Dive Brief:
- Michaels attributed a decrease in net sales in the first quarter to the closure of 94 Aaron Brothers stores and a decrease in operating income to higher distribution costs, in part because a difficult hurricane season during the second half of 2017, according to the earnings call transcript.
- Michaels also expects "to realize $10 million to $15 million in increased transportation costs" in fiscal 2018, according to CFO Denise Paulonis.
- Michaels will also spend more in capital expenditures this year to invest in new technology and expand its e-commerce presence. In the first quarter of 2017, the company invested approximately $15.7 million in capital expenditures, whereas in the first quarter of 2018 it invested $27.8 million.
Dive Insight:
Michaels lost sales (as Paulonis confirmed to an analyst in the earnings call) due to a rough hurricane season, which Paulonis said "disrupted" a Jackson, Florida distribution center, so a lower tax rate going into 2018 and plans to invest more in capital expenditures — likely due to the tax law — could help Michaels get back on track.
Paulonis said Michaels has "historically been very strong" in the third and fourth quarters despite bad weather. Because the retailer will roll out a new store layout in the second quarter to better cater to consumer demands and convenience, she said, the second quarter sales might also slip.
"We expect the headwinds from supply chain costs and the cost impact of our investment agenda will disproportionately weigh against the first half of the year," she said.
Based on the comments made by executives in the earnings call, it seems Michaels is banking on strong third and fourth quarters. The higher supply chain costs may dwindle as the year progresses, but the high transportation costs — likely due to the capacity crunch and higher freight rates — could hamper the retailer's growth for the year.
Investing in new technology and adjusting store formats to meet consumer needs may be exactly what Michaels needs to do to avoid accumulating higher supply chain costs again: it could allow the retailer to modernize its operations and logistics to better handle bad weather down the road.