Michaels' Stores: Arts, Crafts, and Profits

07/04/2003 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

"One of the byproducts of the recent tax plan will be a big boost in dividends at many companies," says Charles Carlson, editor of The Drip Investor, a leading source  of information on dividend reinvestment plans. "Indeed, with dividends now being taxed at a maximum 15% rate, companies will be doing all they can to shell out big dividends to shareholders. More companies will also initiate dividends, such as our latest featured stock, Michael's Stores."

"Michaels Stores (MIK NYSE) is the world’s largest retailer of arts, crafts, framing, floral, decorative wall décor, and seasonal merchandise for the hobbyist and do-it-yourself home decorator. The company owns and operates more than 770 Michaels’ stores. This retailing niche has been growing rapidly over the years. Michaels’ sales were $2.8 billion in fiscal 2003 ended in January, more than double the revenue from 1996. The company’s net income has grown sharply as well, increasing nearly fivefold since 1997.

"Tough weather conditions have hampered sales for most retailers this year, and Michaels has been no exception. More recently, however, sales trends have been improving. For fiscal 2004 overall, Michaels should see per-share profits jump 16% to $2.44. Over the long term, store expansion and an improved inventory system should help drive profits. The stock trades at 16 times consensus fiscal 2004 earnings. That multiple seems on the low side relative to the company’s expected earnings growth and dominance of its particular retail niche.

"As the company’s sales trends continue to improve, the stock should gain more backers. The current price provides an opportunity to buy good merchandise on sale. Sales trends are improving, and the company’s specialty niche has ample growth potential over the next several years. The stock provides an aggressive growth selection in the retailing sector. I would feel very comfortable buying the stock at current prices and stepping up buying on dips into the low $30s."

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