8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported): August 24, 2005

MICHAELS STORES, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	001-09338	75-1943604
(State or Other Jurisdiction	(Commission	(IRS Employer
of Incorporation)	File Number)	Identification No.)

8000 Bent Branch Drive
Irving, Texas 75063
P.O. Box 619566
DFW, Texas 75261-9566
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (972) 409-1300

     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

Press Release

Item 2.02.   Results of Operations and Financial Condition.

     The information contained in this Current Report on Form 8-K, including the exhibit attached hereto, is being furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Furthermore, the information contained in this Current Report on Form 8-K shall not be deemed to be incorporated by reference into any registration statement or other document filed pursuant to the Securities Act of 1933, as amended.

     On August 24, 2005, Michaels Stores, Inc. issued a press release announcing, among other things, its financial results for the second quarter of fiscal 2005. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K.

Item 9.01.   Financial Statements and Exhibits.

     (c) Exhibits.

Exhibit
Number	Description
99.1	Press release issued by Michaels Stores, Inc., dated August 24, 2005.

2

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

MICHAELS STORES, INC.
By:	/s/ Jeffrey N. Boyer
	Jeffrey N. Boyer
	Executive Vice President —
	Chief Financial Officer

Date: August 24, 2005

INDEX TO EXHIBITS

Exhibit
Number	Description
99.1	Press release issued by Michaels Stores, Inc., dated August 24, 2005.

EX-99.1

Exhibit 99.1

NEWS RELEASE	Lisa K. Klinger
FOR IMMEDIATE RELEASE	Vice President – Treasurer and
	Investor Relations
	(972) 409-1528

Michaels Stores, Inc. Reports Second Quarter Results

— Diluted EPS Increases 15.8% to $0.22 —

— Operating Income Increases 32.2% —

IRVING, Texas – August 24, 2005 – Michaels Stores, Inc. (NYSE: MIK) today reported preliminary unaudited financial results for its second quarter ended July 30, 2005. Net income for the quarter increased $4.1 million to $30.8 million, up 15.2% versus $26.7 million for the same quarter last year. Diluted earnings per share increased 15.8% for the quarter to $0.22 versus $0.19 in the second quarter of 2004.

     Michael Rouleau, Chief Executive Officer, said, “We are pleased with our overall performance for the quarter, as we increased our same-store sales by 4.2% over the same period last year and expanded our operating margins by over 140 basis points to 8.4% of sales. Our operating income increased 32.2% over the same period last year to a second quarter record of $62.8 million. We continue to make solid progress in leveraging our new inventory management systems, resulting in higher inventory in-stock positions, stronger sales of regular priced merchandise, reduced levels of clearance in our basic assortments and enhanced execution of our merchandising programs in our stores.”

     Mr. Rouleau added, “During the quarter, we also made excellent progress on our ‘Pursuit of the Perfect Store’ initiative. Our 25 test stores have been remodeled and their performance is exceeding the performance of the remainder of the chain. We are also in a position to begin piloting our new Hybrid Distribution method with key vendors in the second half of this year. Our Hybrid Distribution project is expected to add additional efficiencies to our supply chain, enhance service to our stores and improve our overall inventory quality and productivity.”

     Mr. Rouleau concluded, “For the second half of the year we expect our merchandising initiatives, stronger advertising programs, increased store staffing levels and improved store execution to deliver solid sales performance and record earnings. Fiscal 2005 should be our 9^th straight year of record profit.”

Operating Performance

     Total sales for the quarter increased 9.2% to $745.5 million from $682.9 million for the same period last year. Same-store sales for the quarter increased 4.2% on a 2.4% increase in average ticket, a 1.4% increase in transactions and a 0.4% increase in custom frame deliveries. A favorable currency translation, due to the stronger Canadian dollar, contributed approximately 0.4% to the average ticket increase for the quarter. Our domestic Michaels Stores’ Pacific, Southwest and Southeast zones delivered strong same-store sales performances during the second quarter of this year with an average increase of approximately 6% versus the

8000 BENT BRANCH DRIVE • IRVING, TEXAS 75063

(972) 409-1300

same period last year. The more weather sensitive Northern, Mid-Atlantic, and Northeast zones averaged a same-store sales increase of approximately 1% over the second quarter of fiscal 2004. Strongest departmental performances came in our Jewelry & Beading, Paper-crafting, Foam and Yarn categories, all contributing solidly to overall same-store sales for the quarter.

     For the quarter, the Company’s operating income increased 32.2% to $62.8 million and to 8.4% of sales from $47.5 million and 7.0% of sales for the same period last year. Gross margin expanded approximately 20 basis points from 37.7% of sales in the second quarter of last year to 37.9% in the second quarter of fiscal 2005, due to improved merchandising margins, partially offset by higher occupancy costs. Merchandise margin expanded primarily as a result of stronger sales of merchandise at regular price and better clearance margin realization.

     Selling, general and administrative expenses increased 5.2% and supported a 9.2% increase in sales, with expenses as a percent of sales declining to 29.3% from 30.3% in the second quarter of last year. Reductions in personnel related costs over the prior year generated the majority of the expense leverage. In the second quarter of fiscal 2004, the Company reported that workers’ compensation costs increased significantly, up $4.5 million versus the second quarter of fiscal 2003, and recorded an expense of $4.9 million, on a pre-tax basis, for exposure related to financial difficulties at a major insurance carrier.

Balance Sheet

     The Company’s combined cash and short-term investment balances at the end of the quarter were $182.9 million, a decrease of $124.5 million over last year’s second quarter combined ending balance of $307.4 million. The Company previously announced that it redeemed its $200 million, 9¹/4% Senior Notes in July 2005, which also resulted in a pre-tax charge to earnings of $12.1 million recognized in the second quarter, representing the combination of the call premium and unamortized debt costs associated with the notes.

     Average inventory per Michaels store, at the end of the second quarter, inclusive of distribution centers, increased 6.9% year over year to $1.154 million after declining 10.7% in the second quarter of 2004. The primary driver of this increase came from an incremental investment in Yarn in preparation for the fall and holiday season. The Company’s Perpetual Inventory and Automated Replenishment merchandising systems continue to enable inventory to be redeployed from slow growth to higher growth categories with incremental inventory investments being made in Yarn, as well as feature space and Back to School categories.

     Additionally, during the quarter, the Company opened 13 and relocated three Michaels stores and opened two Recollections stores.

     The Company also announced that it has repurchased an additional 457,900 shares of the Company’s common stock during the second quarter of fiscal 2005 under its stock repurchase plans at an average price, including commission, of $41.13 per share. Subsequent to the end of the quarter, the Company repurchased an additional 542,100 shares at an average price, including commission, of $38.31 per share. As of August 24, 2005, under its repurchase plans, the Company is authorized to repurchase approximately 2.45 million additional shares plus such shares as may be repurchased with proceeds from the future exercise of options under the Company’s 2001 General Stock Option Plan.

Outlook

     The Company currently forecasts same-store sales for the third quarter of fiscal 2005 to increase 2% to 4% with operating margin expanding approximately 80 to 100 basis points, driving an increase of approximately 15% to 20% in operating income versus the third quarter of fiscal 2004. Diluted earnings per share for the third quarter of 2005 are currently expected to range from $0.38 to $0.40, versus $.31 in the third quarter of 2004.

8000 BENT BRANCH DRIVE • IRVING, TEXAS 75063

(972) 409-1300

     For the fourth quarter of fiscal 2005, same-store sales are expected to increase 4% to 6% over the fourth quarter of fiscal 2004. Operating margin is expected to expand by approximately 150 to 200 basis points in the fourth quarter of fiscal 2005 versus the fourth quarter of fiscal 2004, driven by gross margin expansion. As compared to the fourth quarter of fiscal 2004, operating income is expected to increase over the prior year by 20% to 25% in the fourth quarter with net income and diluted earnings per share also increasing 20% to 25%.

     For fiscal 2005, the Company currently expects same-store sales to increase 4% to 6% and total sales to increase 9% to 11%. Operating margin for the year is currently expected to grow approximately 150 to 160 basis points primarily driven by gross margin expansion. Diluted earnings per share for 2005 are currently expected to range from $1.85 to $1.90, an increase of approximately 25% to 30% over fiscal 2004 results.

     The Company will host a conference call at 4:00 p.m. central time today to discuss its second quarter and year-to-date fiscal 2005 earnings results as well as its outlook for the second half of fiscal 2005. Those who wish to participate in the call may do so by dialing 973-633-6740. 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 replay will be available for 30 days after the date of the event. Recordings may be accessed at www.michaels.com or by phone at 973-341-3080, PIN 5446629.

     The Company plans to release its 2005 third quarter sales on Thursday, November 3, 2005, at 6:30 a.m. central time. Any interested party may view the Company’s press release at www.michaels.com.

     Michaels Stores, Inc. is the world’s largest specialty retailer of arts, crafts, framing, floral, wall décor, and seasonal merchandise for the hobbyist and do-it-yourself home decorator. As of August 24, 2005, the Company owns and operates 872 Michaels stores in 48 states and Canada, 165 Aaron Brothers stores, 11 Recollections stores and four Star Wholesale operations.

     This document may contain forward-looking statements that reflect our plans, estimates, and beliefs. Any statements contained herein (including, but not limited to, statements to the effect that Michaels or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended January 29, 2005, and in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2005. Specific examples of forward-looking statements include, but are not limited to, forecasts of same-store sales growth, operating income, and diluted earnings per share. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: our ability to remain competitive in the areas of merchandise quality, price, breadth of selection, customer service, and convenience; our ability to anticipate and/or react to changes in customer demand; changes in consumer confidence; unexpected consumer responses to changes in promotional programs; unusual weather conditions; the execution and management of our store growth and the availability of acceptable real estate locations for new store openings; the effective maintenance of our perpetual inventory and automated replenishment systems and related impacts to inventory levels; delays in the receipt of merchandise ordered from our suppliers due to delays in connection with either the manufacture or shipment of such merchandise; transportation delays (including dock strikes and other work stoppages); changes in political, economic, and social conditions; commodity, energy and fuel cost increases, currency fluctuations, and changes in import duties; our ability to maintain the security of electronic and other confidential information; financial difficulties of any of our insurance providers, key vendors, or suppliers; and other factors as set forth in our Annual Report on Form 10-K for the fiscal year ended January 29, 2005, particularly in “Critical Accounting Policies and Estimates” and “Risk Factors,” and in our other Securities and Exchange Commission filings. We intend these forward-looking statements to speak only as of the time of this release and do not undertake to update or revise them as more information becomes available.

     This press release is also available on the Michaels Stores, Inc. website (www.michaels.com).

— Tables Follow —

8000 BENT BRANCH DRIVE • IRVING, TEXAS 75063

(972) 409-1300

Michaels Stores, Inc.

Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)

	Quarter Ended						Six Months Ended
	July 30,			July 31,			July 30,			July 31,
	2005			2004			2005			2004
Net sales	$	745,493		$	682,934		$	1,566,509		$	1,408,786
Cost of sales and occupancy expense		463,203			425,628			979,539			891,256
Gross profit		282,290			257,306			586,970			517,530
Selling, general, and administrative expense		218,012			207,158			442,482			412,859
Store pre-opening costs		1,454			2,643			4,193			5,126
Operating income		62,824			47,505			140,295			99,545
Interest expense		15,500			5,069			20,590			10,397
Other (income) and expense, net		(2,369	)		(877	)		(5,049	)		(1,666	)
Income before income taxes		49,693			43,313			124,754			90,814
Provision for income taxes		18,878			16,567			47,406			34,736
Net income	$	30,815		$	26,746		$	77,348		$	56,078
Earnings per common share:
Basic	$	0.23		$	0.20		$	0.57		$	0.41
Diluted	$	0.22		$	0.19		$	0.56		$	0.40
Weighted average shares outstanding:
Basic		135,774			136,304			135,896			136,432
Diluted		139,134			139,280			139,203			139,486
Dividends per common share	$	0.10		$	0.06		$	0.17		$	0.12

Michaels Stores, Inc.

Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

Subject to reclassification	July 30,			January 29,			July 31,
	2005			2005			2004
ASSETS
Current assets:
Cash and equivalents	$	182,909		$	535,852		$	257,443
Short-term investments		—			50,379			50,000
Merchandise inventories		1,090,239			936,395			954,736
Prepaid expenses and other		39,010			26,613			39,655
Deferred and prepaid income taxes		58,580			22,032			26,865
Total current assets		1,370,738			1,571,271			1,328,699
Property and equipment, at cost		963,201			913,174			845,738
Less accumulated depreciation		(544,714	)		(506,193	)		(450,010	)
		418,487			406,981			395,728
Goodwill		115,839			115,839			115,839
Other assets		18,765			17,569			14,923
		134,604			133,408			130,762
Total assets	$	1,923,829		$	2,111,660		$	1,855,189
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	248,645		$	256,266		$	211,408
Accrued liabilities and other		232,385			242,682			194,798
Income taxes payable		—			12,992			—
Total current liabilities		481,030			511,940			406,206
9 1/4% Senior Notes due 2009		—			200,000			200,000
Deferred income taxes		26,848			30,355			28,241
Other long-term liabilities		86,898			72,200			39,170
Total long-term liabilities		113,746			302,555			267,411
		594,776			814,495			673,617
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $0.10 par value, 2,000,000 shares authorized; none issued		—			—			—
Common Stock, $0.10 par value, 350,000,000 shares authorized; shares issued and outstanding of 135,827,039 at July 30, 2005, 135,726,717 at January 29, 2005, and 135,774,156 at July 31, 2004		13,583			13,573			13,577
Additional paid-in capital		425,002			451,449			463,523
Retained earnings		880,990			826,821			700,079
Accumulated other comprehensive income		9,478			5,322			4,393
Total stockholders’ equity		1,329,053			1,297,165			1,181,572
Total liabilities and stockholders’ equity	$	1,923,829		$	2,111,660		$	1,855,189

Michaels Stores, Inc.

Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Six Months Ended
Subject to reclassification	July 30,			July 31,
	2005			2004
Operating activities:
Net income	$	77,348		$	56,078
Adjustments:
Depreciation		48,085			43,576
Amortization		194			197
Write-off of unamortized debt issuance costs		12,133			—
Other		325			521
Changes in assets and liabilities:
Merchandise inventories		(153,844	)		(61,813	)
Prepaid expenses and other		(12,397	)		(10,457	)
Deferred income taxes and other		(4,853	)		1,712
Accounts payable		(7,621	)		38,700
Income taxes payable		(32,737	)		(2,377	)
Accrued liabilities and other		(5,363	)		869
Other long-term liabilities		11,584			2,190
Net cash (used in) provided by operating activities		(67,146	)		69,196
Investing activities:
Additions to property and equipment		(60,510	)		(51,861	)
Purchases of short-term investments		(226	)		(50,000	)
Sales of short-term investments		50,605			—
Net proceeds from sales of property and equipment		—			45
Net cash used in investing activities		(10,131	)		(101,816	)
Financing activities:
Repayment of Senior Notes		(209,250	)		—
Proceeds from stock options exercised		25,787			18,387
Repurchase of Common Stock		(71,197	)		(55,114	)
Cash dividends paid to stockholders		(23,184	)		(16,364	)
Proceeds from issuance of Common Stock and other		2,178			1,329
Net cash used in financing activities		(275,666	)		(51,762	)
Net decrease in cash and equivalents		(352,943	)		(84,382	)
Cash and equivalents at beginning of period		535,852			341,825
Cash and equivalents at end of period	$	182,909		$	257,443

Michaels Stores, Inc.

Summary of Operating Data
(Unaudited)

The following table sets forth the percentage relationship to net sales of each line item of our unaudited consolidated statements of income:

	Quarter Ended						Six Months Ended
	July 30,			July 31,			July 30,			July 31,
	2005			2004			2005			2004
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales and occupancy expense		62.1			62.3			62.5			63.3
Gross profit		37.9			37.7			37.5			36.7
Selling, general, and administrative expense		29.3			30.3			28.2			29.3
Store pre-opening costs		0.2			0.4			0.3			0.3
Operating income		8.4			7.0			9.0			7.1
Interest expense		2.1			0.8			1.3			0.8
Other (income) and expense, net		(0.4	)		(0.1	)		(0.3	)		(0.1	)
Income before income taxes		6.7			6.3			8.0			6.4
Provision for income taxes		2.6			2.4			3.1			2.4
Net income		4.1	%		3.9	%		4.9	%		4.0	%

The following table sets forth certain of our unaudited operating data (dollar amounts in thousands):

	Quarter Ended						Six Months Ended
	July 30,			July 31,			July 30,			July 31,
	2005			2004			2005			2004
Michaels stores:
Retail stores open at beginning of period		857			818			844			804
Retail stores opened during the period		13			9			27			23
Retail stores opened (relocations) during the period		3			10			11			22
Retail stores closed during the period		—			—			(1	)		—
Retail stores closed (relocations) during the period		(3	)		(10	)		(11	)		(22	)
Retail stores open at end of period		870			827			870			827
Aaron Brothers stores:
Retail stores open at beginning of period		165			158			164			158
Retail stores opened during the period		—			3			1			3
Retail stores closed during the period		—			(1	)		—			(1	)
Retail stores open at end of period		165			160			165			160
ReCollections stores:
Retail stores open at beginning of period		9			2			8			2
Retail stores opened during the period		2			3			3			3
Retail stores open at end of period		11			5			11			5
Star Wholesale stores:
Wholesale stores open at beginning of period		4			3			3			3
Wholesale stores opened during the period		—			—			1			—
Wholesale stores open at end of period		4			3			4			3
Total store count at end of period		1,050			995			1,050			995
Other operating data:
Average inventory per Michaels store (1)	$	1,154		$	1,079		$	1,154		$	1,079
Comparable store sales increase (2)		4.2	%		5.5	%		6.1	%		5.7	%

(1)	Average inventory per Michaels store calculation excludes Aaron Brothers, Recollections, and Star Wholesale stores.
(2)	Comparable store sales increase represents the increase in net sales for stores open the same number of months in the indicated period and the comparable period of the previous year, including stores that were relocated or expanded during either period. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions.