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Michaels stock up as buyer is sought

As the nation's largest arts and crafts retailer reveals plans to sell, its value leaps $600-million, to 40 times earnings.

By MARK ALBRIGHT
Published March 21, 2006

Shares in Michaels Stores Inc. jumped 14 percent Monday after the nation's largest arts and crafts retailer put itself up for sale.

With 11 stores in the Tampa Bay market, Michaels hopes private equity group investors will value the company at a higher price than Wall Street. The Irving, Texas, company's market value leaped $600-million to close at a premium price of 40 times earnings Monday after news spread that Michaels hired JP Morgan Chase & Co. to find prospective buyers. The stock closed at $38.35, up $4.39. Analysts say the stock could fetch up to $43.

Debt-free Michaels reported solid but hardly spectacular sales and earnings for 2005 in a corner of retailing that some analysts think has more huge stores than demand. Michaels' fourth quarter included profit margins depressed by competitors' deep discounting and a downturn in the two-year runup of fashion yarn sales.

"The decline in fashion yarn sales helped drag down our (profit) margins for the entire store," said Michael Rouleau, the company's 67-year-old chief executive officer, who announced he is retiring after guiding the retailer the past decade.

Thanks to the growth of craft crazes as varied as bead threading, silk flower arranging and scrapbooking, an ever-growing number of retailers armed with bigger and bigger stores are fighting for a piece of the business. Rivals range from Jo-Ann Fabrics to Wal-Mart, as well as two other similar superstore chains that recently opened stores as far south as North Florida: A.C. Moore and Hobby Lobby.

If Michaels finds a buyer, it would become the latest in a string of national retailers - ranging from parts of Albertsons to all of Neiman Marcus Group and Toys "R" Us - to be taken private in the past year.

"Right now, private equity funds have never had more money, and they have never been more hungry to use it," said Howard Davidowitz, a New York investment banker who specializes in retailing.

Founded by Michael Dupey in 1962, Michaels was a 16-store Texas arts supplies chain until it was acquired by billionaire hedge fund investors Sam and Charles Wyly in 1984. The brothers recast the chain as an arts and crafts superstore chain that grew to 895 stores and sales of $3.7-billion in 2005. Earnings increased 9 percent to $220-million, or 95 cents a share, up from $202-million, or 64 cents a share, in 2004, but the company cautions that comparisons are clouded by changes in accounting procedures. Sales in stores open more than a year rose 3.6 percent.

The Wylys still have a 9 percent stake in Michaels and Charles remains chairman.

--Information from Bloomberg News was used in this report. Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified March 21, 2006, 02:30:40]