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306 Parker Circle
Lawrence, KS 66049
Phone: 785-760-5071
Email: mike@clnonline.com


A view of the industry through the eyes of a chain buyer.

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Highlights of Michaels' SEC Filing

The finances and the plans.

Staff Report (June 4. 2012)

(Note: Recently Michaels filed a statement with the Securities & Exchange Commission regarding its intent to hold an Initial Public Offering (IPO) of common stock. Below are highlights of the 220-page filing. To read the complete filing, click HERE.)

New Stores. During this fiscal year, "we anticipate opening 45 to 50 new Michaels stores, which includes 10 to 15 relocations, 10 to 15 new urban and small-market formats, as well as seven stores in Québec." There are plans to open stores in Puerto Rico by 2014. Store openings will be funded primarily by cash flow.

Products. "We plan to increase the penetration of our private branded products assortment and believe additional opportunities exist through global sourcing and product design to reduce costs and balance value, selection and new product introductions. We will continue to replace third party offerings with our private branded products to enhance our gross margin. In addition to capitalizing on our direct sourcing capabilities, increasing our private brand offerings will allow us to more effectively tailor our products to customer tastes, control costs and manage our supply chain."

Media. "A substantial portion of our promotional activities utilize circular advertisements in local newspapers. A continued decline in consumer subscriptions of these newspapers could reduce the frequency with which consumers receive our circular advertisements, thereby negatively affecting sales, results of operations and cash flow." (CLN's Comment: Yet more evidence of the change in hard-copy publishing.)

Execs. "We are dependent on the services, abilities and experience of our executive officers, including John B. Menzer, our Chief Executive Officer, and Charles M. Sonsteby, our Chief Administrative Officer and Chief Financial Officer. Mr. Menzer is currently on medical leave from the Company and the timing of his return is unclear. The permanent loss of the services of any of these senior executives and any change in the composition of our senior management team could have a negative impact on our ability to execute on our business and operating strategies."

IPO Purpose. Proceeds from the stock offering will be used to to repurchase or redeem all outstanding indebtedness under the Subordinated Discount Notes (an aggregate amount of $306 million of which was outstanding as of January 28, 2012), and to repurchase or redeem all, or a portion, of the Senior Subordinated Notes (an aggregate amount of $393 million of which was outstanding as of January 28, 2012). Michaels plans to repay any remainder of the Senior Subordinated Notes with cash on hand. Any excess proceeds will be used for working capital and other general corporate purposes.

Miscellaneous. The private brand merchandise represented 44% of total net sales, up from 32% in fiscal 2010. … Direct imports, as a percent of total sales, increased to 26% compared to 23% in fiscal 2010. … There will be "frequent" merchandise resets.

Vendor Allowances. "We recognized vendor allowances of $115 million, or 2.7% of Net sales, in fiscal 2011, $112 million, or 2.8% of Net sales, in fiscal 2010, and $133 million, or 3.4% of Net sales, in fiscal 2009….As a result of our increased direct import penetration, vendor allowances, as a percentage of sales, have been declining and we expect this trend to continue in future years."

Gift Cards. "We record a gift card liability on the date we issue the gift card to the customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. The deferred revenue associated with outstanding gift cards increased $4 million from $26 million at January 29, 2011, to $30 million as of January 28, 2012."

Legal. There are numerous lawsuits pending:

1. Some related to the pin pad tampering that occurred in approximately 90 stores last year.

2. To date, MasterCard has assessed approximately $400,000 of re-issuance fees and alleged fraud losses. Michaels is appealing.

3. Lawsuits, usually in California, claiming managers and employees were not paid properly.

4. A lawsuit in Ohio claiming "Michaels advertised discounts on its framing products and/or services without actually providing a discount to its customers since Michaels has a perpetual sale on framing products and/or services in its stores."

Management Fees. Michaels paid "$13 million and $14 million for fiscal 2011 and fiscal 2010, respectively, consisting of management fees and associated expenses paid to our Sponsors [Bain and Blackstone] and Highfields Capital Management, L.P."

Bain. The company owns a piece of various vendors Michaels uses:

1. From 2009 to 2011, Michaels paid $83.3 million to Unisource for printing Michaels circular ads. Bain owns 58% of Unisource, but Michaels stopped using Unisource during the first quarter of fiscal 2011.

2. Bain also owns approximately 51% of LogicSource, an external vendor for "print procurement services" beginning in the fourth quarter of fiscal 2010. Since then Michaels has paid LogicSource $5+ million.

3. Bain also owns an approximately 28% of HD Supply, a vendor used for non-merchandise supplies. Michaels paid HD approximately $1.1 million during fiscal 2009, but has not used them since.

4. Bain also owns approximately 14% of Sungard, utilized for certain integrated software and processing services. The Blackstone Group owns a piece of  Sunguard, too – approximately 12%. In three years Michaels paid Sungard $0.6 million.

Blackstone. The company also owns a piece of various Michaels vendors.

1. Has a participation agreement with CoreTrust Purchasing Group ("CPG"), a division of HealthTrust Purchasing, designating CPG as Michaels' exclusive "group purchasing organization" to purchase certain non-merchandise products and services from other vendors. CPG receives a commission from the vendors and remits a portion of the commission to an affiliate of Blackstone.

2. Blackstone owns approximately 77% of RGIS, for count store inventory. In the last three years Michaels paid RGIS $19.1 million.

3. Blackstone owns approximately 67% of Vistar, used for all of the candy-type items in the stores. In the past three years, Michaels has paid Vistar $57.6 million.

4. During the second quarter of fiscal 2011, Blackstone acquired approximately 99% of Centro Properties Group, a vendor utilized to lease certain properties. Michaels paid Centro $3.2 million in fiscal 2011 and expects to pay $6.0 million this fiscal year.

5. An affiliate of Blackstone is Equity Healthcare which negotiates with providers of health benefit plans and other services. Michaels pays a fee of $2 per employee per month. In recent years Michaels has had 5,400, 5,700, and 5,800 employees enrolled in health and welfare benefit plans

6. Blackstone owns approximately 99% of Hilton Hotels, used for "hospitality services." . In the past two years Michaels has paid Hilton $2.4 million.

7. In fiscal 2010 and 2009, The Blackstone Group owned approximately 6% of Allied Waste, used for waste management services. During that period Michaels paid Waste Management $1.7 million.

8. In fiscal 2009, Blackstone owned approximately 28% of Freedom Communications, used for newspaper advertisements. Michaels paid Freedom $1.7 million in fiscal 2009.

9. Blackstone Group owns approximately 99% of La Quinta, used as the preferred hotel provider. In the past three year Michaels has paid La Quinta $0.5 million.

Underwriters. Financial institutions involved in the IPO are J.P. Morgan Securities, Goldman, Sachs, Barclays Capital, Deutsche Bank Securities, Merrill Lynch, Pierce, Fenner & Smith, Credit Suisse Securities (USA), Morgan Stanley, and Wells Fargo Securities.



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