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Robert Stephens, CFA
Robert Stephens, CFA
Articles (169) 

Why Michaels Companies Has a Bright Future

The retailer is poised to recover

May 23, 2019 | About:

Continued investments in its omnichannel offering may lead to an improved financial performance for Michaels Companies Inc. (NASDAQ:MIK). The arts and crafts specialty retailer is focusing on its fulfilment capacity and digital operations to boost conversion rates among customers.

It is also improving the layout of its stores and changing its pricing structure in order to more effectively differentiate itself from peers.

While the wider retail sector faces an uncertain future, Michaels' plans to leverage customer data could lead to improved engagement and higher sales.

Having declined 48% in the last year versus a 4% rise for the S&P 500, the retailer could have turnaround potential.

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Omnichannel investment

Further investments in the omnichannel offering could improve its financial prospects. The company recently refreshed its website in order to make searching and browsing easier for visitors. In addition, it added new features to its app, such as visual and verbal search capabilities. These are expected to be dovetailed with greater personalization across its digital footprint based on a customer’s preferred store and shopping history.

The launch of a buy online and pick up in store service prompted an accelerated investment in the company’s fulfilment capabilities. Michaels is investing in a new order management system, while retrofitting its distribution center to support e-commerce fulfilment. This has the potential to make its supply chain more efficient, which could lead to an improved omnichannel experience in terms of availability and speed of delivery.

Innovation

Michaels is aiming to improve the in-store experience for customers. It recently converted 238 stores to its flexible merchandise area format, which leverages space at the front of the store to highlight new releases and seasonal items. Alongside this, it is in the process of upgrading its point-of-sale system in its Canadian stores to offer a faster checkout experience that could improve customer satisfaction levels.

Leveraging its customer data could lead to better-targeted and increasingly personalized offerings that help to boost brand trust and loyalty. Michaels has over 75 million customer records and is able to link more than 80% of its sales to a specific customer. Using transaction and marketing data, the company is set to develop proprietary models to customize communication across a variety of digital channels in order to boost engagement and conversion rates. Since two-thirds of its sales are from customers enrolled in its loyalty program, the use of data analytics and enhanced customer relationship management strategies could significantly improve its sales prospects.

Threats

The company continues to search for a suitable external candidate to become CEO, which could lead to increased uncertainty at a time when the wider retail sector has a challenging outlook. Retail sales declined 0.2% last month, which means they have risen just 1.1% since August. The industry’s growth rate may remain weak in the near term if additional tariffs on imports from China are passed on to consumers.

Michaels is set to make changes to its pricing strategy in order to remain relevant among consumers. Its Everyday Value Program aims to improve customers' perceptions of the value it offers. This eliminates unproductive discounting that has proven to be unhelpful for the business in recent years, causing customers to delay purchasing items that are not discounted. Although promotions are expected to remain part of the company’s pricing strategy, they are likely to form part of a holistic standpoint that aims to simplify the customer experience.

Future prospects

Next year, Michaels is expected to post a 6% increase in earnings, suggesting its forward price-earnings ratio of 4 is appealing and that the stock may offer a wide margin of safety.

Over the long run, the retailer’s plans to invest in its omnichannel capabilities may enhance its competitive position, while an improved in-store experience could lead to higher customer loyalty.

Though the prospects facing the retail sector are uncertain, a revised pricing structure and the increasing use of data analytics could improve customer engagement and conversion rates.

Having declined heavily in the last year, the stock could offer recovery potential over the long term.

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Rating: 3.0/5 (1 vote)

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Comments

Praveen Chawla
Praveen Chawla premium member - 3 weeks ago

MIK is ridiculously cheap on a p/e basis. It seems to be priced for bankruptcy. What is the market missing?

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