Retail Survival Factors
With Amazon's (Nasdaq:AMZN) stock hitting all-time highs and online shopping continuing to disrupt retail, many investors feel most comfortable turning to other industries. While there are retailers who have successfully adapted, there have also been plenty of casualties.
However, difficult environments often present investors with opportunity as noted by value investor Seth Klarman:
"Generally, the greater the stigma or revulsion, the better the bargain."
The retail companies that survive will likely need some combination of an experiential element, a product mix that lends itself to brick and mortar, and products where shoppers simply enjoy doing their shopping in-person. Gaining a holistic picture of customers across channels and leveraging this data across operations will also likely be key.
How Does Michaels Measure Up?
Arts and crafts specialty retailer The Michaels Companies (Nasdaq:MIK) appears to do well on all of these “survival factors.” The leading arts and crafts retailer by store count, Michaels has the footprint to take advantage of the approximately 68 million households who participated in at least one craft project in 2016. Across their store locations, management has increased the number of in-person craft classes and projects to create more in-store experiences.
In addition, management believes the tactile nature and low to average item prices of many of their products are more conducive to in-person shopping. Also, the company recently expanded their Axicom marketing collaboration to leverage an integrated view of their customers across both digital and offline channels.
Are these factors enough to make this retailer's stock price attractive at current levels? It appears so after taking a closer look at Michaels’ recent stock performance and employing finbox.io's valuation models to arrive at a fair value estimate for the stock.
Michaels' Stock History
Michaels recently posted a new 52-week low, continuing its downtrend since late April. The decline came amid concerns in its core crafts business (comparable sales stores decreased 0.4%) and a heavy promotional environment. However, management continues to implement strategic initiatives to address these challenges.
For example, management implemented "Michaels Rewards," a rewards and loyalty program to increase engagement and address customer pricing sensitivity. Competitors Hobby Lobby and JoAnn Fabrics and Crafts do not currently offer loyalty programs. Management also showed a willingness to leverage the online crafting community, recently partnering with Pinterest in offering all-in-one craft kits for popular Pinterest ideas.
Fair Value Estimate
Assuming these new initiatives, along with Michaels’ survival factors, can stabilize its recent comparable store sale declines, the stock looks attractively priced at current levels. If revenue can grow in the low single-digits, while maintaining EBITDA margins in the near-term, there looks to be over 30% upside for the stock.
Finbox's average fair value estimate of $26.34 across 9 different valuation models compares favorably to the stock’s recent trading price of $19.55. This estimate is also in line with Wall Street’s consensus one-year target of $25.83.
Michaels' Thesis Summary
Looking for bargains often means going to where there is sector stigma and retail certainly fits the bill. There are real concerns over Michaels’ comparable store sales declines and a heavy promotional environment. However, if management can stabilize its core craft business with recent initiatives, then the stock looks to have significant upside at current trading levels.
With The Michaels Companies set to report earnings next Tuesday morning, value investors may want to take a closer look at this retail name for a potential bargain opportunity.