Michaels Stores, Inc. Reports First Quarter Results

Market Wire, May, 2008

Michaels Stores, Inc. today reported unaudited financial results for the first quarter of fiscal 2008 ended May 3, 2008. Total sales for the quarter were $847 million, a 1.0% increase from fiscal 2007 first quarter sales of $839 million. Same-store sales for the comparable 13-week period decreased 2.9%.

Chief Executive Officer, Brian Cornell, said, "While our overall comps for the first quarter declined 2.9%, we were very encouraged with the sales of our Kids and Specialty Craft categories, Scrapbooking and Frame and Art Supplies. Sales in April showed a reversal of trend with same-store sales up 3.1% on a strong increase in transactions. This positive sales and transaction performance gives us confidence that our new marketing and merchandising programs are connecting with our Michaels customers."

Mr. Cornell continued, "We are pleased with the recent performance trends in our newly reset Jewelry and Beading category, the launch of our Kids Craft program, 'The Knack,' and more effective promotional activity that is driving profitable sales growth and consumer traffic."

Mr. Cornell concluded, "In addition, we continue to make progress on our long-term key business initiatives. We are investing prudently in our business and are focused on the transition from competing on supply to winning on demand. We are confident these new programs and initiatives will continue to positively impact our business over the balance of 2008 and beyond."

First Quarter Results

The Company's gross margin rate in the first quarter decreased 40 basis points from 38.9% in fiscal 2007 to 38.5% in fiscal 2008. The decrease in the gross margin rate was driven primarily by a deleveraging of our distribution costs.

Selling, general, and administrative expense in the first quarter increased $18 million to $272 million, or as a percent of sales, to 32.1% compared to 30.3% in the first quarter of fiscal 2007. The total dollar increase in selling, general, and administrative expense was primarily due to our increased store count, planned in-store investments, and severance expense, partially offset by a reduction in consulting costs.

Operating income decreased as a percent of sales, from 7.2% in the first quarter of fiscal 2007 to 5.7% in the first quarter of fiscal 2008.

For the first quarter, net loss improved $3 million, from a net loss of $23 million in fiscal 2007 to a net loss of $20 million in fiscal 2008, primarily due to reduced interest expense, largely offset by deleveraging of SG&A expenses.

The Company presents Adjusted EBITDA to provide investors with additional information to evaluate our operating performance and our ability to service our debt. Adjusted EBITDA for the quarter was $97 million, or 11.5% of sales versus $113 million, or 13.5% of sales in the first quarter of fiscal 2007. Reconciliations of GAAP measures to non-GAAP EBITDA and Adjusted EBITDA are included at the end of this press release.

Balance Sheet and Cash Flow

The Company's cash balance at the end of the first quarter was $42 million, a decrease of $3 million compared to last year's first quarter ending balance of $45 million. Average inventory per Michaels store at the end of the first quarter of fiscal 2008, inclusive of distribution centers, was down 9.5% to $808,000 compared to $893,000 for the same period last year. The decrease in average inventory was primarily due to appropriate management of inventory in light of the challenging sales environment, benefits from our Hybrid distribution method, and a favorable comparison against the timing of last year's merchandise resets.

Capital spending for the quarter totaled $21 million, with $11 million attributable to real estate activities, such as new, relocated, existing and remodeled stores and $7 million for merchandise and financial system enhancements.

First quarter debt level totaled $3.979 billion, a decrease of $97 million from last year's first quarter ending balance of $4.076 billion. As of May 28, 2008, availability under the Company's revolving credit facility was approximately $500 million. Additionally, during the quarter, the Company made its $5.9 million Term Loan amortization payment.

During the first quarter, the Company opened 17 new and relocated three Michaels stores, and also closed two Aaron Brothers stores.

Outlook

For fiscal 2008, same-store sales growth is expected to be approximately flat given the current economic environment. In addition, fiscal 2008 Net Cash from Operations and Adjusted EBITDA are expected to be consistent with fiscal 2007 levels.

The Company will host a conference call at 4:00 p.m. Central time today, hosted by Chief Executive Officer, Brian Cornell and Senior Vice President - Finance and Treasurer, Lisa Klinger. Those who wish to participate in the call may do so by dialing 973-935-8513, conference ID #9430843. Any interested party will also have the opportunity to access the call via the Internet at www.michaels.com . To listen to the live call, please go to the website at least fifteen minutes early to register and download any necessary audio software. For those who cannot listen to the live broadcast, a recording will be available for 30 days after the date of the event. Recordings may be accessed at www.michaels.com or by phone at 800-642-1687, PIN #9430843.