Digital holdout Michaels plans 2014 IPO

The nation’s largest arts and crafts retailer plans to go public this year and the launch of a new ecommerce platform that gives Michaels Stores long overdue online sales capabilities is a key element of its growth strategy.

Michaels Stores has a strong online, mobile and social presence where it regularly engages with millions of customers, but its rudimentary Web site only allows for the sale of gift cards and a few books. That situation is expected to change this year as the operator of 1,259 stores launches a new e-commerce platform that will allow it to  drive even strong engagement and the potential to sell stuff to the millions of customers with whom it has a digital relationship. For example, Michaels had more than 180 million visitors to its Web site during the past 12 months, 1.5 million Facebook fans, 300,000 Pinterest followers and 100,000 Twitter followers, according to the company’s registration statement filed with the Securities and Exchange Commission.

“We expect our new e-commerce platform will allow us to sell much of our current assortment while also expanding into e-commerce-only products,” the company said in the filing. “Although we expect this channel will produce a more limited sales penetration than more commoditized retail categories, we believe it will augment our multi-channel strategy to broaden our customer base and improve the shopping experience.”

Beyond announcing the intended launch of the ecommerce platform, Michaels offered few details about its online plans, focusing instead on the market potential for physical stores which average about 19,000 square feet and offer 36,000 products. Michaels contends the U.S. and Canada can support 1,500 of its stores, or roughly 250 more than its current total. This year, it expects to open between 40 and 50 stores which is slightly fewer than the 54 stores the company said it opened during the nine month period ended November 2.

In addition to new stores and the launch of an ecommerce platform, other components of Michael’s growth strategy outlined in its filing include:

• Broadening the appeal of stores to those new to do-it-yourself projects as well as more experienced crafters.
• Enhancing the store experience with improved signage and open sightlines to make stores more shoppable while developing flexible store formats to address unique market opportunities.
• Reaching new and existing customers with expanded marketing efforts that include print, digital, direct mail, broadcast and community events.
• Strengthening merchandising and sourcing capabilities to better identify and source new trends, merchandise and categories that enhance our exclusive brands.

Overseeing the retailer’s growth strategy is Carl Rubin, an executive with considerable prior public company experience. He joined Michael’s as CEO in March 2013 after spending three years as president and CEO of Ulta Salon, Cosmetics & Fragrance since 2010. Prior to that, Rubin spent five years with Office Depot, last serving as president of the company’s North American Retail division and prior to that spent six year with Accenture where he was a partner.

The initial public stock offering will mark a return to public ownership for a company that was taken private in late 2006 by Bain Capital Partners and Blackstone Group. The offering will be led by J.P. Morgan and Goldman, Sachs & Co. Upon completion, the private equity concerns will retain control of the company and Michaels will receive none of the proceeds from the stock sales. Instead, the $4.4 billion retailer will remain saddled with debt of roughly $3.7 billion, but it does have some sales momentum and a host of favorable financial metrics on its side.

Sales for the nine month period ended November 2 increased 4.5% to a little more than $3 million thanks to a 2.1% same store sales increase and the addition of new selling space. Meanwhile, operating profits of $334 million during the period were essentially flat with the prior year total of $337 while net income increased to $110 million from $95 million. The company boasted an 11.1% operating margin and a 3.6% net margin during the period.


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