This audio is auto-generated. Please let us know if you have feedback.
Dive Brief:
- S&P Global Ratings downgraded Michaels’ corporate credit rating to B- from B, according to an emailed release Friday.
- With expectations for a “shallow" recession and weak demand, analysts with the ratings agency expect Michaels’ leverage to remain “very high” before improving next year.
- S&P’s downgrade of the crafting retailer follows that of Moody’s, which lowered its corporate rating for Michaels to B2 in July.
Dive Insight:
A little over a year and a half ago, Michaels went through a leveraged buyout. In doing so, it took on new debt as an affiliate of private equity firm Apollo Global Management acquired the company for a price tag of $5 billion. The retailer at the time was coming off a year in which it added nearly $200 million to its sales as bored consumers sheltering at home took up sewing, knitting and other crafts.
The deal was part of a short-lived revival of buyouts in the retail space amid an industry resurgence in 2021. Large traditional retailers had previously lost favor with private equity firms following a rash of retail bankruptcies by alums of leveraged buyouts in the second half of the previous decade.
For the dozens that filed in the era of the “retail apocalypse,” which spilled into the early months of the COVID-19 pandemic, high debt loads from private equity acquisitions met with declines in traffic, sales and profits — a recipe for financial trouble.
In 2021, private equity firms acquired eight retail companies, including At Home, Casper, Francesca’s and Michaels, among others. (There may have been more if activist investors had gotten their way at Kohl’s and elsewhere.)
Some of those companies have now run headlong into a demand shortfall and likely recession. Michaels has joined At Home recently in getting downgraded over the mix of leverage and market challenges.
In the case of Michaels, S&P analysts noted that the retailer’s comparable sales in the second quarter fell by high single digits while freight costs cut into profitability. Meanwhile, the company’s debt has increased yet more after it pulled $326 million from its revolver in Q2 to pull forward seasonal merchandise.
Driving the sales declines at Michaels now and in coming months are slowdowns in discretionary spending as consumers grapple with food and fuel prices. More, S&P analysts said that “we believe spending habits quickly changed after the post-pandemic reopening, with a wide range of entertainment options available to compete for consumers' wallets.”
Michaels’ struggles reflect that of fellow crafting retailer Joann. Last year, Joann’s then-private equity owners also took advantage of hot financial markets, in this case using a booming IPO market to cash out some of their position in the retailer.
After public investors bought into the company, which still carried more than $750 million in total debt after its IPO — a figure that has increased in the time since — Joann too ran into the market woes of 2022. In the company’s first quarter, Joann reported a nearly 13% drop in comparable sales and margin compression of more than 500 basis points.
Looking ahead, for the crafting segment and specialty retail more broadly, the macroeconomic environment will possibly be of chief importance. With Michaels, S&P analysts hold a negative outlook, indicating the possibility of more downgrades, and said that they expect the retailer will “remain vulnerable to weakening macroeconomic conditions.”
via https://www.aiupnow.com
Ben Unglesbee, Khareem Sudlow
