Dive Brief:

• Arts and crafts retailer Michaels Companies reported net sales of $1.16 billion for its first quarter, roughly flat compared with the same period last year and falling short of analyst expectations of $1.17 billion. Comparable store sales fell 1.2%, a drop the company attributed to a decline in average customer tickets, according to a company release. Michaels stock fell by 4.7% in pre-market trading.
• Operating income fell by 4.2% to $139.3 billion while net income increased 2% to $72.2 million. Diluted earnings per share increased nearly 12% to 38 cents, or 36 cents after inventory accounting and acquisition adjustments, up from 34 cents in the prior-year period. Earnings per share narrowly beat analyst expectations of 35 cents, according to Thomson Reuters data.
• For the fiscal year, Michaels executives expect net sales growth of between 2.2% and 3.7%; comparable sales to fall somewhere between a 0.2% drop and 1.3% increase, or, on a constant currency basis basis, to remain flat or grow up to 1.5%; and diluted earnings per common share of between $2.03 and $2.15.

Dive Insight:

Michaels CEO and Chairman Chuck Rubin said he expects the company’s sales to improve in the second half of the year, after facing a “coloring headwind” in 2016, as well as disruption to stores from layout changes last year and a different kind of disruptor: the 2016 presidential election. Still, the company had to adjust expectations to account for a weakening in the Canadian dollar.

While Michaels remains a stalwart for hardcore crafters, the company still faces heady competition on several fronts. “With the acquisition of Lamrite West having largely annualized out, Michaels' overall sales growth deteriorated this quarter,” Neil Saunders, managing director of GlobalData Retail, said in comments emailed to Retail Dive. “Despite adding 12 more stores, net of closures, total sales growth flatlined — and was actually down a fraction in monetary terms. This means that, within its category, Michaels is now losing market share.”

Saunders also questioned to what extent the “coloring headwind” noted by executives — i.e., the drop off in the adult “coloring craze” that gave Michaels sales a boost in the previous year — affected the company’s sales. “While we do not dispute that this played a role, we also note that comparable sales growth over the same period last year was anemic — coming in at 0.9% on a total basis and 1.4% in constant currency terms,” he said. “In this context, this quarter's results are poor.”

Michaels acquired Lamrite West for $150 million in 2016 in an effort to boost its private label sales and direct sourcing capabilities. The retailer has made other moves to stay current and adapt to trends. That includes a partnership with Pinterest to create Make It Kits, packages that include all the necessary supplies consumers need to create specific craft projects trending on the social media platform. The partnership, announced in April, was a way for Michaels to cash in on the the DIY fervor that Pinterest has helped generate.

But even with those efforts, Michaels has lost market share, especially among casual crafters, to generalist retailers, including Amazon, Saunders said. Hobby Lobby is “a particular threat,” said Saunders, and continues to steal share from Michaels as customers rank Hobby Lobby higher “across a whole range of metrics from service to range breadth and depth.”

“At the most simplistic level, we believe Michaels is suffering from increased competition in the crafting market,” Saunders said. “The one positive coming out of the first quarter is that despite the pressures, consumer demand became more buoyant towards the end of the period. ... Even so, we still believe that Michaels will end this fiscal year with negative same-store growth: something that underlines the fact corrective action is needed.”