike Baker.
Chuck RubinThank you.
The next question comes from Seth Sigman at Credit Suisse.
Good morning, Seth SigmanThanks. Nice quarter.
Just a few follow-up-
As you take a step back, you \'ve seen improvements to comps in the last few quarters.
We went through a week and a week with more volatility.
I think that\'s what you talked about in the past.
When you look at Q3 outside of the hurricane, do you feel that you are seeing more consistency now, do you think it is a function of the environment, do you think it is a function of some internal plans?
It will help as long as there are more colors.
You know, it\'s a good question, Seth. There was--
You know, the Hurricane provides enough volatility to rule this out if you want. On a week-by-
The basis of the week, I think it is quite stable.
You will still see fluctuations during the week.
I still believe that while we are satisfied with the performance of our business, the customer is still changing.
She wants value, she wants convenience, she wants simple things, and I think we\'re ready for all of this; but the day-to-
The day when she was shopping fluctuated, even within a day ---
You know, we saw some days in one day, and the time frame for her shopping changed from night to day, or from day to night.
But overall we see more stability and we feel good-
As I said, we are very pleased with our positioning in the fourth quarter and we think she--
You know, the mentality of our customers is also good, so I think that means more stability.
Seth sigmanok, this is very helpfulThen my follow-
Questions about online growth.
I just want to better understand the growth you see with touch and touch --
As you discussed earlier, the store nature of shopping.
It is clear that growth starts with a low base, but can you help us? Maybe let\'s see if your business is actually growing online, what do you know about online customers?
Is it a different customer, is it incremental, is it a different type of shopper?
More colors, thank you.
As you said, our online business is growing fast.
We doubled in the third quarter.
This is still a small part of our business, but we are very happy with its progress and its tracking is very close to where we think it will be at this stage, this gives us confidence in our plans for the future.
The product portfolio we sell online is slightly different from the one we sell in the store. It tends to be--
You know, we tend to sell more tickets online than in the store.
As far as customers are concerned, we see new customers.
Now, when we define new ones, in some cases, because we\'re still in the process of identifying customers, we think part of them is new, but they may have been unknown to us in the past, for example, they may have come in and paid cash, or we may not be able to track their credit card number.
But you know, we are happy to see that we still have some new customers.
We know that customers who shop for us online and in stores are a valuable part of our customer base.
She often shop and she spends more money with us so omni-
We believe that the customers we see are using our app to help guide them in-store.
We think this cross
The channel technology enhancements that we have implemented, we see the beginning of providing better value to those customers who take advantage of it, and we think it will continue to serve us.
But again, this is an industry that we think will be undervalued compared to other online sales industries, however, using numbers makes her experience better in stores and occasionally in e-commerce products or deals, we think this is a more exciting part for us.
Denise paullonisand if you link it to analyst day, we talk a lot about where we think the industry is in the middle of single digit penetration, and where we are far below that number, so, in some cases, the rapid growth you are seeing now starts from zero in 2014.
As Chuck mentioned, we are really catching up with more industry levels than going beyond that.
Seth Sigman Wei
Thank you for your color and happy holidays.
Chuck RubinThanks, you too.
The next question comes from Dan Wewer and Raymond James.
Please continue. Dan WewerThanks.
Chuck, after some of the changes you \'ve implemented in the last four to six months, you sound more optimistic about the framework business.
If this continues, what are the sales opportunities and incremental sales opportunities for 2018?
Is it 1, 2 percentage points, less or--?
If you can help us solve this problem?
Chuck RubinYes Dan, we haven\'t gotten into the 2018 guidelines yet, but I can tell you that there are a lot of issues with the custom framework business.
We are still very committed to this.
This is a business we are very good.
So far, we are the biggest players in the industry.
We are excited about the online product we just launched, although we do think that the online framework is more popular than the sales that different companies are doing, but we do think our online service is a great extension.
This is a very high profit part of our business because most of the products we sell are vertical, but it is a real sales experience, not a self-service environment inside our store, so, we are trying to make it all positive again.
It will become positive and we are just not sure when it will be.
As I mentioned in the prepared comments, we are excited about some of the progress we are making.
Taking into account the profit structure of this business, every step of the improvement we make, from the bottom line and bottom line point of view, is very good for us.
Again, I don\'t remember what penetration we said, but this is the single digit percentage of our entire business, so as we discussed before, we run a series of businesses, the custom framework is one of them, so it\'s less than 10% of our total sales, and it\'s just that its profit is very attractive.
So we are trying to make it better, we believe it will become positive, and when it becomes positive, we believe it will have a good boost to our bottom line.
Dan wewerok, then as a follow-up
It is worth mentioning that it seems that higher supply chain costs and increased contraction gains continue in the first half of 2018.
Can you provide more details about what caused a higher contraction?
Considering that your inventory level looks so low at this point, I find it odd.
To some extent, from the industry base we know, we still have an incredible overall competitive edge.
The decline in our history is very low, so the rise we have seen this year is more due
But we know why.
We do a lot ~
The store sells our products to make it easier for customers to try, test, and touch what they are going to buy.
One example is that we have a marker bar in front of the store where people can not only test the color, they can test the thickness of the pen that will be purchased.
Well, by default, this makes it easier for people who may not be very active to get this item.
But we are doing something good.
We continue to consider our fixtures and we continue to consider investments in technology to make it more difficult for any theft to occur, so, we mainly count stores in the first three quarters of this year, so before we read whether the changes we are making will have a significant impact on changing our current trajectory, this will enter 2018.
But again, I would like to remind you that overall, we have a very low rate of contraction compared to the industry.
Thank you, Dan wewerok.
I think we can answer another question.
Okay, thank you.
The last question comes from Alan Rifkin, who works with BTIG.
Thank you so much to Alan Rifkin.
With the acquisition of Lamrite now about 18 months, where do you think the specific areas of future synergies are, Chuck, where do you believe the future synergies are, no matter what they are, will all be implemented in calendar 18?
I have a quick trackup, please.
Chuck RubinWell, you know, the backend synergies, we\'re going to get most of what we \'ve got.
Synergy in terms of capabilities, we are taking advantage of all of this.
We said in our prepared comments that the China office we have, the China, Hong Kong office, was very small when we acquired the company.
This is a prominent part of the investment for us and it will continue to expand.
Product developer as part of Lamrite-very talented.
They helped us develop the Martha Stewart production line and we now have exclusive products in our industry;
David Tutti, I mentioned it in the comments I prepared, so they did a really good job there.
This is also scalable.
Pat Catan, a small chain store-
35, 36 stores allow us to test the new business in a very controlled environment, so we have fabrics in all the stores in Pat Catan, we have a lot of knowledge about the fabric business, we also expanded the variety of parties.
So synergy, I think I will express it in a different way.
I think the scalability of Lamrite West is good and we are getting a good use of it and I think it can continue to scale.
Thank you, Alan rickino. As a follow-
Well, you said Christmas was a little ahead of schedule.
I was wondering if you think this is good for the company do you think incremental revenue will increase with the growth of the whole holiday season or will it really start driving revenue growth later this year?
Chuck RubinYes, we said it before.
In the third quarter, whether online or in the store, this is not a significant impact on the third quarter, but it gives us a good understanding of the initial customer response, we don\'t think that what happened in the fourth quarter will be a cannibal.
We think it will be a growth and I think it is a good learning for us and we are working hard now and have some business, especially in this industry where we sell a lot of things, people actually use these things to do something for the holidays, if you can give them more time to do it, I think they responded very well.
But we don\'t think it\'s a cannibal.
Thank you, Alan rickino.
Good luck to the festival.
Thank you, Alan.
With this, let me go to the end of the call just now.
We have seen good momentum in the business, and we are encouraged by the customer\'s response to our improvements in the store and online.
At the beginning of the fourth quarter, our team was ready to serve our customers in stores and online.
As I said, we have what we are-
We have a compelling marketing plan to convey the value and solutions we offer, and we invest in creating an integrated all-round
Channel shopping experience.
As I mentioned earlier, although we do recognize that the core of the season is still ahead, we are happy with the initial start of the quarter.
We are excited about our plans and we are confident in the investments we make to support our long-term plans
We are confident that they will drive the continued momentum and provide strong, long-term
With that, let me thank you for joining us today.
We wish you all a happy holiday and we look forward to sharing our fourth quarter
Your achievements in three years. Thank you.
The meeting is now over.
Thank you for attending today\'s speech.
You can disconnect now.