UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended November 2, 2019

Commission file number 001-36501

THE MICHAELS COMPANIES, INC.

A Delaware Corporation

IRS Employer Identification No. 37-1737959

8000 Bent Branch Drive

Irving, Texas 75063

(972) 409-1300

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.06775 par value	MIK	Nasdaq Stock Exchange

The Michaels Companies, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

The Michaels Companies, Inc. has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

The Michaels Companies, Inc. is a large accelerated filer.

The Michaels Companies, Inc. is not (1) a shell company, (2) a small reporting company or (3) an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).

As of November 26, 2019, 146,785,176 shares of The Michaels Companies, Inc.’s common stock were outstanding.

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THE MICHAELS COMPANIES, INC.

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Part I—FINANCIAL INFORMATION

		Page

Item 1.	Financial Statements	3

	Consolidated Statements of Comprehensive Income for the 13 and 39 weeks ended November 2, 2019 and November 3, 2018 (unaudited)	3

	Consolidated Balance Sheets as of November 2, 2019, February 2, 2019 and November 3, 2018 (unaudited)	4

	Consolidated Statements of Cash Flows for the 39 weeks ended November 2, 2019 and November 3, 2018 (unaudited)	5

	Consolidated Statements of Stockholders’ Deficit for the 13 and 39 weeks ended November 2, 2019 and November 3, 2018 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

Part II—OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 6.	Exhibits	33

Signatures		34

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Part I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

(Unaudited)


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
Net sales	$	1,222,021	$	1,274,058	$	3,349,430	$	3,482,835
Cost of sales and occupancy expense		780,387		795,104		2,123,171		2,173,990
Gross profit		441,634		478,954		1,226,259		1,308,845
Selling, general and administrative		322,807		340,593		933,478		970,191
Restructure and impairment charges		41,376		—		48,332		44,278
Store pre-opening costs		1,402		1,196		4,370		3,995
Operating income		76,049		137,165		240,079		290,381
Interest expense		38,781		37,798		116,274		109,493
Losses on early extinguishments of debt and refinancing costs		161		—		1,316		1,835
Other expense (income), net		78		(121)		2,931		(2,646)
Income before income taxes		37,029		99,488		119,558		181,699
Income taxes		8,324		15,719		28,615		43,557
Net income	$	28,705	$	83,769	$	90,943	$	138,142

Other comprehensive income, net of tax:
Foreign currency and interest rate swaps		1,230		3,016		(8,358)		(3,230)
Comprehensive income	$	29,935	$	86,785	$	82,585	$	134,912

Earnings per common share:
Basic	$	0.19	$	0.50	$	0.58	$	0.79
Diluted	$	0.19	$	0.50	$	0.58	$	0.78
Weighted-average common shares outstanding:
Basic		150,877		165,975		155,299		174,949
Diluted		150,925		166,570		155,342		175,851

See accompanying notes to consolidated financial statements.

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THE MICHAELS COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)


	November 2,		February 2,		November 3,
ASSETS	2019		2019		2018
Current Assets:
Cash and equivalents	$	118,387	$	245,887	$	102,670
Merchandise inventories		1,423,367		1,108,715		1,440,875
Prepaid expenses and other		73,223		98,659		100,791
Accounts receivable, net		25,224		57,328		42,997
Income taxes receivable		1,744		4,935		6,544
Total current assets		1,641,945		1,515,524		1,693,877
Property and equipment, at cost		1,733,717		1,656,098		1,642,838
Less accumulated depreciation and amortization		(1,301,785)		(1,217,021)		(1,189,442)
Property and equipment, net		431,932		439,077		453,396
Operating lease assets		1,613,527		—		—
Goodwill		94,290		112,069		119,074
Other intangible assets, net		5,043		17,238		20,591
Deferred income taxes		38,075		25,005		23,367
Other assets		20,267		19,423		28,730
Total assets	$	3,845,079	$	2,128,336	$	2,339,035

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities:
Accounts payable	$	658,182	$	485,004	$	645,469
Accrued liabilities and other		374,120		378,742		407,684
Current portion of operating lease liabilities		303,023		—		—
Current portion of long-term debt		24,900		24,900		240,261
Income taxes payable		22,520		43,907		476
Total current liabilities		1,382,745		932,553		1,293,890
Long-term debt		2,649,756		2,681,000		2,690,302
Long-term operating lease liabilities		1,374,555		—		—
Other liabilities		69,853		140,978		144,694
Total liabilities		5,476,909		3,754,531		4,128,886

Commitments and contingencies

Stockholders’ Deficit:
Common stock, $0.06775 par value, 350,000 shares authorized; 146,770 shares issued and outstanding at November 2, 2019; 157,774 shares issued and outstanding at February 2, 2019; and 158,616 shares issued and outstanding at November 3, 2018		9,850		10,594		10,700
Additional paid-in-capital		1,245		5,954		—
Treasury stock		—		—		(12,168)
Accumulated deficit		(1,620,009)		(1,628,185)		(1,781,493)
Accumulated other comprehensive loss		(22,916)		(14,558)		(6,890)
Total stockholders’ deficit		(1,631,830)		(1,626,195)		(1,789,851)
Total liabilities and stockholders’ deficit	$	3,845,079	$	2,128,336	$	2,339,035

See accompanying notes to consolidated financial statements.

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THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	39 Weeks Ended
	November 2,		November 3,
	2019		2018
Cash flows from operating activities:
Net income	$	90,943	$	138,142
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of operating lease assets		244,258		—
Depreciation and amortization		94,025		89,933
Share-based compensation		18,664		20,780
Debt issuance costs amortization		3,509		3,759
Loss on write-off of investment		5,036		—
Accretion of long-term debt, net		(195)		(385)
Restructure and impairment charges		48,332		44,278
Deferred income taxes		(9,984)		7,710
Losses on early extinguishments of debt and refinancing costs		1,316		1,835
Changes in assets and liabilities:
Merchandise inventories		(316,220)		(338,260)
Prepaid expenses and other		(14,445)		(2,886)
Accounts receivable		30,684		(18,269)
Other assets		(4,728)		(1,314)
Operating lease liabilities		(225,951)		—
Accounts payable		162,222		150,088
Accrued interest		8,441		7,850
Accrued liabilities and other		(10,471)		1,077
Income taxes		(18,318)		(79,258)
Other liabilities		(751)		734
Net cash provided by operating activities		106,367		25,814

Cash flows used in investing activities:
Additions to property and equipment		(89,632)		(119,553)

Cash flows from financing activities:
Common stock repurchased		(107,908)		(430,509)
Payments on term loan credit facility		(18,675)		(17,356)
Payment of 2020 senior subordinated notes		(510,000)		—
Issuance of 2027 senior notes		500,000		—
Borrowings on asset-based revolving credit facility		11,100		307,400
Payments on asset-based revolving credit facility		(11,100)		(89,400)
Payment of debt refinancing costs		(8,158)		(1,117)
Payment of dividends		—		(317)
Proceeds from stock options exercised		506		1,812
Net cash used in financing activities		(144,235)		(229,487)

Net change in cash and equivalents		(127,500)		(323,226)
Cash and equivalents at beginning of period		245,887		425,896
Cash and equivalents at end of period	$	118,387	$	102,670

Supplemental cash flow information:
Cash paid for interest	$	105,374	$	98,864
Cash paid for taxes	$	56,793	$	115,724

See accompanying notes to consolidated financial statements.

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THE MICHAELS COMPANIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands)

(Unaudited)


	13 Weeks Ended
											Accumulated
	Number of						Additional				Other
	Common		Common		Treasury		Paid-in		Accumulated		Comprehensive
	Shares		Stock		Stock		Capital		Deficit		Loss		Total
Balance at August 3, 2019		155,199	$	10,419	$	—	$	—	$	(1,573,843)	$	(24,146)	$	(1,587,570)
Net income		—		—		—		—		28,705		—		28,705
Foreign currency and interest rate swaps		—		—		—		—		—		1,230		1,230
Share-based compensation		—		—		—		6,424		—		—		6,424
Exercise of stock options and other awards		242		17		—		(53)		—		—		(36)
Repurchase of stock and retirements		(8,747)		(586)		—		(5,126)		(74,871)		—		(80,583)
Issuance of restricted stock awards		76		—		—		—		—		—		—
Balance at November 2, 2019		146,770	$	9,850	$	—	$	1,245	$	(1,620,009)	$	(22,916)	$	(1,631,830)

Balance at August 4, 2018		171,375	$	11,504	$	—	$	—	$	(1,700,978)	$	(9,906)	$	(1,699,380)
Net income		—		—		—		—		83,769		—		83,769
Foreign currency and interest rate swaps		—		—		—		—		—		3,016		3,016
Share-based compensation		—		—		—		8,550		—		—		8,550
Exercise of stock options and other awards		347		23		—		340		—		—		363
Repurchase of stock and retirements		(13,106)		(827)		(12,168)		(8,890)		(164,284)		—		(186,169)
Balance at November 3, 2018		158,616	$	10,700	$	(12,168)	$	—	$	(1,781,493)	$	(6,890)	$	(1,789,851)


	39 Weeks Ended
											Accumulated
	Number of						Additional				Other
	Common		Common		Treasury		Paid-in		Accumulated		Comprehensive
	Shares		Stock		Stock		Capital		Deficit		Loss		Total
Balance at February 2, 2019		157,774	$	10,594	$	—	$	5,954	$	(1,628,185)	$	(14,558)	$	(1,626,195)
Net income		—		—		—		—		90,943		—		90,943
Foreign currency and interest rate swaps		—		—		—		—		—		(8,358)		(8,358)
Share-based compensation		—		—		—		19,182		—		—		19,182
Exercise of stock options and other awards		836		57		—		449		—		—		506
Repurchase of stock and retirements		(11,987)		(801)		—		(24,340)		(82,767)		—		(107,908)
Issuance of restricted stock awards		147		—		—		—		—		—		—
Balance at November 2, 2019		146,770	$	9,850	$	—	$	1,245	$	(1,620,009)	$	(22,916)	$	(1,631,830)

Balance at February 3, 2018		181,919	$	12,206	$	—	$	21,740	$	(1,539,781)	$	(3,660)	$	(1,509,495)
Net income		—		—		—		—		138,142		—		138,142
Foreign currency and interest rate swaps		—		—		—		—		—		(3,230)		(3,230)
Share-based compensation		—		—		—		21,597		—		—		21,597
Exercise of stock options and other awards		847		57		—		1,755		—		—		1,812
Repurchase of stock and retirements		(24,150)		(1,563)		(12,168)		(45,092)		(379,854)		—		(438,677)
Balance at November 3, 2018		158,616	$	10,700	$	(12,168)	$	—	$	(1,781,493)	$	(6,890)	$	(1,789,851)

See accompanying notes to consolidated financial statements.

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THE MICHAELS COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

All expressions of the “Company”, “us”, “we”, “our”, and all similar expressions are references to The Michaels Companies, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires. Our consolidated financial statements include the accounts of The Michaels Companies, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday closest to January 31. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal 2019” relate to the 52 weeks ending February 1, 2020 and references to “fiscal 2018” relate to the 52 weeks ended February 2, 2019. In addition, all references to “the third quarter of fiscal 2019” relate to the 13 weeks ended November 2, 2019 and all references to “the third quarter of fiscal 2018” relate to the 13 weeks ended November 3, 2018. Finally, all references to “the nine months ended November 2, 2019” relate to the 39 weeks ended November 2, 2019 and all references to “the nine months ended November 3, 2018” relate to the 39 weeks ended November 3, 2018. Because of the seasonal nature of our business, the results of operations for the 13 and 39 weeks ended November 2, 2019 are not indicative of the results to be expected for the entire year.

Restructure and Impairment Charges

In March 2018 and January 2019, we closed our Aaron Brothers and Pat Catan’s stores, respectively. In the first nine months of fiscal 2019, we recorded a restructure charge related to Pat Catan’s totaling $8.2 million, primarily related to employee-related expenses and the impairment of an indefinite-lived intangible asset. In the first nine months of fiscal 2018, we recorded a restructure charge related to Aaron Brothers totaling $44.3 million, primarily related to the transfer of the rights to sell inventory and other assets to a third party to facilitate the store closures and assist with the disposition of our remaining lease obligations and employee-related expenses. In the first nine months of fiscal 2018, Pat Catan's and Aaron Brothers had net sales totaling approximately $75.5 million and $12.9 million, respectively. Excluding the restructure charges, Aaron Brothers and Pat Catan’s did not have a material impact on the Company’s operating income in the periods presented.

The Company reviews goodwill and other indefinite-lived intangible assets for impairment annually in the fourth quarter, or more frequently if events occur which indicate the carrying value of these assets may not be recoverable. In addition, long-lived assets and definite-lived intangible assets that are subject to amortization are evaluated for indicators of impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. If indications of impairment exist, fair value is generally determined using the present value of future cash flows using updated financial projections and a weighted-average cost of capital.

During the third quarter of fiscal 2019, the Company identified impairment indicators within our Darice wholesale business that were primarily due to a deterioration in sales associated with overall declining demand from customers. These indicators have led the Company to revise Darice’s forecasted sales expectations downwards resulting in a significantly lower projected operating plan. As a result, the Company performed interim impairment tests as of November 2, 2019 on Darice’s goodwill, indefinite and definite-lived intangible assets and long-lived assets, including operating lease assets.

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As a result of the interim impairment testing, the Company recorded an impairment charge of $40.1 million at November 2, 2019, consisting of $17.8 million related to goodwill, $14.4 million related to long-lived assets, including operating lease assets, and $7.9 million related to indefinite and definite-lived intangible assets. At November 2, 2019, the carrying value of Darice’s operating lease assets adjusted for the impairment charge totaled $32.5 million. The carrying value of the remaining long-lived assets related to Darice, including intangible assets, are not material.

Share Repurchase Program

In September 2018, the Board of Directors authorized a new share repurchase program for the Company to purchase $500 million of the Company’s common stock on the open market or through accelerated share repurchase transactions. The share repurchase program does not have an expiration date, and the timing and number of repurchase transactions under the program will depend on market conditions, corporate considerations, debt agreements and regulatory requirements. Shares repurchased under the program are held as treasury shares until retired. During the nine months ended November 2, 2019, we repurchased 11.6 million shares for an aggregate amount of $105.1 million. As of November 2, 2019, we had $293.5 million of availability remaining under our current share repurchase program.

Accounting Pronouncement Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). Under ASU 2016-02, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The lease standard requires companies to use a modified retrospective transition approach as of the beginning of the earliest comparable period presented in the company’s financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” which provided an additional transition option that allows companies to continue applying the guidance under the current lease standard in the comparative periods presented in the consolidated financial statements. We utilized the additional transition option to adopt ASU 2016-02 in the first quarter of fiscal 2019. As a result, the standard was applied starting February 3, 2019 and prior periods were not restated. We also elected the practical expedient permitted under the transition guidance which permits companies not to reassess prior conclusions on lease identification, historical lease classification and initial direct costs. The adoption of the standard resulted in the recognition of operating lease assets and liabilities of approximately $1.7 billion as of February 3, 2019. The adoption did not result in a material impact on our consolidated statements of comprehensive income.

Recent Accounting Pronouncement Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”) which makes significant changes to the accounting for credit losses on financial assets and disclosures. The standard requires immediate recognition of management’s estimates of current expected credit losses. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. ASU 2016-13 permits only a modified retrospective approach without restatement. We do not anticipate a material impact to the consolidated financial statements once implemented.

2. FAIR VALUE MEASUREMENTS

As defined in Accounting Standards Codification (“ASC”) 820, Fair Value Measurements (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect

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market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

●

Level 1—Quoted prices for identical instruments in active markets;

●

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

●

Level 3—Instruments with significant unobservable inputs.

Impairment losses related to store-level operating lease assets and property and equipment are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted weighted-average cost of capital and comparable store sales growth assumptions and, therefore, are classified as a Level 3 measurement in the fair value hierarchy.

Impairment losses related to goodwill and other indefinite-lived intangible assets are calculated based on the estimated fair value of each reporting unit, which is determined using significant unobservable inputs including the present value of future cash flows expected to be generated by the reporting unit using a weighted-average cost of capital, terminal values and updated financial projections for the next five years and are classified as Level 3 measurements in the fair value hierarchy.

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their estimated fair values due to the short maturities of these instruments.

The table below provides the fair values of our senior secured term loan facility (“Amended and Restated Term Loan Credit Facility”), our 8% senior notes maturing in 2027 (“2027 Senior Notes”), our 5.875% senior subordinated notes maturing in 2020 (“2020 Senior Subordinated Notes’’) and our interest rate swaps.


	November 2,		February 2,		November 3,
	2019		2019		2018
	(in thousands)
Assets
Interest rate swaps	$	—	$	—	$	5,028

Liabilities
Term loan credit facility	$	2,135,435	$	2,177,098	$	2,195,613
Senior notes		496,155		—		—
Senior subordinated notes		—		511,913		510,000
Short-term portion of interest rate swaps		11,938		2,557		571
Long-term portion of interest rate swaps		6,295		3,809		—

The fair values of our Amended and Restated Term Loan Credit Facility, our 2027 Senior Notes and our 2020 Senior Subordinated Notes were determined based on quoted market prices which are considered Level 1 inputs within the fair value hierarchy.

The fair value of our interest rate swaps was calculated using significant observable inputs including the present value of estimated future cash flows using the applicable interest rate curves and, therefore, were classified as Level 2 inputs within the fair value hierarchy. The short-term and long-term interest rate swap liabilities are recorded in accrued liabilities and other liabilities, respectively, in our consolidated balance sheets. The interest rate swap asset in fiscal 2018 is recorded in other assets in our consolidated balance sheets.

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3. REVENUE RECOGNITION

Our revenue is primarily associated with sales of merchandise to customers within our stores, customers utilizing our e-commerce platforms and through our Darice wholesale business (“Darice”). Revenue from sales of our merchandise is recognized when the customer takes possession of the merchandise. Payment for our retail sales is typically due at the time of the sale.

Right of Return

A sales return reserve is established using historical customer return behavior and reduces both revenue and cost of goods sold. The Company presents the gross sales return reserve in other current liabilities and the estimated value of the merchandise expected to be returned in prepaid expenses and other in the consolidated balance sheets.

Customer Receivables

As of November 2, 2019, February 2, 2019 and November 3, 2018, receivables from customers, which consist primarily of trade receivables related to Darice, were approximately $18.0 million, $32.1 million and $30.5 million, respectively, and are included in accounts receivable, net in the consolidated balance sheets.

Gift Cards

The gift card liability is included in accrued liabilities and other in the consolidated balance sheets. The following table includes activity related to gift cards (in thousands):


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
Balance at beginning of period	$	55,764	$	50,513	$	61,071	$	56,729
Issuance of gift cards		11,878		12,275		36,343		37,552
Revenue recognized ⁽¹⁾		(12,300)		(12,592)		(41,715)		(42,193)
Gift card breakage		(724)		(758)		(1,081)		(2,650)
Balance at end of period	$	54,618	$	49,438	$	54,618	$	49,438

(1)

Revenue recognized from the beginning liability during the third quarters of fiscal 2019 and fiscal 2018 totaled $6.9 million and $7.1 million, respectively. Revenue recognized from the beginning liability during the first nine months of fiscal 2019 and fiscal 2018 totaled $19.4 million and $19.7 million, respectively.

4. LEASES

We lease our retail store locations, distribution centers, office facilities and certain equipment under non-cancelable operating leases. Substantially all store leases have initial lease terms of approximately 10 years, the majority of which provide for one or more five-year renewal options. The exercise of lease renewal options is at the Company’s sole discretion. We include the lease renewal option periods in the calculation of our operating lease assets and liabilities when it is reasonably certain that we will renew the lease.

Our operating lease assets represent our right to use an underlying asset for the lease term and our operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In addition, operating lease assets exclude lease incentives received. As most of our leases do not contain an implicit rate of return, we use our estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. For operating leases that commenced prior to the adoption date of the new lease accounting standard, we used the incremental borrowing rate as of the adoption date. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. Our short-term non-real estate leases, which have a non-cancelable lease term of less than one year, are not included in the operating lease assets or liabilities. Short-term lease expense is recognized on a straight-line basis over the lease term.

The components of lease costs are as follows (in thousands):


	13 Weeks Ended		39 Weeks Ended
	November 2,		November 2,
	2019		2019
Operating lease cost ⁽¹⁾	$	106,294	$	316,358
Variable lease cost ⁽²⁾		38,319		110,836
Total lease cost	$	144,613	$	427,194

(1)	Includes an immaterial amount related to short-term non-real estate leases.

(2)	Includes taxes, insurance and common areas maintenance costs for our leased facilities which are paid based on actual cost incurred by the lessor. Also includes contingent rent which is immaterial in the periods presented.

Additional information related to our operating leases is as follows (in thousands, except weighted-average data):


	39 Weeks Ended
	November 2,
	2019
Operating cash outflows included in the measurement of lease liabilities	$	322,701
Operating lease assets obtained in exchange for new operating lease liabilities	$	222,887
Weighted-average remaining lease term		6.0 years
Weighted-average discount rate		5.6%

Maturities of our lease liabilities are as follows as of November 2, 2019 (in thousands):


Fiscal Year
2019	$	71,036
2020		421,971
2021		373,165
2022		311,434
2023		248,741
Thereafter		573,554
Total lease payments	$	1,999,901
Less: Interest		(322,323)
Present value of lease liabilities	$	1,677,578

Lease payments exclude $96.1 million related to 28 leases that have been signed as of November 2, 2019 but have not yet commenced.

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5. DEBT

Long-term debt consists of the following (in thousands):


			November 2,		February 2,		November 3,
	Interest Rate		2019		2019		2018
Term loan credit facility	Variable		$	2,188,775	$	2,207,450	$	2,214,994
Asset-based revolving credit facility	Variable			—		—		218,000
Senior notes	8.00	%		500,000		—		—
Senior subordinated notes	5.875	%		—		510,000		510,000
Total debt				2,688,775		2,717,450		2,942,994
Less unamortized discount/premium and debt costs				(14,119)		(11,550)		(12,431)
Total debt, net				2,674,656		2,705,900		2,930,563
Less current portion				(24,900)		(24,900)		(240,261)
Long-term debt			$	2,649,756	$	2,681,000	$	2,690,302

Revolving Credit Facility

As of November 2, 2019 and November 3, 2018, the borrowing base under our senior secured asset-based revolving credit facility (“Amended Revolving Credit Facility”) was $850.0 million, of which Michaels Stores, Inc. (“MSI”) had unused borrowing capacity of $768.0 million and $567.0 million, respectively. As of November 2, 2019 and November 3, 2018, outstanding standby letters of credit, which reduce our borrowing base, totaled $82.0 million and $65.0 million, respectively.

On August 30, 2019, MSI, as borrower, and Michaels Funding, Inc. and certain of MSI’s subsidiaries, as guarantors, entered into an amended and restated credit agreement with Wells Fargo Bank, National Association and other lenders. The amendment extends the maturity date of the Amended Revolving Credit Facility to August 30, 2024, subject to an earlier springing maturity date if certain of our outstanding indebtedness has not been repaid, redeemed, refinanced or cash collateralized or if the necessary availability reserves have not been established prior to such time. MSI is required to pay a commitment fee on the unutilized commitments under the Amended Revolving Credit Facility which is 0.25% per annum, subject to reduction to 0.20% when excess availability is less than 50% of the loan cap. The loan cap is defined as the lesser of the commitment amount and the borrowing base. All other significant terms of the Amended Revolving Credit Facility have remained unchanged.

As of November 2, 2019, net debt issuance costs totaled $3.7 million and are being amortized as interest expense over the life of the Amended Revolving Credit Facility. As a result of the refinancing of our Amended Revolving Credit Facility on August 30, 2019, MSI recorded a loss on the early extinguishment of debt of $0.2 million during the third quarter of fiscal 2019.

8% Senior Notes due 2027

On July 8, 2019, MSI issued $500 million in principal amount of 2027 Senior Notes. The 2027 Senior Notes were issued pursuant to an indenture among MSI, certain subsidiaries of MSI, as guarantors, and U.S. Bank National Association, as trustee (the “2027 Senior Notes Indenture”). The 2027 Senior Notes mature on July 15, 2027 and bear interest at a rate of 8% per year, with interest payable semi-annually on January 15 and July 15 of each year, beginning on January 15, 2020.

The net proceeds from the offering and sale of the 2027 Senior Notes, together with cash on hand, were used to redeem MSI’s outstanding 2020 Senior Subordinated Notes.

The 2027 Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of MSI’s subsidiaries that guarantee indebtedness under the Amended Revolving Credit Facility and the Amended and Restated Term Loan Credit Facility (collectively defined as the “Senior Secured Credit Facilities”).

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The 2027 Senior Notes are general, unsecured obligations of MSI, and the guarantees of the 2027 Senior Notes are general, unsecured obligations of the guarantors. They (i) rank equally in right of payment with all of MSI’s and the guarantors’ existing and future senior debt, including the Senior Secured Credit Facilities, (ii) are effectively subordinated to any of MSI’s and the guarantors’ existing and future secured debt to the extent of the value of the assets securing such debt, including the Senior Secured Credit Facilities, (iii) are structurally subordinated to all of the liabilities of MSI’s subsidiaries that are not guaranteeing the 2027 Senior Notes, and (iv) are senior in right of payment with all of MSI’s and the guarantors’ existing and future subordinated debt.

At any time prior to July 15, 2022, MSI may redeem (a) up to 40% of the aggregate principal amount of the 2027 Senior Notes with the gross proceeds from one or more Equity Offerings, as defined in the 2027 Senior Notes Indenture, at a redemption price of 108% of the principal amount plus accrued and unpaid interest thereon to, but excluding, the redemption date and/or (b) all or part of the 2027 Senior Notes at 100% of the principal amount plus any accrued and unpaid interest thereon to, but excluding, the redemption date plus a make-whole premium. Thereafter, MSI may redeem all or part of the 2027 Senior Notes at the redemption prices set forth below (expressed as percentages of the principal amount of the 2027 Senior Notes to be redeemed) plus any accrued and unpaid interest thereon to, but excluding, the applicable date of redemption, if redeemed during the twelve month period beginning on July 15 of each of the years indicated below:


Year	Percentage
2022	104	%
2023	102	%
2024 and thereafter	100	%

Upon a change in control, MSI is required to offer to purchase the 2027 Senior Notes at 101% of the aggregate principal amount, plus any accrued and unpaid interest thereon to, but excluding, the date of purchase.

Subject to certain exceptions and qualifications, the 2027 Senior Notes Indenture contains covenants that, among other things, limit MSI’s ability and the ability of its restricted subsidiaries, including the guarantors, to:

●

incur additional indebtedness or issue certain disqualified stock or preferred stock;

●

create liens;

●

pay dividends on MSI’s capital stock or make distributions or redeem or repurchase MSI’s capital stock;

●

prepay subordinated debt or make certain investments, loans, advances, and acquisitions;

●

transfer or sell assets;

●

engage in consolidations, amalgamations or mergers, or sell, transfer or otherwise dispose of all or substantially all of their assets; and

●

enter into certain transactions with affiliates.

The 2027 Senior Notes Indenture also provides for customary events of default which, if any of them occurs, would require or permit the principal of and accrued interest on the 2027 Senior Notes to become or to be declared due and payable. As of November 2, 2019, MSI was in compliance with all covenants.

As of November 2, 2019, net debt issuance costs totaled $6.0 million and are being amortized over the life of the 2027 Senior Notes. As a result of the redemption of our 2020 Senior Subordinated Notes on July 29, 2019, MSI recorded a loss on the early extinguishment of debt of $1.2 million during the second quarter of fiscal 2019.

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Interest Rate Swaps

In April 2018, we executed two interest rate swaps with an aggregate notional value of $1 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The interest rate swaps have a maturity date of April 30, 2021 and were executed for risk management and are not held for trading purposes. The objective of the interest rate swaps is to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR. The swaps replaced the one-month LIBOR with a fixed interest rate of 2.7765% and payments are settled monthly. The swaps qualify as cash flow hedges and changes in the fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair value are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect earnings. Amounts reclassified from accumulated other comprehensive income to interest expense during the third quarters of fiscal 2019 and fiscal 2018 were $1.7 million and $1.6 million, respectively. Amounts reclassified from accumulated other comprehensive income to interest expense during the nine months ended November 2, 2019 and November 3, 2018 were $3.3 million and $3.7 million, respectively.

6. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table includes detail regarding changes in the composition of accumulated other comprehensive loss (in thousands):


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
Beginning of period	$	(24,146)	$	(9,906)	$	(14,558)	$	(3,660)
Foreign currency translation		972		(942)		424		(6,528)
Interest rate swaps		258		3,958		(8,782)		3,298
End of period	$	(22,916)	$	(6,890)	$	(22,916)	$	(6,890)

7. INCOME TAXES

The effective tax rate was 22.5% in the third quarter of fiscal 2019 compared to 15.8% in the third quarter of fiscal 2018. The effective tax rate in the third quarter of fiscal 2019 was higher than the same period in the prior year primarily due to $7.1 million of tax benefits recognized in the third quarter of fiscal 2018 associated with the enactment of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The effective tax rate was 23.9% in the nine months ended November 2, 2019 compared to 24.0% in the same period in the prior year. The effective tax rate in the first nine months of fiscal 2019 was slightly lower than the same period in the prior year primarily due to a tax benefit associated with a state income tax settlement in fiscal 2019 and a $1.0 million charge in fiscal 2018 associated with the enactment of the Tax Act, partially offset by the vesting and expiration of share-based compensation awards.

8. EARNINGS PER SHARE

The Company’s unvested restricted stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by ASC 260, “Earnings Per Share”. In applying the two-class method, net income is allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Basic earnings per share is computed by dividing net income allocated to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding plus the potential dilutive impact from stock options and restricted stock units. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. There were 10.1 million and 8.4 million anti-dilutive shares during the third quarters of fiscal 2019 and fiscal 2018, respectively. There were 10.6 million and 7.1 million anti-dilutive shares during the nine months ended November 2, 2019 and November 3, 2018, respectively.

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The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share data):


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
Basic earnings per common share:
Net income	$	28,705	$	83,769	$	90,943	$	138,142
Less income related to unvested restricted shares		(40)		(138)		(108)		(285)
Income available to common shareholders - Basic	$	28,665	$	83,631	$	90,835	$	137,857

Weighted-average common shares outstanding - Basic		150,877		165,975		155,299		174,949

Basic earnings per common share	$	0.19	$	0.50	$	0.58	$	0.79

Diluted earnings per common share:
Net income	$	28,705	$	83,769	$	90,943	$	138,142
Less income related to unvested restricted shares		(40)		(138)		(108)		(284)
Income available to common shareholders - Diluted	$	28,665	$	83,631	$	90,835	$	137,858

Weighted-average common shares outstanding - Basic		150,877		165,975		155,299		174,949
Effect of dilutive stock options and restricted stock units		48		595		43		902
Weighted-average common shares outstanding - Diluted		150,925		166,570		155,342		175,851

Diluted earnings per common share	$	0.19	$	0.50	$	0.58	$	0.78

9. SEGMENTS AND GEOGRAPHIC INFORMATION

We consider Michaels-U.S., Michaels-Canada, Pat Catan’s and Darice to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting (“ASC 280”). We determined that Michaels-U.S., Michaels-Canada and Pat Catan’s have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine these operating segments into one reporting segment. Darice does not meet the materiality criteria in ASC 280 and, therefore, is not disclosed separately as a reportable segment. Our chief operating decision makers evaluate historical operating performance and forecast future periods’ operating performance based on operating income.

Our net sales by country are as follows (in thousands):


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
United States⁽¹⁾	$	1,105,178	$	1,153,784	$	3,038,315	$	3,158,393
Canada		116,843		120,274		311,115		324,442
Total	$	1,222,021	$	1,274,058	$	3,349,430	$	3,482,835

(1)

In the first quarter of fiscal 2018 we closed our Aaron Brothers stores and in the fourth quarter of fiscal 2018 we closed our Pat Catan’s stores. In the third quarter of fiscal 2018, Pat Catan’s sales totaled approximately $26.7 million. For the nine months ended November 3, 2018, Pat Catan’s and Aaron Brothers sales totaled approximately $75.5 million and $12.9 million, respectively.

10. RELATED PARTY TRANSACTIONS

Affiliates of, or funds advised by, Bain Capital Private Equity, L.P. (“Bain Capital”) and The Blackstone Group L.P. (“The Blackstone Group”) owned approximately 36% and 14% of our outstanding common stock, respectively, as of November 2, 2019. Affiliates of The Blackstone Group also held $4.9 million of our Amended and Restated Term Loan Credit Facility as of November 2, 2019.

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The Blackstone Group owns a majority equity position in RGIS, a vendor we utilized until February 2018 to count our store inventory. There were no payments associated with this vendor during the third quarter of fiscal 2018. Payments associated with this vendor during the nine months ended November 3, 2018 were $0.7 million. These expenses are included in selling, general and administrative (“SG&A”) in the consolidated statements of comprehensive income.

The Blackstone Group owns a majority equity position in ShopCore Properties, LP, Blackstone Real Estate DDR Retail Holdings III, LLC and Blackstone Real Estate RC Retail Holdings, LLC and has significant influence over Edens Limited Partnership, vendors we utilize to lease certain properties. Payments associated with these vendors during the third quarters of fiscal 2019 and fiscal 2018 were $2.5 million. Payments made during the nine months ended November 2, 2019 and November 3, 2018 were $7.5 million and $8.5 million, respectively. These expenses are included in cost of sales and occupancy expense in the consolidated statements of comprehensive income.

The Blackstone Group owns a majority equity position in JDA Software Group, Inc., a vendor we utilize for transportation and supply chain software. Payments associated with this vendor during the third quarters of fiscal 2019 and fiscal 2018 were $0.7 million and $0.3 million, respectively. Payments made during the nine months ended November 2, 2019 and November 3, 2018 were $2.3 million and $2.2 million, respectively. These expenses are included in SG&A in the consolidated statements of comprehensive income.

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11. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Our debt covenants restrict MSI, and certain subsidiaries of MSI, from various activities including the incurrence of additional debt, payment of dividends and the repurchase of MSI’s capital stock (subject to certain exceptions), among other things. The following condensed consolidated financial information represents the financial information of MSI and its wholly-owned subsidiaries subject to these restrictions. The information is presented in accordance with the requirements of Rule 12-04 under the SEC’s Regulation S-X.

Michaels Stores, Inc.

Condensed Consolidated Balance Sheets

(in thousands)


	November 2,		February 2,		November 3,
ASSETS	2019		2019		2018
Current assets:
Cash and equivalents	$	117,597	$	245,108	$	101,895
Merchandise inventories		1,423,367		1,108,715		1,440,875
Prepaid expenses and other current assets		100,165		160,767		146,317
Total current assets		1,641,129		1,514,590		1,689,087
Property and equipment, net		431,932		439,077		453,396
Operating lease assets		1,613,527		—		—
Goodwill		94,290		112,069		119,074
Other assets		63,390		61,667		73,088
Total assets	$	3,844,268	$	2,127,403	$	2,334,645

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:
Accounts payable	$	658,182	$	485,004	$	645,469
Accrued liabilities and other		373,710		378,313		407,252
Current portion of operating lease liabilities		303,023		—		—
Current portion of long-term debt		24,900		24,900		240,261
Other current liabilities		22,520		43,907		41,948
Total current liabilities		1,382,335		932,124		1,334,930
Long-term debt		2,649,756		2,681,000		2,690,302
Long-term operating lease liabilities		1,374,555		—		—
Other liabilities		125,819		199,705		156,770
Total stockholders’ deficit		(1,688,197)		(1,685,426)		(1,847,357)
Total liabilities and stockholders’ deficit	$	3,844,268	$	2,127,403	$	2,334,645

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Michaels Stores, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
Net sales	$	1,222,021	$	1,274,058	$	3,349,430	$	3,482,835
Cost of sales and occupancy expense		780,387		795,104		2,123,171		2,173,990
Gross profit		441,634		478,954		1,226,259		1,308,845
Selling, general and administrative		322,563		340,375		932,777		969,500
Restructure and impairment charges		41,376		—		48,332		44,278
Store pre-opening costs		1,402		1,196		4,370		3,995
Operating income		76,293		137,383		240,780		291,072
Interest and other expense, net		38,863		37,680		119,218		106,857
Losses on early extinguishment of debt and refinancing costs		161		—		1,316		1,835
Income before income taxes		37,269		99,703		120,246		182,380
Income taxes		8,381		15,771		28,780		43,722
Net income	$	28,888	$	83,932	$	91,466	$	138,658

Other comprehensive income, net of tax:
Foreign currency and interest rate swaps		1,230		3,016		(8,358)		(3,230)
Comprehensive income	$	30,118	$	86,948	$	83,108	$	135,428

Michaels Stores, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)


	39 Weeks Ended
	November 2,		November 3,
	2019		2018
Cash flows from operating activities:
Net cash provided by operating activities	$	104,014	$	22,855

Cash flows used in investing activities:
Additions to property and equipment		(89,632)		(119,553)

Cash flows from financing activities:
Net repayments of debt		(539,775)		(106,756)
Net borrowings of debt		511,100		307,400
Payment of debt refinancing costs		(8,158)		(1,117)
Payment of dividend to Michaels Funding, Inc.		(105,060)		(426,063)
Net cash used in financing activities		(141,893)		(226,536)

Net change in cash and equivalents		(127,511)		(323,234)
Cash and equivalents at beginning of period		245,108		425,129
Cash and equivalents at end of period	$	117,597	$	101,895

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12. SUBSEQUENT EVENT

On November 22, 2019, the Company entered into an asset purchase agreement with A.C. Moore Incorporated, and certain of its affiliates, to acquire intellectual property and the right to lease up to 40 store locations for $58 million, subject to certain purchase price adjustments. In connection with the acquisition we also leased a distribution facility in New Jersey. The store locations are expected to be reopened under the Michaels brand name in fiscal 2020 and will include the relocation of certain existing Michaels stores. The transaction is intended to expand our presence in strategic markets and better serve our customers both online and in stores.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company (and the related notes thereto included elsewhere in this quarterly report), the audited consolidated financial statements of the Company (and the related notes thereto) and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on March 19, 2019.

All of the “Company”, “us”, “we”, “our”, and similar expressions are references to The Michaels Companies, Inc. (“Michaels”) and our consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Overview

We are the largest arts and crafts specialty retailer in North America (based on store count) providing materials, project ideas and education for creative activities under the Michaels retail brand. We also operate a wholesale business under the Darice brand name and a market-leading, vertically-integrated custom framing business under the Artistree brand name. As of November 2, 2019, we operated 1,274 Michaels stores.

Net sales for the third quarter of fiscal 2019 decreased 4.1% compared to the same period in the prior year. The decrease in net sales was due primarily to a 2.2% decrease in comparable store sales and the closure of our Pat Catan’s stores in fiscal 2018. The decrease was partially offset by net sales related to 18 additional Michaels stores opened (net of closures) since November 3, 2018. Gross profit as a percent of net sales decreased 150 basis points to 36.1% during the third quarter of fiscal 2019 due to an increase in promotional activity, the impact of tariffs on inventory we purchase from China, a change in sales mix and deleveraging occupancy and distribution related costs. The decrease was partially offset by benefits from our ongoing pricing and sourcing initiatives and a decrease in inventory reserves. Operating income as a percent of net sales decreased to 6.2% for the third quarter of fiscal 2019 compared to 10.8% in the same period in the prior year. The decrease in operating income was due to a $40.1 million impairment charge recorded during the third quarter of fiscal 2019 as a result of lower than expected operating performance in our wholesale business and lower retail sales.

Certain products that we import from China have been impacted by tariffs. During the first nine months of fiscal 2019, we successfully mitigated a substantial amount of the financial impact of these tariffs. Our mitigation efforts included, among other things, selectively increasing prices on certain of our products, sourcing products from alternative countries and negotiating lower prices with our suppliers in China. If additional tariffs are implemented, we cannot provide any assurances that our mitigation efforts will be successful and, as a result, such tariffs could have a material impact on our business.

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Comparable Store Sales

Comparable store sales represents the change in net sales for stores open the same number of months in the comparable period of the previous year, including stores that were relocated or expanded during either period, as well as e-commerce sales. A store is deemed to become comparable in its 14^th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than two weeks is not considered comparable during the month it is closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes comparable in its 14^th month of operation after its reopening.

Operating Information

The following table sets forth certain operating data:


		13 Weeks Ended						39 Weeks Ended
	November 2,			November 3,			November 2,			November 3,
	2019			2018			2019			2018
Michaels stores:
Open at beginning of period		1,262			1,251			1,258			1,238
New stores		13			6			21			21
Relocated stores opened		5			4			13			20
Closed stores		(1)			(1)			(5)			(3)
Relocated stores closed		(5)			(4)			(13)			(20)
Open at end of period		1,274			1,256			1,274			1,256

Aaron Brothers stores:
Open at beginning of period		—			—			—			97
Closed stores		—			—			—			(97)
Open at end of period		—			—			—			—

Pat Catan's stores:
Open at beginning and end of period		—			36			—			36
Total store count at end of period		1,274			1,292			1,274			1,292

Other Operating Data:
Average inventory per Michaels store (in thousands) ⁽¹⁾	$	1,069		$	1,039		$	1,069		$	1,039
Comparable store sales		(2.2)	%		3.8	%		(1.7)	%		1.4	%
Comparable store sales, at constant currency		(2.1)	%		4.3	%		(1.4)	%		1.4	%

(1)	The calculation of average inventory per Michaels store excludes our Aaron Brothers and Pat Catan’s stores.

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Results of Operations

The following table sets forth the percentage relationship to net sales of line items in our consolidated statements of comprehensive income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes.


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and occupancy expense	63.9		62.4		63.4		62.4
Gross profit	36.1		37.6		36.6		37.6
Selling, general and administrative	26.4		26.7		27.9		27.9
Restructure and impairment charges	3.4		—		1.4		1.3
Store pre-opening costs	0.1		0.1		0.1		0.1
Operating income	6.2		10.8		7.2		8.3
Interest expense	3.2		3.0		3.5		3.1
Losses on early extinguishments of debt and refinancing costs	—		—		—		0.1
Other expense (income), net	—		—		0.1		(0.1)
Income before income taxes	3.0		7.8		3.6		5.2
Income taxes	0.7		1.2		0.9		1.3
Net income	2.3	%	6.6	%	2.7	%	4.0	%

13 Weeks Ended November 2, 2019 Compared to the 13 Weeks Ended November 3, 2018

Net Sales. Net sales decreased $52.0 million in the third quarter of fiscal 2019, or 4.1%, to $1,222.0 million compared to the third quarter of fiscal 2018. The decrease in net sales was primarily due to a $26.8 million decrease in comparable store sales, a $26.7 million decrease related to the closure of our Pat Catan’s stores during the fourth quarter of fiscal 2018 and a $10.4 million decrease in wholesale revenue. The decrease was partially offset by an $11.7 million increase related to 18 additional Michaels stores opened (net of closures) since November 3, 2018. Comparable store sales decreased 2.2%, or 2.1% at constant exchange rates, compared to the third quarter of fiscal 2018 due to a decrease in customer transactions, partially offset by an increase in average ticket.

Gross Profit. Gross profit was 36.1% of net sales in the third quarter of fiscal 2019 compared to 37.6% in the third quarter of fiscal 2018. The 150 basis point decrease was primarily due to an increase in promotional activity, the impact of tariffs on inventory we purchase from China, a change in sales mix and deleveraging occupancy and distribution related costs. The decrease was partially offset by benefits from our ongoing pricing and sourcing initiatives and a decrease in inventory reserves.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) was 26.4% of net sales in the third quarter of fiscal 2019 compared to 26.7% in the third quarter of fiscal 2018. SG&A decreased $17.8 million to $322.8 million in the third quarter of fiscal 2019. The decrease was primarily due to a $9.9 million decrease in performance-based compensation and other payroll-related costs and a $7.4 million decrease related to the closure of our Pat Catan’s stores during the fourth quarter of fiscal 2018. The decrease was partially offset by $2.4 million associated with operating 18 additional Michaels stores (net of closures) since November 3, 2018.

Interest Expense. Interest expense increased $1.0 million to $38.8 million in the third quarter of fiscal 2019 compared to the same period in the prior year. The increase was primarily due to $2.4 million related to a higher interest rate associated with our senior notes issued in July 2019. The increase was partially offset by a $1.1 million decrease

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related to reduced borrowings on our senior secured asset-based revolving credit facility (“Amended Revolving Credit Facility”).

Losses on Early Extinguishments of Debt and Refinancing Costs. We recorded a loss on the early extinguishment of debt of $0.2 million during the third quarter of fiscal 2019 related to the refinancing of our Amended Revolving Credit Facility.

Income Taxes. The effective tax rate was 22.5% in the third quarter of fiscal 2019 compared to 15.8% in the third quarter of fiscal 2018. The effective tax rate in the third quarter of fiscal 2019 was higher than the same period in the prior year primarily due to $7.1 million of tax benefits recognized in the third quarter of fiscal 2018 associated with the enactment of the Tax Cuts and Jobs Act of 2017 (“Tax Act”).

39 Weeks Ended November 2, 2019 Compared to the 39 Weeks Ended November 3, 2018

Net Sales. Net sales decreased $133.4 million in the first nine months of fiscal 2019, or 3.8%, to $3,349.4 million compared to the first nine months of fiscal 2018. The decrease in net sales was primarily due to an $88.4 million decrease related to the closure of our Pat Catan’s and Aaron Brothers stores during fiscal 2018, a $55.3 million decrease in comparable store sales and a $19.1 million decrease in wholesale revenue. The decrease was partially offset by $29.9 million of net sales related to 18 additional Michaels stores opened (net of closures) since November 3, 2018. Comparable store sales decreased 1.7%, or 1.4% at constant exchange rates, compared to the first nine months of fiscal 2018 due to a decrease in customer transactions, partially offset by an increase in average ticket.

Gross Profit. Gross profit was 36.6% of net sales in the first nine months of fiscal 2019 compared to 37.6% in the first nine months of fiscal 2018. The 100 basis point decrease was primarily due to the impact of tariffs on inventory we purchase from China, a change in sales mix, an increase in promotional activity and deleveraging occupancy and distribution related costs. The decrease was partially offset by benefits from our ongoing pricing and sourcing initiatives.

Selling, General and Administrative. SG&A was 27.9% of net sales in the first nine months of fiscal 2019 and fiscal 2018. SG&A decreased $36.7 million to $933.5 million in the first nine months of fiscal 2019. The decrease was primarily due to a $24.8 million decrease related to the closure of our Pat Catan’s and Aaron Brothers stores during fiscal 2018, a $19.9 million decrease in performance-based compensation and other payroll-related costs and a $4.4 million decrease in marketing expenses. The decrease was partially offset by $6.8 million associated with operating 18 additional Michaels stores (net of closures) since November 3, 2018 and $5.6 million of CEO severance expense.

Restructure and Impairment Charges. We recorded an impairment charge of $40.1 million in the third quarter of fiscal 2019 as a result of lower than expected operating performance in our wholesale business. In addition, we recorded a restructure charge of $8.2 million in the first nine months of fiscal 2019 related to the closure of our Pat Catan’s stores during the fourth quarter of fiscal 2018 and a restructure charge of $44.3 million in the first nine months of fiscal 2018 primarily related to the closure of our Aaron Brothers stores during the first quarter of fiscal 2018.

Interest Expense. Interest expense increased $6.8 million to $116.3 million in the first nine months of fiscal 2019 compared to the same period in the prior year. The increase was primarily due to $7.0 million related to higher interest rates associated with our term loan credit facility and our senior notes issued in July 2019 and $1.7 million of interest paid on our senior subordinated notes during the period between the issuance of our senior notes and the redemption of the senior subordinated notes. The increase was partially offset by a $1.0 million decrease related to reduced borrowings on our Amended Revolving Credit Facility and a $0.5 million decrease in settlement payments associated with our interest rate swaps.

Losses on Early Extinguishments of Debt and Refinancing Costs. We recorded a loss on the early extinguishment of debt of $1.3 million during the first nine months of fiscal 2019 related to the redemption of our senior subordinated notes and the refinancing of our Amended Revolving Credit Facility. We recorded a loss on the early extinguishment of debt of $1.8 million during the first nine months of fiscal 2018 related to the refinancing of our term loan credit facility.

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Other Expense (Income), Net. Other expense (income), net increased $5.6 million in the first nine months of fiscal 2019 compared to the same period in the prior year. The increase was primarily due to a $5.0 million charge related to the write-off of an investment in a liquidated business.

Income Taxes. The effective tax rate was 23.9% in the first nine months of fiscal 2019 compared to 24.0% in the first nine months of fiscal 2018. The effective tax rate in the first nine months of fiscal 2019 was slightly lower than the same period in the prior year primarily due to a tax benefit associated with a state income tax settlement in fiscal 2019 and a $1.0 million charge in fiscal 2018 associated with the enactment of the Tax Act, partially offset by the vesting and expiration of share-based compensation awards.

Liquidity and Capital Resources

We require cash principally for day-to-day operations, to finance capital investments (including possible acquisitions), purchase inventory, service our outstanding debt and for seasonal working capital needs. We expect that our available cash, cash flow generated from operating activities and funds available under our Amended Revolving Credit Facility will be sufficient to fund planned capital expenditures, working capital requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable future. Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely affected by the occurrence of any of the events described under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 or our failure to meet our debt covenants. Our Amended Revolving Credit Facility provides senior secured financing of up to $850 million, subject to a borrowing base. As of November 2, 2019, the borrowing base was $850.0 million, of which we had $82.0 million of outstanding standby letters of credit and $768.0 million of unused borrowing capacity. Our cash and cash equivalents totaled $118.4 million at November 2, 2019.

We had total outstanding debt of $2,689 million at November 2, 2019, of which $2,189 million was subject to variable interest rates and $500 million was subject to fixed interest rates. In April 2018, we executed two interest rate swaps with an aggregate notional value of $1 billion associated with our outstanding Amended and Restated Term Loan Credit Facility. The swaps replaced the one-month LIBOR with a fixed interest rate of 2.7765%.

On August 30, 2019, Michaels Stores, Inc. (“MSI”), as borrower, and Michaels Funding, Inc. and certain of MSI’s subsidiaries, as guarantors, entered into an amended and restated credit agreement with Wells Fargo Bank, National Association and other lenders. The amendment extends the maturity date of the Amended Revolving Credit Facility to August 30, 2024, subject to an earlier springing maturity date if certain of our outstanding indebtedness has not been repaid, redeemed, refinanced or cash collateralized or if the necessary availability reserves have not been established prior to such time. MSI is required to pay a commitment fee on the unutilized commitments under the Amended Revolving Credit Facility which is 0.25% per annum, subject to reduction to 0.20% when excess availability is less than 50% of the loan cap. The loan cap is defined as the lesser of the commitment amount and the borrowing base. All other significant terms of the Amended Revolving Credit Facility have remained unchanged.

On July 8, 2019, MSI issued $500 million in principal amount of 8% senior notes maturing in 2027 (“2027 Senior Notes”). The 2027 Senior Notes were issued pursuant to an indenture among MSI, certain subsidiaries of MSI, as guarantors, and U.S. Bank National Association, as trustee (the “2027 Senior Notes Indenture”). The 2027 Senior Notes mature on July 15, 2027 and bear interest at a rate of 8% per year, with interest payable semi-annually on January 15 and July 15 of each year, beginning on January 15, 2020.

The net proceeds from the offering and sale of the 2027 Senior Notes, together with cash on hand, were used to redeem MSI’s outstanding senior subordinated notes.

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The 2027 Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of MSI’s subsidiaries that guarantee indebtedness under the Amended Revolving Credit Facility and the senior secured term loan facility (“Amended and Restated Term Loan Credit Facility”) (collectively defined as the “Senior Secured Credit Facilities”).


Year	Percentage
2022	104	%
2023	102	%
2024 and thereafter	100	%

●

incur additional indebtedness or issue certain disqualified stock or preferred stock;

●

create liens;

●

pay dividends on MSI’s capital stock or make distributions or redeem or repurchase MSI’s capital stock;

●

prepay subordinated debt or make certain investments, loans, advances, and acquisitions;

●

transfer or sell assets;

●

engage in consolidations, amalgamations or mergers, or sell, transfer or otherwise dispose of all or substantially all of their assets; and

●

enter into certain transactions with affiliates.

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Our substantial indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations. Management reacts strategically to changes in economic conditions and monitors compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and flexibility.

We intend to use excess operating cash flows to invest in growth opportunities (including possible acquisitions), repurchase outstanding shares and repay portions of our indebtedness, depending on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. As such, we and our subsidiaries, affiliates and significant shareholders may, from time to time, seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. If we use our excess cash flows to repay our debt, it will reduce the amount of excess cash available for additional capital expenditures.

Cash Flow from Operating Activities

Cash flows provided by operating activities were $106.4 million in the first nine months of fiscal 2019 compared to $25.8 million in the first nine months of fiscal 2018. The increase in cash provided by operating activities was primarily due to additional collections of outstanding receivables and lower tax payments.

Inventory at the end of the third quarter of fiscal 2019 decreased $17.5 million, or 1.2%, to $1,423.4 million, compared to $1,440.9 million at the end of the third quarter of fiscal 2018. The decrease in inventory was primarily related to the closure of our Pat Catan’s stores in the fourth quarter of fiscal 2018. The decrease was partially offset by tariffs enacted on product that we purchase from China, lower sales and additional inventory associated with the operation of 18 additional Michaels stores (net of closures) since November 3, 2018. Average inventory per Michaels store (inclusive of distribution centers, in-transit and inventory for the Company’s e-commerce site) increased 2.9% to $1,069,000 at November 2, 2019 from $1,039,000 at November 3, 2018.

Cash Flow from Investing Activities

The following table includes capital expenditures paid during the periods presented (in thousands):


	39 Weeks Ended
	November 2,		November 3,
	2019		2018
New and relocated stores including stores not yet opened ⁽¹⁾	$	10,787	$	27,399
Existing stores		23,257		32,694
Information systems		40,132		43,602
Corporate and other		15,456		15,858
	$	89,632	$	119,553

(1)

In the first nine months of fiscal 2019, we incurred capital expenditures related to the opening of 34 Michaels stores, including the relocation of 13 stores. In the first nine months of fiscal 2018, we incurred capital expenditures related to the opening of 41 Michaels stores, including the relocation of 20 stores.

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Non-GAAP Measures

The following table sets forth certain non-GAAP measures used by the Company to manage our performance and measure compliance with certain debt covenants. The Company defines “EBITDA” as net income before interest, income taxes, depreciation and amortization. The Company defines “Adjusted EBITDA” as EBITDA adjusted for certain defined amounts in accordance with the Company’s Senior Secured Credit Facilities.

The Company has presented EBITDA and Adjusted EBITDA to provide investors with additional information to evaluate our operating performance and our ability to service our debt. Adjusted EBITDA is a required calculation under the Company’s Senior Secured Credit Facilities that is used in the calculations of fixed charge coverage and leverage ratios, which, under certain circumstances determine mandatory repayments or maintenance covenants and may restrict the Company’s ability to make certain payments (characterized as restricted payments), investments (including acquisitions) and debt repayments.

As EBITDA and Adjusted EBITDA are not measures of liquidity calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), these measures should not be considered in isolation of, or as substitutes for, net cash provided by operating activities as an indicator of liquidity. Our computation of EBITDA and Adjusted EBITDA may differ from similarly titled measures used by other companies.

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The following table shows a reconciliation of EBITDA and Adjusted EBITDA to net income and net cash provided by operating activities (in thousands):


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018
Net cash provided by operating activities	$	108,475	$	112,376	$	106,367	$	25,814
Amortization of operating lease assets		(81,397)		—		(244,258)		—
Depreciation and amortization		(31,295)		(30,879)		(94,025)		(89,933)
Share-based compensation		(6,658)		(8,446)		(18,664)		(20,780)
Debt issuance costs amortization		(970)		(1,237)		(3,509)		(3,759)
Loss on write-off of investment		—		—		(5,036)		—
Accretion of long-term debt, net		(67)		129		195		385
Restructure and impairment charges		(41,376)		—		(48,332)		(44,278)
Deferred income taxes		10,023		(6,940)		9,984		(7,710)
Losses on early extinguishments of debt and refinancing costs		(161)		—		(1,316)		(1,835)
Changes in assets and liabilities		72,131		18,766		389,537		280,238
Net income		28,705		83,769		90,943		138,142
Interest expense		38,781		37,798		116,274		109,493
Income taxes		8,324		15,719		28,615		43,557
Depreciation and amortization		31,295		30,879		94,025		89,933
Interest income		(297)		(137)		(2,012)		(2,385)
EBITDA		106,808		168,028		327,845		378,740
Adjustments:
Losses on early extinguishments of debt and refinancing costs		161		—		1,316		1,835
Share-based compensation		6,658		8,446		18,664		20,780
Restructure and impairment charges		41,376		—		48,332		44,278
Severance costs		1,683		—		10,744		902
Store pre-opening costs		1,402		1,196		4,370		3,995
Store remodel costs		174		1,325		242		5,079
Foreign currency transaction losses (gains)		192		(149)		659		(950)
Store closing costs		478		(328)		(469)		3,321
Other ⁽¹⁾		1,788		754		4,489		2,035
Adjusted EBITDA	$	160,720	$	179,272	$	416,192	$	460,015

(1)	Other adjustments primarily relate to items such as moving and relocation expenses, franchise taxes, sign-on bonuses, directors fees and CEO search costs.

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Disclosure Regarding Forward-Looking Information

The above discussion, as well as other portions of this Quarterly Report on Form 10-Q, contains forward-looking statements that reflect our plans, estimates and beliefs. Statements regarding sufficiency of capital resources and planned uses of excess cash flow as well as any other statements contained herein (including, but not limited to, statements to the effect that Michaels or its management “anticipates”, “plans”, “estimates”, “expects”, “believes”, “intends” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our Annual Report. Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance or achievements to be materially different from anticipated results, prospects, performance or achievements expressed or implied by such forward-looking statements. Most of these factors are outside of our control and are difficult to predict. Such risks and uncertainties include, but are not limited to the following:

●

risks related to the effect of economic uncertainty;

●

risks related to our substantial indebtedness;

●

restrictions in our debt agreements that limit our flexibility in operating our business;

●

changes in customer demand could materially adversely affect our sales, results of operations and cash flow;

●

competition, including internet-based competition, could negatively impact our business;

●

a weak fourth quarter would materially adversely affect our results of operations;

●

unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our sales, results of operations, cash flow and financial condition;

●

evolving foreign trade policy (including tariffs imposed on certain foreign-made goods) may adversely affect our business;

●

our reliance on foreign suppliers increases our risk of obtaining adequate, timely and cost-effective product supplies;

●

our results may be adversely affected by serious disruptions or catastrophic events, including geo-political events and weather;

●

our failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information, which could result in an additional data breach, could materially adversely affect our financial condition and operating results;

●

we may be subject to information technology system failures or network disruptions, or our information systems may prove inadequate, resulting in damage to our reputation, business operations and financial condition;

●

our failure to increase comparable store sales and open new stores could impair our ability to improve our sales, profitability and cash flows;

●

damage to the reputation of the Michaels brand or our private and exclusive brands could adversely affect our sales;

●

risks associated with the suppliers from whom our products are sourced and transitioning to other qualified vendors could materially adversely affect our revenue and profit growth;

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●

changes in regulations or enforcement, or our failure to comply with existing or future regulations, may adversely impact our business;

●

significant increases in inflation or commodity prices such as petroleum, natural gas, electricity, steel, wood, and paper may adversely affect our costs, including cost of merchandise;

●

improvements to our supply chain may not be fully successful;

●

we are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries;

●

the Company’s ability to execute its strategic initiatives could be impaired if it fails to retain its senior management team;

●

any difficulty executing or integrating an acquisition, a business combination or a major business initiative could adversely affect our business or results of operations;

●

our marketing programs, e-commerce initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results of operations;

●

product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our operations, merchandise offerings, reputation, results of operation, cash flow, and financial condition;

●

changes in estimates or projections used to assess fair value of intangible assets, goodwill and property and equipment may cause us to incur impairment charges that could adversely affect our results of operations;

●

disruptions in the capital markets could increase our costs of doing business;

●

our real estate leases generally obligate us for long periods, which subjects us to various financial risks;

●

we have co-sourced certain of our information technology, accounts payable, payroll, accounting and human resources functions, and may co-source other administrative functions, which makes us more dependent upon third parties;

●

failure to attract and retain quality sales, distribution center and other team members in appropriate numbers as well as experienced buying and management personnel could adversely affect our performance;

●

affiliates of, or funds advised by, Bain Capital Private Equity, L.P. and The Blackstone Group L.P. own approximately 36% and 14%, respectively, of the outstanding shares of our common stock and as a result will have the ability to strongly influence our decisions, and they may have interests that differ from those of other stockholders; and

●

our holding company structure makes us, and certain of our direct and indirect subsidiaries, dependent on the operations of our, and their, subsidiaries to meet our financial obligations.

For more details on factors that may cause actual results to differ materially from such forward-looking statements see the Risk Factors section of our Annual Report. Except as required by applicable law, we disclaim any intention to, and undertake no obligation to, update or revise any forward-looking statement.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries. Our sales, costs and expenses of our Canadian subsidiaries, when translated into U.S. dollars, can fluctuate due to exchange rate movement. A 10% increase or decrease in the exchange rate of the Canadian dollar would have increased or decreased net income by approximately $9 million for the 39 weeks ended November 2, 2019.

Interest Rate Risk

We have market risk exposure arising from changes in interest rates on our Amended and Restated Term Loan Credit Facility and our Amended Revolving Credit Facility. The interest rates on our Amended and Restated Term Loan Credit Facility and our Amended Revolving Credit Facility will reprice periodically, which will impact our earnings and cash flow. In April 2018, we executed two interest rate swap agreements with an aggregate notional value of $1 billion which are intended to mitigate interest rate risk associated with future changes in interest rates for borrowings under our Amended and Restated Term Loan Credit Facility. As a result of these interest rate swaps, our exposure to interest rate volatility for $1 billion of our Amended and Restated Term Loan Credit Facility was eliminated beginning in the second quarter of fiscal 2018. The interest rate on our 2027 Senior Notes is fixed. Based on our overall interest rate exposure to variable rate debt outstanding as of November 2, 2019, a 100 basis point change in interest rates would impact income before income taxes by approximately $12 million for fiscal 2019. A 100 basis point change in interest rates would impact the fair value of our long-term fixed rate debt by approximately $13 million. A change in interest rates would not materially affect the fair value of our variable rate debt as the debt reprices periodically.

Inflation Risk

We do not believe inflation and changing commodity prices have had a material impact on our net sales, income from continuing operations, plans for expansion or other capital expenditures for any period presented in this report. However, we cannot be sure inflation and changing commodity prices will not have an adverse impact on our operating results, financial condition, plans for expansion or other capital expenditures in future periods.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the SEC under the Exchange Act) designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. We note the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms.

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Change in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended November 2, 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There were no material changes to the disclosure made in Note 14 to the consolidated financial statement in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

ITEM 1A. RISK FACTORS

There have been no material changes to the Risk Factors described in the Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides certain information with respect to our purchases of shares of the Company’s common stock during the third quarter of fiscal 2019:


					Approximate Dollar Value
				Total Number of	of Shares That May
				Shares Purchased	Yet Be Purchased
	Total Number of	Average Price		as Part of Publicly	Under the Plan ⁽²⁾
Period	Shares Purchased ⁽¹⁾	Paid per Share		Announced Plan ⁽²⁾	(in thousands)
August 4, 2019 - August 31, 2019	3,156	$	5.59	—	$	373,353
September 1, 2019 - October 5, 2019	8,640,642		9.32	8,582,771		293,524
October 6, 2019 - November 2, 2019	3,889		8.70	—		293,524
Total	8,647,687	$	9.32	8,582,771	$	293,524

(1)

These amounts reflect the following transactions during the third quarter of fiscal 2019: (i) the repurchase of shares as part of our publicly announced share repurchase program and (ii) surrender of shares of common stock to the Company to satisfy tax withholding obligations in connection with the vesting of employee restricted stock equity awards.

(2)

In September 2018, the Board of Directors authorized the Company to purchase up to $500 million of the Company’s common stock on the open market or through accelerated share repurchase transactions. The share repurchase program does not have an expiration date. The Company has retired and intends to continue to retire shares repurchased under the program.

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ITEM 6. EXHIBITS

(a)

Exhibits:


Exhibit Number		Description of Exhibit

10.1		First Amendment to Third Amended and Restated Credit Agreement, dated as of August 30, 2019, among Michaels Stores, Inc., Michaels Funding, Inc., various subsidiaries of Michaels Stores, Inc., Wells Fargo Bank, National Association, as administrative agent and collateral agent, the lenders party thereto and the other agents named therein (previously filed as Exhibit 10.1 to Form 8-K filed by the Company on September 4, 2019, SEC File No. 001-36501).

10.2		Letter agreement, dated October 11, 2019, by and among the Company and certain investment funds affiliated with The Blackstone Group Inc. and Bain Capital Private Equity, L.P. (previously filed as Exhibit 10.1 to Form 8-K filed by the Company on October 11, 2019, SEC File No. 001-36501).

10.3*		Amendment to Letter Agreement, effective October 21, 2019, between Michaels Stores, Inc. and Mark S. Cosby (filed herewith).

10.4*		Restricted Stock Unit Agreement, dated October 21, 2019, between The Michaels Companies, Inc. and Mark S. Cosby (filed herewith).

10.5*		Stock Option Agreement, dated October 21, 2019, between The Michaels Companies, Inc. and Mark S. Cosby (filed herewith).

10.6*		Form of Restricted Stock Unit Agreement, dated November 4, 2019, between The Michaels Companies, Inc. and Mark S. Cosby (filed herewith).

10.7*		Restricted Stock Award Agreement, dated November 4, 2019, between The Michaels Companies, Inc. and Philo Pappas (filed herewith).

31.1		Certifications of Mark S. Cosby pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certifications of Denise A. Paulonis pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Management contract or compensatory plan or agreement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	THE MICHAELS COMPANIES, INC.

	By:	/s/ Mark S. Cosby
		Mark S. Cosby
		Chief Executive Officer and Director
		(Principal Executive Officer)

	By:	/s/ Denise A. Paulonis
		Denise A. Paulonis
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: December 6, 2019