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): July 5, 2006

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):

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

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

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

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

Item 2.02. Results of Operations and Financial Condition.

     The information contained in this Item 2.02 of this Current Report on Form 8-K and the exhibit attached hereto is being furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Furthermore, the information contained in this Item 2.02 of 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 3, 2006, Michaels Stores, Inc. issued a press release announcing, among other things, its sales results for the second quarter of fiscal 2006. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K.

Item 8.01. Other Events.

     On June 8, 2006, Michaels announced that its Audit Committee (assisted by independent legal counsel and outside accounting experts) had commenced an internal review of Michaels’ historical stock option practices, including a review of Michaels’ underlying option grant documentation and procedures and related accounting. As of the date of this report, the Audit Committee has not reached any final conclusions as the internal review has not yet been completed. On June 30, 2006, Michaels announced that its Board of Directors had approved an agreement and plan of merger (the “Merger Agreement”) between the Company and the entities sponsored by Bain Capital, LLC (“Bain”) and The Blackstone Group (“Blackstone”). As described below and as described in the Company’s other reports filed with the Securities and Exchange Commission referenced below, (a) certain lawsuits and certain amendments to existing lawsuits have been filed relating to the Company’s historical stock option procedures and/or relating to Michaels’ pending transaction with Bain and Blackstone and (b) the Company has received two grand jury subpoenas and a letter from the Securities and Exchange Commission relating to its historical stock option practices.

Fathergill

     As described in Micheals’ Form 10-Q for the quarterly period ended April 29, 2006, “Part II — Other Information — Item 1. Legal Proceedings — Derivative Claims,” on March 21, 2003, Julie Fathergill filed a purported stockholder derivative action naming certain former and current officers and directors of Michaels, including all of Michaels’ current directors, as individual defendants and Michaels as a nominal defendant. The derivative action originally related to actions prior to Michaels’ announcement on November 7, 2002 that the Company had revised its outlook for the fourth fiscal quarter of 2002, adjusting downward guidance for annual earnings per diluted share. The action, as amended on December 8, 2005, includes allegations that, prior to that announcement, certain of the defendants made misrepresentations and failed to disclose negative information about the financial condition of Michaels while the individual defendants were selling shares of Michaels common stock and allegations questioning, among other things, issues relating to Michaels’ inventory systems and infrastructure, as well as transactions and holdings of Michaels common stock by certain trusts established by or for the benefit of two of Michaels’ directors and/or their families.

2

     On July 10, 2006, the plaintiff filed a Second Amended Shareholder Derivative and Class Action Petition in which she reasserted many of the same factual allegations previously disclosed, added new derivative allegations regarding the granting of stock options to certain officers and directors from 1994 through 2000, and class action allegations regarding the proposed transaction with Bain and Blackstone, and added certain additional former officers and directors as individual defendants. Among other things, the plaintiff seeks (a) a declaration that the Merger Agreement violates the individual defendants’ fiduciary duties and therefore is unlawful and unenforceable, (b) an injunction that prevents the consummation of the proposed transaction unless and until the Company discloses all material facts regarding the merger and implements procedures to obtain the highest possible price for the Company, (c) an indeterminate amount of damages from the individual defendants, (d) certain corporate governance changes, (e) formation of a constructive trust on the proceeds of defendants’ alleged trading activities and (f) restitution from, and disgorgement of proceeds derived by, the named officers with respect to the alleged acts.

Gottlieb and Schuman

     As described in Michaels’ Form 10-Q for the quarterly period ended April 29, 2006, “Part II — Other Information — Item 1. Legal Proceedings — Derivative Claims,” on June 9, 2006 and June 12, 2006, Feivel Gottlieb and Roberta Schuman filed purported stockholder derivative actions against the current members of Michaels’ Board of Directors as individual defendants, and against Michaels as a nominal defendant in connection with Michaels’ historical stock option practices.

     On July 5, 2006, the plaintiffs filed First Amended Shareholder Derivative and Class Action Petitions (“Amended Petitions”) against the individual defendants, Michaels as a nominal defendant, and against Bain and Blackstone. In addition to the derivative allegations previously disclosed, the Amended Petitions add class action allegations against Michaels’ directors for breach of fiduciary duty related to the proposed transaction with Bain and Blackstone, and a claim against Bain and Blackstone for aiding and abetting the directors’ alleged breach of fiduciary duty. In addition to the previously disclosed relief sought by the plaintiffs, as a result of these new claims, the plaintiffs seek (a) to enjoin the transaction with Bain and Blackstone (or declare it void, if it is consummated), (b) require the defendants to disgorge the property they received as a result of their allegedly wrongful conduct and (c) an indeterminate amount of damages from the defendants, jointly and severally.

Hulliung

     As described in Michaels’ Form 8-K filed on June 28, 2006, on June 19, 2006, Albert Hulliung filed a purported stockholder derivative action against our Chairman of the Board and Vice Chairman of the Board, in their capacities as officers and directors, all of Michaels’ other current directors, one additional current officer and certain of our former officers as individual defendants and Michaels as a nominal defendant in connection with Michaels’ historical stock option practices.

3

     On July 27, 2006, the plaintiff amended his complaint adding certain other former and current officers and one former director of Michaels as individual defendants and including allegations similar to those set forth in the recently amended Fathergill Petition, described above. The plaintiff asserts claims derivatively on behalf of Michaels for (a) breach of fiduciary duty and violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by each of the individual defendants, (b) unjust enrichment against certain of the individual defendants who received stock options during the relevant period and (c) insider selling against certain of the individual defendants who sold Michaels common stock during the time period. Additionally, the plaintiff purports to represent a class of Michaels’ shareholders. The plaintiff seeks, among other relief, (i) an indeterminate amount of damages from the individual defendants, (ii) restitution from, and disgorgement of proceeds derived by, the individual defendants who received stock options, (iii) the imposition of a constructive trust against the individuals who were alleged to have engaged in insider sales and (iv) other unspecified equitable relief.

Ziolkowski

     On July 7, 2006, James and Christine Ziolkowski filed a purported stockholder derivative action, which is pending in the United States District Court, Northern District of Texas, Dallas Division. The lawsuit names certain former and current officers and directors of Michaels as individual defendants, and Michaels as a nominal defendant. In connection with the granting of stock options to the named officers, the plaintiffs assert claims of (a) breaches of fiduciary duty and violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by each of the individual defendants, (b) aiding and abetting of the named officers’ breach of their fiduciary duties by the director defendants and (c) unjust enrichment and rescission against the named officers. The plaintiffs seek, among other relief, (i) an indeterminate amount of damages from the individual defendants, (ii) restitution from, and disgorgement of proceeds derived by, the named officers with respect to the alleged acts, (iii) rescission of all option contracts granted to the named officers, and cancellation of any current or future obligations of Michaels under any executory contracts obtained by the named officers as a result of the alleged acts, (iv) formation of a constructive trust to hold all executory option contracts issued to the named officers and (v) punitive damages against the named officers. All of these claims are asserted derivatively on behalf of Michaels.

Governmental Inquiries

     On July 27, 2006, the Company received a grand jury subpoena issued by the U.S. District Court for the Northern District of Texas requesting documents relating to the granting of stock options during 1990 to present. As described in Michaels’ Form 8-K, filed on June 16, 2006, the Company has also received a grand jury subpoena from the U.S. District Court for the Southern District of New York requesting documents relating to the granting of stock options and, as described in Michaels’ Form 8-K, filed on June 15, 2006, the Company has received a letter from the Division of Enforcement of the Securities and Exchange Commission requesting that the Company preserve certain documents concerning stock option grants and stating that the Securities and Exchange Commission intends to request a production of such documents in the future.

4

     For additional information regarding the Audit Committee’s internal review of our historical stock option practices, see our Form 10-Q for the quarterly period ended April 29, 2006, “Part II — Other Information — Item 1. Legal Proceedings — Internal Review of Stock Option Practices.” For additional information regarding the Company’s pending transaction with Bain and Blackstone, see our Form 8-K filed on July 6, 2006.

Item 9.01. Financial Statements and Exhibits.

     (d) Exhibits.

Exhibit Number	Description
99.1	Press release issued by Michaels Stores, Inc., dated August 3, 2006

5

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
	President and Chief Financial Officer

Date: August 3, 2006

Index to Exhibits

Exhibit Number	Description
99.1	Press release issued by Michaels Stores, Inc., dated August 3, 2006

EX-99.1

Exhibit 99.1

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

Michaels Stores Second Quarter Total Sales Increase 3.0%

IRVING, Texas — August 3, 2006 — Michaels Stores, Inc. (NYSE: MIK) reported today that total sales for the second quarter were $768.3 million, a 3.1% increase over last year’s $745.5 million. Same-store sales for the quarter declined (0.3%) on a 2.9% increase in average ticket, a (2.6%) decrease in transactions, and a (0.6%) decrease in custom frame deliveries. Year-to-date sales of $1.601 billion increased 2.2% from $1.567 billion for the same period last year. Same-store sales year-to-date were down (1.7%) over the same period a year ago on a (3.8%) decrease in transactions and a 2.1% increase in average ticket. A favorable Canadian currency translation added approximately 0.6% to the average ticket increase for the second quarter and approximately 0.5% for the first six months of fiscal 2006.

The Company reported that same-store sales were affected by ongoing programs to reduce the level of promotional and clearance sales, as well as a considerable reduction in average per store clearance and discontinued inventory during the quarter. On a same-store sales basis, promotional and clearance sales declined significantly during the quarter, in part due to the lower clearance and discontinued inventory levels, the elimination of a highly promotional Custom Frame event and a reduction in the breadth of promotions in the Floral department. The decrease in promotional and clearance sales on a same-store basis was almost entirely offset by a solid increase in regular price sales on a same-store basis for the quarter.

For the second quarter, the Southeast, Southwest, and Northeast zones delivered the strongest relative domestic same-store sales performances in Michaels stores. The Company’s strongest category performances came in General Crafts, primarily driven by Jewelry and Beads, Apparel Crafts, Impulse, and Kids Crafts businesses.

The Company currently expects fiscal 2006 second quarter diluted earnings per share to range from approximately $0.15 to $0.17, inclusive of a number of incremental items for 2006. This represents an increase of 25% to 42% over the prior year period. Note that fiscal 2005 second quarter results include an incremental charge of $0.05 per diluted share related to the Company’s early redemption of its 9¹/4% Senior Notes in July 2005. The Company’s fiscal 2006 second quarter results are currently expected to include legal and professional services expenses totaling approximately $3 million, on a pre-tax basis, for its review of stock option practices and its investigation efforts related to governmental inquiries. In addition the Company’s second quarter forecast also includes approximately $8 million on a pre-tax basis for additional costs related to the Company’s review of strategic alternatives and proposed merger transaction. The financial impact of the additional expenses and lower than anticipated sales levels are expected to be partly offset by a stronger than expected expansion in gross margin during the quarter.

As previously announced on June 30, 2006, following a comprehensive review of strategic alternatives that began on March 20, 2006, the Board of Directors approved a transaction to recapitalize the Company with investment by

8000 BENT BRANCH DRIVE · IRVING, TEXAS 75063
(972) 409-1300

two leading global private investment firms, Bain Capital and The Blackstone Group. Under the terms of the agreement, following the transaction Bain Capital and Blackstone will own substantially all of the outstanding shares of Michaels Stores, and the shareholders will receive $44 per share in cash, representing a transaction value of more than $6 billion. Completion of the transaction is contingent on regulatory review and approval by the shareholders of Michaels Stores and is expected to occur by the end of the calendar year.

The Company plans to release its fiscal 2006 second quarter earnings results on Wednesday, August 23, 2006, and will conduct a conference call at 4:00 p.m. CT on that date, hosted by Michaels Stores President and CFO, Jeffrey Boyer, and President and COO, Gregory Sandfort. 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 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 973-341-3080, PIN 6885488.

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 3, 2006, the Company owns and operates 906 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 28, 2006, and in our Quarterly Report on Form 10-Q for the quarter ended April 29, 2006. 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; our ability to obtain regulatory approval of the merger transaction; lawsuits asserted by our stockholders or others challenging the merger transaction; disruptions from the merger transaction, including the potential diversion of management’s attention to completion of the transaction and away from execution of existing business plans and the potential loss of employees or business partners because of perceived uncertainties; and other factors as set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006, 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).

8000 BENT BRANCH DRIVE · IRVING, TEXAS 75063
(972) 409-1300