Michaels Stores, Inc. Business Information, Profile, and History

Company Perspectives:

Since our founding, the family of Michaels Stores, Inc., the nation's largest retailer of arts and crafts materials, has been helping crafters of all ages express their imaginations with skill and originality. With a broad assortment of products, knowledgeable and friendly associates, in-store events, classrooms, and instructional displays, we offer a shopping experience that inspires our customers to pursue their creative goals. At Michaels Stores, Inc. we provide the ideas and education to complete an array of artistic, leisure, and home décor projects for beginners and experts from start to finish.

History of Michaels Stores, Inc.

Michaels Stores, Inc. is the largest specialty retailer of arts, crafts, and home decor in North America. The company operates several different retail and wholesale businesses, led by its mainstay Michaels chain, which comprises more than 850 stores in the United States and Canada. Michaels also operates Aaron Brothers, a 165-store chain that offers custom framing services and an assortment of ready-made frames. Michaels' wholesale business is operated through Star Decorators' Wholesale Warehouse, which is a business-to-business supplier of floral and decorating supplies. In addition, Michaels operates ReCollections, a chain of nine stores that carries supplies for scrapbooks. A smaller version of the mainstay Michaels concept is operated as Village Crafts by Michaels, a format designed for communities with populations ranging between 70,000 and 90,000. Michaels also owns Artistree, a manufacturer of frames with three locations in California, Texas, and North Carolina. Artistree exclusively serves the Michaels and Aaron Brothers chains.

The First Ten Years

Two decades before the 450th Michaels arts and crafts store opened in 1996 the first store was established, its creation the work of a young, enterprising businessman whom retail analysts would later hail as a "merchandising genius." His name was Michael Dupey, and he got his start in 1973 when he converted one of a group of Ben Franklin stores operated by his father into an arts and craft store that operated under the name Michaels. Located in Dallas, the first store became part of the Dupey family business, a company headed by Michael Dupey's father, Jim Dupey, and aptly named Dupey Enterprises, Inc. Founded in 1962 and the predecessor to Michaels Stores, Inc., Dupey Enterprises controlled the first store and transformed the retail concept into a chain, adding additional stores as the 1970s progressed.

Dupey Enterprises controlled the Michaels retail concept for ten years. With Michael Dupey leading the way, the Dupey family business expanded the number of Michaels stores, assembling a small chain of stores comprising 11 units, nearly all of which were located in Texas, by the time its era of ownership was over. Although the Michaels retail concept enjoyed an encouraging start, the period of Dupey ownership would stand as the least prolific decade in the retailer's first 30 years of existence. Michael Dupey created the concept, but the work of transforming Michaels into a national chain and building it into the largest retailer of its kind in the United States fell to the new owners who took control of the company in 1983. The year marked the beginning of the Wyly era in Michaels' history, a period during which Michaels arts and crafts stores proliferated throughout the United States and into Canada and Puerto Rico.

1983 Acquisition by the Wylys

In 1983, Dupey Enterprises sold Michaels to Peoples Restaurants, Inc., a company controlled by renowned Dallas entrepreneurs Sam Wyly and his older brother Charles J. Wyly, Jr. Among his numerous accomplishments in the business world, Sam Wyly had founded University Computing Company, a computer software and services company, in 1963. He had cofounded Earth Resources Company, an oil refiner and miner of gold and silver, and, along with his brother, had acquired a 20-unit restaurant chain named Bonanza Steakhouse in 1967. Under the stewardship of the Wyly brothers, Bonanza Steakhouse ballooned into a sprawling 600-restaurant chain during the ensuing two decades, recording an impressive rate of expansion that the Wylys would match with their new acquisition, Michaels.

As part of the deal that brought Michaels into the Peoples Restaurants fold, Michael Dupey successfully negotiated for ownership of two Dallas Michaels stores and was granted the exclusive, royalty-free rights to open licensed Michaels stores in Dallas and area counties. Other than this proviso, Peoples Restaurants assumed full control over the 11-unit Michaels chain, but the company did not hold on to the retailer for long. In 1984, one year after acquiring the retailer, Peoples Restaurants spun off Michaels to Peoples Restaurants shareholders in a rights offering at $2.50 per share, making the arts and crafts retailer a separate, publicly traded corporate entity. On May 6, 1984, the company began trading its stock on the NASDAQ, with the Wylys ranking as the largest shareholders in Michaels Stores, Inc.

Concurrent with the company's initial public offering, Sam Wyly was named chairman of Michaels and a seat on the company's board of directors was taken by his brother Charles, who was named vice-chairman in 1985. Under the leadership of the Wylys, Michaels expanded aggressively, casting aside the prosaic growth that characterized the first decade of its existence to emerge quickly as a strong, regional competitor in the arts and crafts retail industry. During their first five years of directing the company, the Wylys (with Sam in charge) devoted more than $100 million toward the acquisition of small arts and crafts chains and toward opening new stores, embarking on this course shortly after taking the retailer public.

1980s Acquisitions

In July 1984, two months after the company's initial public offering, Michaels acquired Montiel Corporation, operator of a 13-unit chain with stores scattered across Colorado, Arizona, and New Mexico. Having already doubled the size of their company in eight weeks, the Wylys pressed forward, opening additional Michaels stores while they searched for further acquisitions. In 1985, six more retailers were purchased, and in 1987 the company acquired Moskatel's, Inc., a 28-store chain in California, where the greatest concentration of Michaels stores would be located in the future.

By the time these acquisitions were completed, Michaels already represented a promising chain on the verge of breaking into the ranks of national arts and crafts retailers. The company's vast selection of merchandise, which included silk and dried flowers, oil paints, picture frames, model airplanes and ships, greeting cards, and party favors, attracted a specific and loyal clientele. Nearly all (90 percent) of Michaels's customers were female, and 25 percent patronized a Michaels store at least once a week. Largely due to the popularity of the Michaels retail concept and the ambitious expansion orchestrated by the Wylys, Michaels' sales and earnings rose strongly during the mid-1980s, reaching $167 million and $4.9 million, respectively, in 1987.

In 1988, Michaels acquired a division of Wal-Mart Stores, Inc. named Helen's Arts & Crafts. The sale by Wal-Mart represented the massive retailer's exit from the business of selling arts and crafts supplies, but Michaels was fast on the rise and the addition of another arts and crafts retailer represented yet one more step toward national prominence. By this point in the company's history, Michaels had recorded incredible growth. The 11 stores acquired by the Wyly-controlled Peoples Restaurants in 1983 had grown into a chain comprising more than 100 stores. Much had been achieved, but as the company exited the late 1980s and prepared for the 1990s, a regrettable event interrupted Michaels' otherwise steady rise toward becoming the preeminent arts and crafts chain in the United States.

By the late 1980s, Michaels' success had attracted considerable attention from both those involved in the arts and crafts industry and the business community in general. One of those drawn to the company was famed investor Richard Bass, who with his firm, Arcadia Partners, attempted a leveraged buyout of Michaels. The particulars of the deal were negotiated during much of 1989 before the proposed $225 million transaction was terminated in January 1990. At Michaels' headquarters in Irving, Texas, executives were dismayed, particularly Sam Wyly. After the pain resulting from the foundered deal had ebbed somewhat, Wyly told a reporter from the Dallas Business Journal, "We wasted almost a year on that deal that failed. It was a major distraction and we will never do that again."

Because of the failed leveraged buyout, Michaels was forced to take a $5 million pretax charge on its balance sheet, which trimmed earnings from $5.2 million to a paltry $13,000, even as annual revenues rose 20 percent to $290 million. The lesson learned from the failed deal was a hard one, but in the wake of Michaels' "major distraction" the company effected sweeping changes that made its operations stronger than ever before. The changes first became apparent in August 1990 when Michaels President B.B. Tulley was replaced by a Michaels director, Donald G. Thomson. Michael Dupey, who at the time was operating his 24-unit MJDesigns chain, was brought in as a special consultant, marking the return of the "merchandising genius," and purchasing was dramatically streamlined. Quickly, the company was moving forward on all fronts with positive momentum. The Michaels chain comprised 140 stores by the end of 1990, with sales reaching $362 million and debt down from $34 million to $9 million after one year.

Animated Growth During the 1990s

By early 1991, the Michaels empire was flourishing once again, prompting one retail analyst to remark, "They [Michaels] are marketing better and buying better. The management restructuring seems to be helping them; they are running a tighter operation." Merchandising and advertising functions had been centralized, profitability was made a primary focus, and regional and district manager positions had been created. At this point, confidence ran high enough to lead Sam Wyly to project that the company would eclipse the $1 billion-in-sales plateau in the next five years, an objective that, remarkably, Michaels achieved.

With a goal of reaching $1 billion in sales in the next five years, Michaels' strategy was clear as it prepared for 1992 and the remainder of the 1990s: aggressive expansion throughout the United States. Midway through its plan to open 35 stores in 1992, the Michaels chain consisted of 157 stores, each selling more than 30,000 different arts and craft items and each averaging more than $3 million in sales annually, roughly twice the arts supply industry average. During the previous five years, store sales had more than doubled and profits had quadrupled, a rate of financial growth that ranked the company as one of the hottest retail stories during the early 1990s. The popularity of Michaels stores was credited to the retailer's vast product selection, with silk and dried flowers representing its largest product category in terms of sales generated. Product selection told only half the tale of the company's success, however, because much was owed to the service provided by Michaels' store employees. Amid the display booths and product departments that filled the selling space in a Michaels store, employees taught in-store art classes, providing instruction for various arts and crafts projects, including how to create T-shirt designs and how to make festive centerpieces. With service, product mix, and rapid expansion propelling the company forward, it was only a matter of time and money before Michaels stores dotted the nation's landscape.

The stores opened in 1993 extended Michaels' presence from its base in the Southeast and Southwest to Ohio, Virginia, Oklahoma, Washington, and Iowa, and carried the company beyond U.S. borders for the first time, as two Michaels stores made their debut in Toronto, Canada. The strategy was to cover as much territory as possible with Michaels stores before competitors had the time to catch up. In 1994, any hope of catching the Irving-based retailer was lost as Michaels completed an unprecedented year of physical growth by increasing its store count more than 70 percent.

In terms of acquisitions, 1994 got off to a start in March when Michaels acquired Oregon Craft & Floral Supply, staking a presence in the Oregon arts and crafts retail market. The company then purchased H&H Craft & Floral, which fleshed out its presence in southern California. Next, in April 1994, Michaels acquired Seattle, Washington-based Treasure House Stores, Inc., moving the company into Washington where it had little market presence. These three acquisitions added 25 stores to the expanding Michaels chain, but the company's next acquisition quickly overshadowed the gains made during the spring months of 1994. In July, Michaels acquired Leewards Creative Crafts Inc., a 101-unit chain of arts and crafts stores that gave Michaels solid footing in the midwestern and northeastern markets, areas where the company had achieved scant market penetration.

In addition to the stores gained through acquisitions during 1994, Michaels opened 32 new stores on its own, helping drive sales up to $995 million. At the beginning of 1995, there were 380 stores composing the Michaels chain, with stores scattered throughout 41 states and in Canada. For 1995, 55 stores were expected to be added to the chain, including units in Alaska and Puerto Rico, as efforts were underway to round out the company's presence throughout North America, particularly in the Northeast. The company's stores by this point averaged 16,000 square feet and were located in highly visible strip shopping centers near shopping malls. Of the merchandise gracing the company's store shelves--general crafts, home decor items, picture frames, art and hobby supplies, party supplies, wearable art, and seasonal and holiday goods--silk and dried flowers and plants still accounted for the bulk of Michaels' sales, generating a fifth of its annual revenue volume.

As store expansion continued in 1995, Michaels added another retail concept to its widely popular Michaels format. In March 1995, the company acquired Aaron Brothers Holdings, Inc., operator of a 71-unit chain of specialty framing and art supply stores. Located primarily in California, where the greatest number of Michaels stores were located, the Aaron Brothers stores offered professional custom framing services, sold photograph frames, and stocked a full line of ready-made frames, as well as a broad selection of art supplies.

Buoyed by the addition of Aaron Brothers and the more than $50 million in sales the retailer generated the year before its acquisition, Michaels entered 1996 as the country's largest arts and crafts retailer. The $1 billion-in-sales mark had been reached in 1995 when the company recorded $1.29 billion in sales. The company anticipated opening between 50 and 55 new Michaels stores in 1996, but was beginning to scale back its expansion plans to achieve greater operational efficiencies. Between 1991 and 1995, the company's expansion of store units had increased at a compounded annual rate of 33 percent; for the future the store growth rate was targeted at 15 percent. As the company charted its course for the late 1990s and the beginning of the 21st century, Michaels officials saw the potential for 900 stores in the United States and in Canada, an estimate that set the stage for another decade of robust growth for the 23-year-old company.

Diversification with the New Century

Michaels' impressive rate of expansion continued as the 1990s progressed, but only after the company dealt with some serious problems related to its rampant growth. Sales in 1996 reached $1.4 billion, a total that hardly could be celebrated because it coincided with a staggering $31 million loss for the year. Worse still, the company was running out of cash. In late 1996, R. Michael Rouleau arrived as the company's new chief executive officer, inheriting a mess that called on his four decades of retail experience to clean up. Rouleau, who had worked for Target and Lowe's, among other retailers, first directed his attention to the company's cash flow problem, raising $125 million in junk bonds to keep the company alive as he implemented sweeping measures designed to return the sprawling company to profitability. Rouleau revamped the chain's units, met with hundreds of vendors, and devoted more resources to the company's custom framing business, Artistree, which began as two small manufacturing shops started by Michaels in 1993. Rouleau's most significant changes were directed at Michael's single greatest problem: inventory management. The equipment and systems used by the company to track inventory were antiquated, dating back to the earliest days of the personal computer. Rouleau invested $22 million in a state-of-the-art point-of-sale system that kept track of inventory movement and he upgraded the systems used in the company's four warehouses. The changes worked wonders, resulting in an average increase in profits of 35 percent compounded annually during the first five years of his tenure. The average revenues generated by a Michaels store increased substantially as well, swelling from $2.9 million in 1997 to nearly $4 million by 2002.

With the revamped, sophisticated infrastructure to support expansion, Michaels grew aggressively around the end of the century. The company added significantly to its two chains, Michaels and Aaron Brothers, and diversified into new business areas. In 2000, the company purchased a one-store florist and decorating supplies operation in Dallas that became the foundation of its Star Decorators' Wholesale Warehouse business. Through its wholesale operation, Michaels began selling floral supplies and accessories, ribbon, containers, party and wedding supplies, and seasonal décor, targeting floral and gift shop owners, interior decorators, banks, and hotels as its customers. The company envisioned its wholesale business eventually occupying 50 locations. In 2002, the company added another dimension to its business by creating an arts-and-crafts store for smaller markets. The first store, roughly half the size of a typical Michaels store, debuted as Village Crafts by Michaels, a concept designed for communities with populations ranging between 70,000 and 90,000. Rouleau and his team identified 150 markets in the United States as ideal locations for the company's Village Crafts concept. Roughly a year after introducing its smaller-store format, the company introduced yet another concept. In mid-2003, the company opened a pilot store in Dallas named ReCollections, a store catering to those who liked to assemble scrapbooks.

By the end of 2004, Michaels stood as a giant in its industry. There were 850 Michaels stores in operation in North America, with company officials setting 1,300 stores as the concept's saturation point. The company's Aaron Brothers chain, which it had acquired as a 50-store chain located exclusively in California, had flowered in a 165-store chain spread across eight states. The company foresaw Aaron Brothers as a 600-store chain. With the company's three other concepts--Star Decorators', Village Crafts by Michaels, and ReCollections--offering further room for expansion, Michaels had no intention of slowing its pace of expansion. By 2006, the company expected to reach $5 billion in sales. By 2009, Michaels planned to open 1,000 additional stores, an ambitious goal that promised aggressive expansion throughout the decade.

Principal Subsidiaries: Aaron Brothers, Inc.; Michaels Finance Company, Inc.; Michaels of Canada, ULC; Michaels Stores Card Services, LLC; Michaels Stores Procurement Company, Inc.

Principal Competitors: A.C. Moore Arts & Crafts, Inc.; Hobby Lobby Stores, Inc.; Jo-Ann Stores, Inc.

Chronology

• Key Dates:
• 1962: Dupey Enterprises, Inc. is founded.
• 1973: Dupey Enterprises converts a Ben Franklin store into an arts-and-crafts store named Michaels.
• 1983: Dupey Enterprises sells the 11-store Michaels chain to Peoples Restaurant, Inc., which spins off the concept as a separate company the following year.
• 1990: A leveraged buyout by Richard Bass's Arcadia Partners collapses.
• 1994: Michaels acquires the 101-store Leewards Creative Crafts chain.
• 1995: The 71-unit Aaron Brothers chain is acquired.
• 1996: R. Michael Rouleau is appointed chief executive officer.
• 2000: Michaels starts a wholesale operation.
• 2002: Village Crafts by Michaels, a smaller-store format, is introduced.
• 2003: The first ReCollections store opens in Dallas.
• 2004: Michaels announces the goal of reaching $5 billion within two years.