Michaels Stores, Inc. Reports Fiscal 2008 Fourth Quarter and Full Year Operating Results

Michaels Stores, Inc. (the "Company") today reported net income for the year ended January 31, 2009, of $4 million compared to a net loss of $32 million for fiscal 2007. Fourth quarter net income improved $21 million to $74 million compared to a net income of $53 million for the corresponding period of the prior year.

Net sales for the fourth quarter decreased 2.5% to $1.268 billion from $1.301 billion last year with same-store sales declining 5.6%. Net sales for the year were $3.817 billion, a decrease of 1.2% from $3.862 billion for the same period last year. Same-store sales for the year decreased 4.6% from fiscal 2007.

Brian C. Cornell, Chief Executive Officer, said, "Our focus during the fourth quarter was on driving sales and maximizing gross margin dollars while effectively clearing through our seasonal merchandise. Consumers responded to the value message, particularly during the month of December where we saw improving traffic trends. Sales of higher ticket, more discretionary categories such as seasonal and home décor declined while sales in our core arts and craft businesses were more resilient."

Mr. Cornell noted, "In the current environment, we are focused on managing all aspects of the business, including expenses, capital expenditures, cash and liquidity very conservatively. We will strive to maximize sales by appealing to our customer through the value messaging introduced last year and through the introduction of compelling new merchandise throughout the year.

"Michaels is built on a strong foundation, and has great potential to build its market leadership position in the arts and crafts segment. We are making the right decisions and have the right initiatives underway to make our business even better and to successfully navigate through today's economic challenges. I believe that John Menzer, who will succeed me as CEO, will lead Michaels to new heights," concluded Mr. Cornell.

Operating Results

The 5.6% decline in same-store sales for the quarter was the result of a 5.0% decrease in average ticket, and a 0.6% decrease in transactions. For the year, the 4.6% decline in same-store sales was due to a 2.5% decrease in average ticket and a 2.1% decrease in transactions. Canadian currency translation adversely affected same-store sales for the fourth quarter by approximately 170 basis points and approximately 20 basis points for fiscal 2008.

The Company's gross margin rate, inclusive of occupancy costs, was 36.3% for both the quarter and fiscal year, decreasing 370 basis points in the fourth quarter and 200 basis points for the year. The decline in the gross margin rate was driven primarily by a 260 basis point decline in merchandise margin for the quarter and 110 basis points for the year combined with a deleveraging in occupancy costs. The decrease in the Company's merchandise margin rate was principally due to increased promotional activity as we sought to sell through holiday merchandise.

Selling, general, and administrative expense in the fourth quarter increased $2 million to $295 million and, as a percent of sales, increased 80 basis points to 23.3% versus the prior year period due primarily to increased advertising expense and store personnel costs. Year-to-date selling, general and administrative expense increased $9 million, to $1.060 billion. As a percent to sales, selling, general and administrative expense increased 60 basis points to 27.8% of sales from 27.2% for the same period last year, resulting primarily from deleveraging advertising and payroll costs, partially offset by lower bonus expense.

Operating income decreased approximately $39 million to $161 million, or to 12.6% of sales, in the fourth quarter of fiscal 2008 from $200 million, or 15.4% of sales in the fourth quarter of fiscal 2007. Fiscal 2008 operating income was $304 million, or 8.0% of sales, versus $354 million, or 9.2% of sales, for fiscal 2007.

Interest expense was lower by $22 million for the quarter and $76 million for the fiscal year, due to a lower average interest rate on our floating rate debt.

The current year tax benefit includes the effect of the favorable settlement of outstanding tax issues.

Adjusted EBITDA for the fourth quarter of fiscal 2008 was $207 million, or 16.3% of sales, versus $266 million, or 20.4% of sales, for the same period last year. Fiscal 2008 Adjusted EBITDA was $489 million, or 12.8% of sales, versus $587 million, or 15.2% of sales, for fiscal 2007. Reconciliations of GAAP measures to non-GAAP Adjusted EBITDA presented herein are included at the end of this press release.

Balance Sheet and Cash Flow

Year end debt levels totaled $3.928 billion, down approximately $255 million from third quarter ending balance and up $65 million from prior year. During the quarter, the Company made a $5.9 million amortization payment on its Senior Secured Term Loan. At the end of fiscal 2008, the Company had $33 million in cash and over $550 million of availability under its revolving credit facility. As of March 9, 2009, availability under the credit facility was approximately $594 million.