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Michaels Stores' resurgence flounders Los Angeles Times By JAMES F. PELTZ The comeback of Michaels Stores Inc., the only nationwide chain in the $10-billion industry of selling arts and crafts, is in danger of unraveling -- or so investors seem to be saying. Michaels this year expects to post its second consecutive annual profit, following two years of losses totaling more than $50 million. But now, sales growth at Michaels and at some of its rivals is slowing, which has Wall Street nervous about whether Michaels can maintain its resurgence. And Michaels said last week that the slowdown is continuing. In reporting results for its fiscal third quarter ended Oct. 31, Michaels said it expects its same-store sales -- those of stores open at least a year, and retailing's benchmark indicator -- to be "flat to slightly down" through the holiday season. At the Michaels store in Medford, the manager said sales have been good but declined to comment further, referring questions to the company's corporate office. A message left at the corporate office was not returned Monday. The grim holiday outlook is the key reason Michaels' stock has plunged 36 percent so far in 1998, despite the company's earnings gains and the market's overall rebound. The stock closed Friday at $18.56, down 31 cents for the day, on Nasdaq. "Investors are certainly viewing this company with caution and waiting to see what happens," said Jason Klein, an analyst at Blackford Securities Corp. in Garden City, N.Y. Worse, no one seems quite sure what's causing fewer shoppers to buy fake flowers, sequins and other craft supplies, and whether it's just a temporary lull or a long-term shift in consumer habits. Michaels and other retailers "seem to be at a loss themselves" to explain it, Klein said. Unseasonably warm or wet weather in various regions has been cited, but analysts said the problem is nationwide. Also, Michaels and the others are reporting that the dollar amount of their average sale is holding firm or rising. It's simply that they're getting fewer shoppers. "It seems like no one really has a good answer for it," said Ozarslan Tangun, an analyst at Southwest Securities Inc. in Dallas. Michaels operates 502 Michaels stores in 46 states, Canada and Puerto Rico. The company also owns the Aaron Brothers art-supplies chain, which has 77 outlets, mostly on the West Coast. The Michaels stores sell a panoply of crafts, silk and dried flowers, frames and other art materials, hobby and needle-craft items and a variety of goods and supplies aimed at specific seasons and holidays. About 36,000 items fill the typical store. Michaels had high expectations for 1998, and the company is unquestionably healthier than it was a few years ago. In its fiscal year ended Jan. 31, Michaels earned $30 million on sales of $1.5 billion, reversing a $31-million loss the previous year. And Michaels said that in the first nine months of its current fiscal year, its profit nearly tripled to $13.4 million from $4.7 million a year earlier, even though sales rose only 9 percent, to $1.03 billion from $949 million. But Michaels' sales momentum has slowed since this summer. The retailer posted a 2 percent same-store sales drop in October and said last week that November's sales will show a single-digit drop as well. These announcements and other recent trends "lead us to believe that consumers are reining in their spending and that the arts-and-crafts industry may be in the early stages of a slowdown," said analyst Dixon Yee of Credit Suisse First Boston. Garden Ridge Corp., a Houston-based company that operates 27 crafts "megastores" east of the Rocky Mountains, also complained recently that "consumer demand softened in October" and that it "has not been pleased with the decline in customer traffic." Today's Business Index Mail Tribune Copyright � The Mail Tribune 1998, Medford, Oregon USA