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Editor's Note: Below is a quick flashback on our long Michaels (MIK) research call from our Retail analysts Brian McGough and Jeremy McLean.

Brian and Jeremy officially added $MIK to the long side on 9/7/2020, took it higher on 10/4/2020, sending their long calls directly to Retail Pro subscribers each time. Hedgeye CEO Keith McCullough gave the Buy Signal on $MIK on 11/9/20 at $7.68 over Real-Time Alerts. Click HERE for further in-depth Retail Pro research.

FLASHBACK | Long $MIK Retail Analysis - 3 3 2021 2 34 35 PM

WHAT McCullough WROTE On 11/9/20

BUY SIGNAL MIK $7.68 

(Trade & Trend Duration)

With the "value" narrative out in full force today, there are A) very few stocks that are cheaper on the Hedgeye Long List than Michaels Companies (MIK) and B) few ways to capitalize on kids getting home schooled by the current #acceleration in COVID cases. 

That's right, the vaccine isn't ending everything you live through just yet,

KM

WHAT MCGOUGH & Mclean WROTE ON 10/4/21

Taking MIK higher on the long bias list.  The setup for MIK here resembles what BBBY has seen over the last few months.  MIK is trading at just 5x EPS, with very high short interest (44% of float is short), leverage and with a catalyst of a strengthening category.  MIK management also set a low bar for near term (by saying nothing) and long term expectations (with 1.5% to 2.5% sales growth) at its virtual analyst day a couple weeks back. 

We’re not bullish on BBBY like we are for MIK, as BBBY is still losing share and we are not sure its fixable long term, but riding the wave of category acceleration BBBY got a huge revaluation when earnings were better than expected.  Like BBBY, MIK has a new management team working on turning around the business, and whether it’s execution driven, or simply from category strength, a quarter or two of solid performance for MIK will convince the market that it is significantly undervalued. 

We think MIK will be around for the long term, and its business will be improving as fall home décor/decorating demand remains strong and demand for crafting and other inside activities grows as US households shift their entertainment from doing stuff outdoors to indoors when winter approaches. 

WHAT MCGOUGH & MCLEAN WROTE ON 9/7/21

Michaels (MIK): Adding to Long Bias list after a solid 2Q. I was surprised by the 15% sell off in Michaels on the print. The company put up a quarter that was much better than decent, and well ahead of consensus on almost every metric. Comps came in at 12% -- which is huge for a company like MIK -- vs the Street’s expectation for a 6% decline. Gross margin and SG&A each beat by about 400bps, with total EBIT margins coming in at 9.2% vs the Street at 1.5% (and last year at 7.3%). Inventory is in great shape – down 19% -- almost too lean. But I’ll take that any day. Liquidity is at $1.3bn, $100mm better than pre-pandemic. E-comm growth in the quarter was up 350%, which is one of the biggest e-comm gains we’ve seen from any retailer reporting 2Q earnings.

The knock is that it’s dilutive to the GM% rate, but did not get in the way of the company beating GM/EPS. The only real negative I heard from the call is that management noted that it benefitted from stimulus during the quarter and that it will be difficult to game what 2H sales will be in the absence of another round of stimulus. That said, 3Q sales performance has been strong to date. All in, it’s surprising that such a heavily shorted stock (34% of the float is short) would trade off so fiercely on this kind of earnings report. In fairness, the stock has doubled off the March bottom, so expectations were not at rock bottom -- though it still trades at sub-7x earnings.

Ultimately, the question that needs to be answered is whether or not Michaels is a survivor. My sense is that the answer is Yes – though likely at a high-single digit margin.  The consensus has steady-state margins going from low double digit pre-pandemic to 8-9% in recovery, which, for the first time in years borders on realistic for MIK. Expectations for 3Q came assume a sharp deceleration in sales vs current trend, which should prove too conservative.

What we Tweeted along the way