Dive Brief:

• Michaels is shuttering all 94 full-size custom framing Aaron Brothers stores, leaving just three smaller stores in the fleet as a "learning laboratory," the company said on Thursday.

• The 70-year old Aaron Brothers brand will be incorporated into the Michaels footprint as a store-within-a-store custom framing service. Online, the company’s framerspointe.com framing destination will be rebranded to aaronbrothers.com, as both a standalone site and as a tab on Michaels.com, CEO Chuck Rubin told analysts, according to a transcript from Seeking Alpha.

• The news comes as Michaels also reported a fourth quarter net sales increase of 8% to $1.89 billion, up from $1.75 billion in the year-ago quarter, and a same-store sales increase of 2.5% (2% on a constant currency basis), thanks to increases in average ticket and transactions. 

Dive Insight:

Sales at Michaels’ custom-framing unit have been dwindling as online players ease remote orders. It’s a small part of the craft supplies retailer’s business, so shedding Aaron Brothers stores is a logical move, according to GlobalData Retail Managing Director Neil Saunders. “In our view, having the concept as a shop-in-shop within Michaels stores and as an online service is both operationally and fiscally sound,” he added.

The retailer may even have an advantage over e-commerce upstarts. Michaels will integrate its custom-framing platform with its in-store custom framing service to make digital custom framing easier, and later this year customers will be able to drop off, pick up or return projects framed online at a Michaels store, the company said, adding that many Aaron Brothers employees will end up working at the new concessions and the three smaller "labs."

"The custom framing industry is very fragmented still and these labs stores, which average about 2,000 square feet, will help us learn how we can better compete against independent custom framing shops," Rubin said.

Despite the relatively small size of the business, framing is valuable to the retailer, he also said. “Compared to other categories, custom framing is a high touch personalized service that requires strong relationship building and selling skills,” he said. “For the last several months, we’ve tested a new management approach based on learnings from Aaron Brothers, which focuses on creating a stronger selling culture within the custom framing team and the sales results have been very encouraging.”

In fiscal 2018, that will expand to more markets and the company expects to impact about 50% of our custom framing sales with its new approach.

Meanwhile, the company is also grappling with delivery snafus that drove up split shipments and shipping costs in the quarter and plans to bring fulfillment in house over the next few years are being expedited as a result.

The retailer plans to amplify the in-store experience with more crafting workshops because of their usefulness in driving traffic to stores, which, despite online growth, still deliver the majority of sales, Rubin said. This past year, more than 1.7 million people made something with family or friends in a Michaels store, nearly 60% more than in 2016, he noted.

Michaels will likely benefit from the demise of Toys R Us, according to Saunders, but executives' weak guidance for the year gives him pause. For fiscal 2018, the company expects total sales to land between $5.2 billion and $5.3 billion and same-store sales to be flat to up 1.5%. That factors in its plans to open 19 new Michaels stores, relocate 17 Michaels stores and revamp of the framing stores.

"We are concerned with the soft sales guidance," Saunders said. "This either reflects a lack of confidence or knowledge of potential issues. Either way, it means there is some doubt as to whether Michaels will continue to move forward over the next 12 months."