10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 4, 2013

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           

Commission file number 001-09338

MICHAELS STORES, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-1943604
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification number)

8000 Bent Branch Drive

Irving, Texas 75063

(Address of principal executive offices, including zip code)

(972) 409-1300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.* Yes o  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of May 21, 2013, 118,687,391 shares of the Registrant’s Common Stock were outstanding.

*The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

MICHAELS STORES, INC.

FORM 10-Q

Part I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of May 4, 2013, February 2, 2013, and April 28, 2012 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the quarters ended May 4, 2013 and April 28, 2012 (unaudited)	4
	Consolidated Statements of Cash Flows for the quarters ended May 4, 2013 and April 28, 2012 (unaudited)	5
	Notes to Consolidated Financial Statements for the quarter ended May 4, 2013 (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
Part II—OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
Signatures		30

2

MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

MICHAELS STORES, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

(Unaudited)

	May 4,			February 2,			April 28,
	2013			2013			2012
ASSETS
Current assets:
Cash and equivalents	$	55		$	56		$	385
Merchandise inventories	842			865			874
Prepaid expenses and other	85			86			77
Deferred income taxes	37			37			42
Income tax receivable	8			3			5
Total current assets	1,027			1,047			1,383
Property and equipment, at cost	1,527			1,502			1,405
Less accumulated depreciation and amortization	(1,186		)	(1,164		)	(1,095		)
Property and equipment, net	341			338			310
Goodwill	94			94			95
Debt issuance costs, net of accumulated amortization of $52, $54, and $78, respectively	42			46			55
Deferred income taxes	13			13			18
Other assets	2			3			4
Total non-current assets	151			156			172
Total assets	$	1,519		$	1,541		$	1,865
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	232		$	263		$	280
Accrued liabilities and other	300			367			388
Current portion of long-term debt	198			150			127
Deferred income taxes	4			4			1
Income taxes payable	31			40			28
Total current liabilities	765			824			824
Long-term debt	2,887			2,891			3,363
Deferred income taxes	2			2			11
Other long-term liabilities	79			83			85
Total long-term liabilities	2,968			2,976			3,459
Total liabilities	3,733			3,800			4,283
Commitments and contingencies
Stockholders’ deficit:
Common Stock, $0.10 par value, 220,000,000 shares authorized; 118,417,069 shares issued and outstanding at May 4, 2013; 118,414,727 shares issued and outstanding at February 2, 2013; 118,420,253 shares issued and outstanding at April 28, 2012	12			12			12
Additional paid-in capital	48			49			49
Accumulated deficit	(2,279		)	(2,326		)	(2,487		)
Accumulated other comprehensive income	5			6			8
Total stockholders’ deficit	(2,214		)	(2,259		)	(2,418		)
Total liabilities and stockholders’ deficit	1,519			1,541			$	1,865

See accompanying notes to consolidated financial statements.

3

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

	Quarter Ended
	May 4,			April 28,
	2013			2012
Net sales	$	993		$	978
Cost of sales and occupancy expense	586			566
Gross profit	407			412
Selling, general, and administrative expense	271			260
Related party expenses	4			3
Store pre-opening costs	2			1
Operating income	130			148
Interest expense	47			66
Refinancing costs and losses on early extinguishment of debt	7			—
Other (income) and expense, net	—			(1		)
Income before income taxes	76			83
Provision for income taxes	29			30
Net income	47			53
Other comprehensive income, net of tax:
Foreign currency translation adjustment	—			2
Actuarial loss on pension plan	(1		)	—
Comprehensive income	$	46		$	55

See accompanying notes to consolidated financial statements.

4

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	Quarter Ended
	May 4,			April 28,
	2013			2012
Operating activities:
Net income	$	47		$	53
Adjustments:
Depreciation and amortization	25			24
Share-based compensation	(1		)	1
Debt issuance costs amortization	2			4
Refinancing costs expensed and losses on early extinguishment of debt	7			—
Changes in assets and liabilities:
Merchandise inventories	23			(34		)
Prepaid expenses and other	1			3
Accounts payable	(14		)	(15		)
Accrued interest	(30		)	37
Accrued liabilities and other	(39		)	(37		)
Income taxes	(15		)	5
Other long-term liabilities	(4		)	—
Net cash provided by operating activities	2			41
Investing activities:
Additions to property and equipment	(22		)	(18		)
Net cash used in investing activities	(22		)	(18		)
Financing activities:
Redemption of senior subordinated notes due 2016	(142		)	—
Borrowings on asset-based revolving credit facility	306			—
Payments on asset-based revolving credit facility	(125		)	—
Repurchase of common stock	—			(2		)
Proceeds from stock options exercised	—			2
Payment of capital leases	(1		)	—
Change in cash overdraft	(19		)	(9		)
Net cash provided by (used in) financing activities	19			(9		)
Net (decrease) increase in cash and equivalents	(1		)	14
Cash and equivalents at beginning of period	56			371
Cash and equivalents at end of period	$	55		$	385
Supplemental Cash Flow Information:
Cash paid for interest	$	75		$	25
Cash paid for income taxes	$	44		$	24

See accompanying notes to consolidated financial statements.

5

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Quarter Ended May 4, 2013

(Unaudited)

Note 1.  Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Michaels Stores, Inc. and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of the “Company”, “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

Because of the seasonal nature of our business, the results of operations for the quarter ended May 4, 2013 are not indicative of the results to be expected for the entire year.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014, and all references to”fiscal 2012” relate to the 53 weeks ended February 2, 2013. In addition, all references herein to “the first quarter of fiscal 2013” relate to the 13 weeks ended May 4, 2013, and all references to “the first quarter of fiscal 2012” relate to the 13 weeks ended April 28, 2012.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to Accounting Standards Codification (“ASC”) 220, Comprehensive Income. ASU No. 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other items not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  This standard, which is prospective, is effective for reporting periods beginning after December 15, 2012, with earlier adoption permitted.  We adopted all requirements of this standard on February 3, 2013, the beginning of fiscal 2013.

6

Note 2.  Debt

Our outstanding debt is detailed in the table below.  We were in compliance with the terms and conditions of all debt agreements for all periods presented.

	May 4, 2013		February 2, 2013		April 28, 2012		Interest Rate
	(in millions)
Senior secured term loan	$	1,640	$	1,640	$	1,996	Variable
Senior notes	1,007		1,007		795		7.750%
Senior subordinated notes	256		393		393		11.375%
Subordinated discount notes	—		—		306		13.000%
Asset-based revolving credit facility	182		1		—		Variable
Total debt	3,085		3,041		3,490
Less current portion	198		150		127
Long-term debt	$	2,887	$	2,891	$	3,363

113/8% Senior Subordinated Notes due 2016

On January 28, 2013, we caused to be delivered to the holders of our outstanding 113/8% Senior Subordinated Notes due November 1, 2016 (the “Senior Subordinated Notes”) an irrevocable notice relating to the redemption of $137 million in aggregate principal amount of the Senior Subordinated Notes. On February 27, 2013, we redeemed the $137 million of Senior Subordinated Notes at a redemption price equal to 103.792%.  In accordance with ASC 470 Debt, we recorded a loss on early extinguishment of debt of approximately $7 million related to the partial redemption of our Senior Subordinated Notes. The $7 million loss is comprised of a $5 million redemption premium and $2 million to write off related debt issuance costs.

Restated Revolving Credit Facility

As of May 4, 2013, the borrowing base of our restated senior secured asset-based revolving credit facility (“the Restated Revolving Credit Facility”) was $650 million, of which we had $182 million in borrowings, $62 million of outstanding letters of credit and the unused borrowing capacity was $406 million.

Note 3.  Comprehensive Income

Accumulated other comprehensive income, net of tax, is reflected in the Consolidated Balance Sheets as follows:

	Foreign Currency
	Translation
	and Other
	(in millions)
Balance at February 2, 2013	$	6
Actuarial loss on pension plan	(1		)
Balance at May 4, 2013	$	5

7

Note 4. Fair Value Measurements

As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

·Level 1 — Quoted prices for identical instruments in active markets;

·Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

·Level 3 — Instruments with significant unobservable inputs.

We apply fair value techniques on a non-recurring basis for the establishment of potential impairment loss related to goodwill pursuant to ASC 350, Intangibles—Goodwill and Other and determining the fair value of long-lived assets pursuant to ASC 360, Property, Plant, and Equipment. During the quarter ended May 4, 2013, there were no events or changes in circumstances indicating the carrying amounts of our goodwill or long-lived assets may not be recoverable.

The table below provides the carrying and fair values of our senior secured term loan facility (“Restated Term Loan Credit Facility”), our 73/4% Senior Notes that mature in 2018 (“2018 Senior Notes”) and our Senior Subordinated Notes, (together, with our 2018 Senior Notes, “our notes” ) as of May 4, 2013. The fair value of our Restated Term Loan Credit Facility was determined based on quoted market prices of similar instruments which are considered Level 2 inputs within the fair value hierarchy. The fair value of our notes was determined based on recent trades which are considered Level 1 inputs within the fair value hierarchy.

	Carrying Value		Fair Value
	(in millions)
Senior secured term loan	$	1,640	$	1,661
Senior notes	1,007		1,100
Senior subordinated notes	256		269

Note 5.  Income Taxes

The effective tax rate was 38.2% for the first quarter of fiscal 2013. The effective tax rate was 36.1% for the first quarter of fiscal 2012. The current year tax rate is higher than the prior year tax rate due primarily to the prior year favorable impact related to our reserve for uncertain tax positions..  We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.7%.

Note 6.  Commitments and Contingencies

We are involved in ongoing legal and regulatory proceedings.  Other than those described in the following paragraphs, there were no material changes to our disclosures of commitments and contingencies from our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

8

Employee Claims

Adams Claim

On March 20, 2009, 114 individuals commenced an action against the Company styled Adams, et al. v. Michaels Stores, Inc. in the U.S. District Court for the Central District of California. The complaint was later amended to add 15 additional plaintiffs.  In 2010, two additional lawsuits making the same allegations were filed in the Central District Court by eight additional plaintiffs, styled Borgen, et al. v. Michaels Stores, Inc. and Langstaff v. Michaels Stores, Inc., and were later consolidated with the Adams suit.  The Adams consolidated suit (“Adams”) alleges that the plaintiffs, certain former and current store managers in California, were improperly classified as exempt employees and, as such, Michaels failed to pay overtime wages, provide meal and rest periods (or compensation in lieu thereof), accurately record hours worked and provide itemized employee wage statements. The Adams suit additionally alleges that the foregoing conduct was in breach of California’s unfair competition law. The plaintiffs seek injunctive relief, damages for unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. We have entered into settlement agreements with virtually all of the individual plaintiffs for an amount that will not have a material effect on our consolidated financial statements.

Ragano Claim

On July 11, 2011, the Company was served with a lawsuit filed in the California Superior Court in and for the County of San Mateo by Anita Ragano, as a purported class action proceeding on behalf of herself and all current and former hourly retail employees employed by Michaels stores in California. We removed the matter to the U.S. District Court for the Northern District of California on August 9, 2011. The complaint was subsequently amended to add an additional named plaintiff, Terri McDonald. The lawsuit alleges that Michaels stores failed to pay all wages and overtime, failed to provide its hourly employees with adequate meal and rest breaks (or compensation in lieu thereof), failed to timely pay final wages, unlawfully withheld wages and failed to provide accurate wage statements and further alleges that the foregoing conduct was in breach of various laws, including California’s unfair competition law. The plaintiffs sought injunctive relief, compensatory damages, meal and rest break penalties, waiting time penalties, interest, and attorneys’ fees and costs. On August 10, 2012, we reached a class-wide settlement with plaintiffs and the Court granted final approval on April 22, 2013. The settlement will not have a material effect on our consolidated financial statements.

Consumer Class Action Claims

California Zip Code Claims

On August 15, 2008, Linda Carson, a consumer, filed a purported class action proceeding against Michaels Stores, Inc. in the Superior Court of California, County of San Diego (“San Diego Superior Court”), on behalf of herself and all similarly-situated California consumers. The Carson lawsuit alleges that Michaels unlawfully requested and recorded personally identifiable information (i.e., her zip code) as part of a credit card transaction. The plaintiff sought statutory penalties, costs, interest, and attorneys’ fees. We contested certification of this claim as a class action and filed a motion to dismiss the claim. On March 9, 2009, the Court dismissed the case with prejudice. The plaintiff appealed this decision to the California Court of Appeals for the Fourth District, San Diego. On July 22, 2010, the Court of Appeals upheld the dismissal of the case. The plaintiff appealed this decision to the Supreme Court of California (“California Supreme Court”). On September 29, 2010, the California Supreme Court granted the plaintiff’s petition for review; however, it stayed any further proceedings in the case until another similar zip code case pending before the court, Pineda v. Williams-Sonoma, was decided. On February 10, 2011, the California Supreme Court ruled, in the Williams-Sonoma case, that zip codes are personally identifiable information and therefore the Song-Beverly Credit Card Act of 1971, as amended (“Song Act”), prohibits businesses from requesting or requiring zip codes in connection with a credit card transaction. On or about April 6, 2011, the Supreme Court transferred the Carson case back to the Court of Appeals with directions to the Court to reconsider its decision in light of the Pineda decision. Upon reconsideration, the Court of Appeals remanded the case back to the San Diego Superior Court on May 31, 2011.

9

Additionally, since the California Supreme Court decision on February 10, 2011, three additional purported class action lawsuits alleging violations of the Song Act have been filed against the Company: Carolyn Austin v. Michaels Stores, Inc. and Tiffany Heon v. Michaels Stores, Inc., both in the San Diego Superior Court and Sandra A. Rubinstein v. Michaels Stores, Inc. in the Superior Court of California, County of Los Angeles, Central Division. The Rubinstein case was transferred to the San Diego Superior Court.  An order coordinating the cases has been entered and plaintiffs filed a Consolidated Complaint on April 24, 2012.  Plaintiffs seek damages, civil penalties, common settlement fund recovery, attorney fees, costs of suit and prejudgment interest.  The parties mediated the matter in March and a tentative settlement has been reached for an amount that will not have a material effect on our consolidated financial statements.

Massachusetts Zip Code Claims

Relying in part on the California Supreme Court decision, an additional purported class action lawsuit was filed on May 20, 2011 against the Company: Melissa Tyler v. Michaels Stores, Inc. in the U.S. District Court-District of Massachusetts, alleging violation of a Massachusetts statute regarding the collection of personally identification information in connection with a credit card transaction.   On March 11, 2013, the Massachusetts Supreme Judicial Court ruled on certified questions on the interpretation of the statute and remanded the case to the U.S. District Court for further proceedings.  Following the Judicial Court’s decision, an additional purported class action lawsuit asserting the same allegations in Tyler was filed in the U.S. District Court-District of Massachusetts by Susan D’Esposito, and the two cases have been consolidated.   We believe we have meritorious defenses to the claims and we are unable, at this time, to estimate a range of loss, if any.

Pricing and Promotion

On April 30, 2012, William J. Henry, a consumer, filed a purported class action proceeding against Michaels Stores, Inc. in the Court of Common Pleas, Lake County, Ohio, on behalf of himself and all similarly-situated Ohio consumers who purchased framing products and/or services from Michaels during weeks where Michaels was advertising a discount for framing products and/or services. The lawsuit alleges that Michaels advertised discounts on its framing products and/or services without actually providing a discount to its customers. The plaintiff is claiming violation of Ohio law ORC 1345.01 et seq., unjust enrichment and fraud. The plaintiff has alleged damages, penalties and fees not to exceed $5 million, exclusive of interest and costs. We believe we have meritorious defenses and intend to defend the lawsuit vigorously. We do not believe the resolution of this lawsuit will have a material effect on our consolidated financial statements.

Data Breach Claims

Payment Card Terminal Tampering

On May 3, 2011, we were advised by the U.S. Secret Service that they were investigating certain fraudulent debit card transactions that occurred on accounts that had been used for legitimate purchases in selected Michaels stores. A subsequent internal investigation revealed that approximately 90 payment card terminals in certain Michaels stores had been physically tampered with, potentially resulting in customer debit and credit card information to be compromised. We have since removed and replaced approximately 7,100 payment card terminals comparable to the identified tampered payment card terminals from our Michaels stores.

On May 18, 2011, Brandi F. Ramundo, a consumer, filed a purported class action proceeding against Michaels Stores, Inc. in the U.S. District Court for the Northern District of Illinois, on behalf of herself and all similarly- situated U.S. consumers alleging that Michaels failed to take commercially reasonable steps to protect consumer financial data, and was in breach of contract and laws, including the Federal Stored Communications Act and the Illinois Consumer Fraud and Deceptive Practices Act.  A number of additional purported class action lawsuits significantly mirroring the claims in the Ramundo complaint were filed against the Company, and subsequently these cases and the Ramundo case  were consolidated and transferred to the Northern District of Illinois.

On August 20, 2012, we reached a tentative class-wide settlement with plaintiffs for an amount that will not have a material effect on our consolidated financial statements and the Court granted final approval on April 17, 2013.

10

General

In addition to the litigation discussed above, we are, and in the future, may be involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources.

ASC 450, Contingencies, governs the disclosure and recognition of loss contingencies, including potential losses from litigation and regulatory matters. It imposes different requirements for the recognition and disclosure of loss contingencies based on the likelihood of occurrence of the contingent future event or events. It distinguishes among degrees of likelihood using the following three terms: “probable”, meaning that “the future event or events are likely to occur”; “remote”, meaning that “the chance of the future event or events occurring is slight”; and “reasonably possible”, meaning that “the chance of the future event or events occurring is more than remote but less than likely”. In accordance with ASC 450, the Company accrues for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the loss cannot be reasonably estimated we estimate the range of amounts, and if no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a material loss has been incurred. No accrual or disclosure is required for losses that are remote.

For some of the matters disclosed above, as well as other matters previously disclosed in the Company’s filings with the Securities and Exchange Commission (“SEC”), the Company is currently able to estimate a reasonably possible loss or range of loss in excess of amounts accrued (if any). For some of the matters included within this estimation, an accrual has been made because a loss is believed to be both probable and reasonably estimable, but an exposure to loss exists in excess of the amount accrued; in these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, although estimable, is believed to be reasonably possible, but not probable; in these cases the estimate reflects the reasonably possible loss or range of loss within the ranges identified. For the various ranges identified, the aggregate of these estimated amounts is approximately $14 million, which is also inclusive of amounts accrued by the Company.

For other matters disclosed above or as previously disclosed in the Company’s filings with the SEC, the Company is not currently able to estimate the reasonably possible loss or range of loss, and has indicated such. Many of these matters remain in preliminary stages (even in some cases where a substantial period of time has passed since the commencement of the matter), with few or no substantive legal decisions by the court defining the scope of the claims, the class (if any), or the potentially available damages, and fact discovery is still in progress or has not yet begun. For all these reasons, the Company cannot at this time estimate the reasonably possible loss or range of loss, if any, for these matters.

It is the opinion of the Company’s management, based on current knowledge and after taking into account its current legal accruals, the eventual outcome of all matters described in this Note would not be likely to have a material impact on the consolidated financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.

Note 7.  Segments and Geographic Information

We consider our Michaels — U.S., Michaels — Canada, Aaron Brothers and online scrapbooking business operations to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting. We determined that our Michaels — U.S., Michaels — Canada, and Aaron Brothers operating segments have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine those operating segments into one reporting segment.  As of May 4, 2013, the online scrapbooking business operating segment was immaterial to the financial statements as a whole. Accordingly, we will report in two reportable segments if Net sales, Operating income or loss, or Total assets of the online scrapbooking operating segment exceeds 10% of the consolidated amounts.

11

Our sales and assets by country are as follows:

	Quarter Ended
	May 4, 2013		April 28, 2012
	(in millions)
Net Sales:
United States	$	899	$	891
Canada	94		87
Consolidated Total	$	993	$	978

	May 4, 2013		February 2, 2013		April 28, 2012
	(in millions)
Total Assets:
United States	$	1,427	$	1,432	$	1,750
Canada	92		109		115
Consolidated Total	$	1,519	$	1,541	$	1,865

Our chief operating decision makers evaluate historical operating performance, plan and forecast future periods’ operating performance based on earnings before interest, income taxes, depreciation, amortization, and refinancing costs and losses on early extinguishment of debt (“EBITDA (excluding refinancing costs and losses on early extinguishment of debt)”). We believe EBITDA (excluding refinancing costs and losses on early extinguishment of debt) represents the financial measure that more closely reflects the operating effectiveness of factors over which management has control. As such, an element of base incentive compensation targets for certain management personnel are based on EBITDA (excluding refinancing costs and losses on early extinguishment of debt). A reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) to Net income is presented below.

	Quarter Ended
	May 4, 2013		April 28, 2012
	(in millions)
Net income	$	47	$	53
Interest expense	47		66
Refinancing costs and losses on early extinguishments of debt	7		—
Provision for income taxes	29		30
Depreciation and amortization	25		24
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$	155	$	173

12

Note 8.  Related Party Transactions

We pay annual management fees to Bain Capital Partners, LLC (“Bain Capital”) and The Blackstone Group L.P. (“The Blackstone Group” and, together with Bain Capital, the “Sponsors”) and Highfields Capital Management LP in the amount of $12 million and $1 million, respectively. We recognized $4 million and $3 million of expense related to annual management fees during the first quarter of fiscal 2013 and fiscal 2012, respectively. These expenses are included in related party expenses on the Consolidated Statements of Comprehensive Income.

Bain Capital owns a majority equity position in LogicSource, an external vendor we utilize for print procurement services.  Payments associated with this vendor during each of the first quarters of fiscal 2013 and fiscal 2012 were $1 million and $2 million, respectively.  These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in Brixmor Properties Group, a vendor we utilize to lease certain properties. Payments associated with this vendor during each of the first quarters of fiscal 2013 and fiscal 2012 were $1 million.  These expenses are included in Cost of sales and occupancy expense in the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in RGIS, an external vendor we utilize to count our store inventory. Payments associated with this vendor during the first quarters of fiscal 2013 and fiscal 2012 were $1 million and $2 million, respectively. These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in Vistar, an external vendor we utilize for all of the candy-type items in our stores.  Payments associated with this vendor during the first quarter of fiscal 2013 and fiscal 2012 were $6 million and $5 million, respectively. These expenses are recognized in cost of sales as the sales are recorded.

Our current directors (other than Jill A. Greenthal) are affiliates of Bain Capital or The Blackstone Group.  As such, some or all of such directors may have an indirect material interest in payments with respect to debt securities of the Company that have been purchased by affiliates of Bain Capital and The Blackstone Group.  As of May 4, 2013, affiliates of The Blackstone Group held $34 million of our senior secured term loan.

Note 9.  Condensed Consolidating Financial Information

All obligations of Michaels Stores, Inc. under our notes, the Restated Revolving Credit Facility and the Rested Term Loan Credit Facility are guaranteed by each of our subsidiaries other than Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC. As of May 4, 2013, the financial statements of Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC were immaterial. Each subsidiary guarantor is 100% owned by the parent and all guarantees are joint and several and full and unconditional.

The following condensed consolidating financial information represents the financial information of Michaels Stores, Inc. and its wholly-owned subsidiary guarantors, prepared on the equity basis of accounting.  The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X.  The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had the subsidiary guarantors operated as independent entities.

13

Supplemental Condensed Consolidating Balance Sheet

	May 4, 2013
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	32		$	23	$	—		$	55
Merchandise inventories	588			254		—			842
Intercompany receivables	—			442		(442		)	—
Other	108			22		—			130
Total current assets	728			741		(442		)	1,027
Property and equipment, net	272			69		—			341
Goodwill	94			—		—			94
Investment in subsidiaries	451			—		(451		)	—
Other assets	54			3		—			57
Total assets	$	1,599		$	813	$	(893	)	$	1,519
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	4		$	228	$	—		$	232
Accrued liabilities and other	177			123		—			300
Current portion of long-term debt	198			—		—			198
Intercompany payable	442			—		(442		)	—
Other	35			—		—			35
Total current liabilities	856			351		(442		)	765
Long-term debt	2,887			—		—			2,887
Other long-term liabilities	70			11		—			81
Total stockholders’ deficit	(2,214		)	451		(451		)	(2,214		)
Total liabilities and stockholders’ deficit	$	1,599		$	813	$	(893	)	$	1,519

14

Supplemental Condensed Consolidating Balance Sheet

	February 2, 2013
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	37		$	19	$	—		$	56
Merchandise inventories	590			275		—			865
Intercompany receivables	—			323		(323		)	—
Other	105			21		—			126
Total current assets	732			638		(323		)	1,047
Property and equipment, net	271			67		—			338
Goodwill	94			—		—			94
Investment in subsidiaries	301			—		(301		)	—
Other assets	59			3		—			62
Total assets	$	1,457		$	708	$	(624	)	$	1,541
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5		$	258	$	—		$	263
Accrued liabilities and other	235			132		—			367
Current portion of long-term debt	150			—		—			150
Intercompany payable	323			—		(323		)	—
Other	39			5		—			44
Total current liabilities	752			395		(323		)	824
Long-term debt	2,891			—		—			2,891
Other long-term liabilities	73			12		—			85
Total stockholders’ deficit	(2,259		)	301		(301		)	(2,259		)
Total liabilities and stockholders’ deficit	$	1,457		$	708	$	(624	)	$	1,541

15

Supplemental Condensed Consolidating Balance Sheet

	April 28, 2012
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	372		$	13	$	—		$	385
Merchandise inventories	577			297		—			874
Intercompany receivables	—			570		(570		)	—
Other	104			20		—			124
Total current assets	1,053			900		(570		)	1,383
Property and equipment, net	250			60		—			310
Goodwill	95			—		—			95
Investment in subsidiaries	563			—		(563		)	—
Other assets	74			3		—			77
Total assets	$	2,035		$	963	$	(1,133	)	$	1,865
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	10		$	270	$	—		$	280
Accrued liabilities and other	269			119		—			388
Current portion of long-term debt	127			—		—			127
Intercompany payable	570			—		(570		)	—
Other	29			—		—			29
Total current liabilities	1,005			389		(570		)	824
Long-term debt	3,363			—		—			3,363
Other long-term liabilities	85			11		—			96
Total stockholders’ deficit	(2,418		)	563		(563		)	(2,418		)
Total liabilities and stockholders’ deficit	$	2,035		$	963	$	(1,133	)	$	1,865

16

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended May 4, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	869		$	547		$	(423	)	$	993
Cost of sales and occupancy expense	556			453			(423		)	586
Gross profit	313			94			—			407
Selling, general, and administrative expense	233			38			—			271
Related party expenses	4			—			—			4
Store pre-opening costs	2			—			—			2
Operating income	74			56			—			130
Interest expense	47			—			—			47
Refinancing costs and losses on early extinguishment of debt	7			—			—			7
Intercompany charges (income)	13			(13		)	—			—
Equity in earnings of subsidiaries	69			—			(69		)	—
Income before income taxes	76			69			(69		)	76
Provision for income taxes	29			26			(26		)	29
Net income	47			43			(43		)	47
Other comprehensive income, net of tax:
Actuarial loss on pension plan	(1		)	—			—			(1		)
Comprehensive income	$	46		$	43		$	(43	)	$	46

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended April 28, 2012
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	861		$	549		$	(432	)	$	978
Cost of sales and occupancy expense	536			462			(432		)	566
Gross profit	325			87			—			412
Selling, general, and administrative expense	225			35			—			260
Related party expenses	3			—			—			3
Store pre-opening costs	1			—			—			1
Operating income	96			52			—			148
Interest expense	66			—			—			66
Other (income) and expense, net	(1		)	—			—			(1		)
Intercompany charges (income)	17			(17		)	—			—
Equity in earnings of subsidiaries	69			—			(69		)	—
Income before income taxes	83			69			(69		)	83
Provision for income taxes	30			25			(25		)	30
Net income	53			44			(44		)	53
Other comprehensive income, net of tax:
Foreign currency translation adjustment	2			—			—			2
Comprehensive income	$	55		$	44		$	(44	)	$	55

17

Supplemental Condensed Consolidating Statement of Cash Flows

	Quarter Ended May 4, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash provided by operating activities	$	(8	)	$	34		$	(24	)	$	2
Investing activities:
Cash paid for property and equipment	(16		)	(6		)	—			(22		)
Net cash used in investing activities	(16		)	(6		)	—			(22		)
Financing activities:
Net repayments of short-term debt	39			—			—			39
Intercompany dividends	—			(24		)	24			—
Other financing activities	(20		)	—			—			(20		)
Net cash used in financing activities	19			(24		)	24			19
Decrease in cash and equivalents	(5		)	4			—			(1		)
Beginning cash and equivalents	37			19			—			56
Ending cash and equivalents	$	32		$	23		$	—		$	55

Supplemental Condensed Consolidating Statement of Cash Flows

	Quarter Ended April 28, 2012
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash provided by operating activities	$	33		$	25		$	(17	)	$	41
Investing activities:
Cash paid for property and equipment	(15		)	(3		)	—			(18		)
Net cash used in investing activities	(15		)	(3		)	—			(18		)
Financing activities:
Intercompany dividends	—			(17		)	17			—
Other financing activities	(9		)	—			—			(9		)
Net cash used in financing activities	(9		)	(17		)	17			(9		)
Increase in cash and equivalents	9			5			—			14
Beginning cash and equivalents	363			8			—			371
Ending cash and equivalents	$	372		$	13		$	—		$	385

18

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

All expressions of the “Company”, “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Disclosure Regarding Forward-Looking Information

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion, as well as other portions of this Quarterly Report on Form 10-Q, contains 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 February 2, 2013. Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance or achievements to be materially different from anticipated results, prospects, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:

·risks related to general economic conditions; if recovery from the economic downturn continues to be slow or prolonged, it could continue to adversely affect consumer confidence and retail spending, decrease demand for our merchandise and adversely impact our results of operations, cash flows and financial condition;

·risks related to our substantial indebtedness, as our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our notes and credit facilities;

·our ability to open new stores and increase comparable store sales growth, as our growth depends on our strategy of expanding our base of retail stores; and if, we are unable to continue this strategy, our ability to increase our sales, profitability, and cash flow could be impaired;

·our reliance on foreign suppliers increases our risk of obtaining adequate, timely, and cost-effective product supplies;

·damage to the reputation of the Michaels brand or our private and exclusive brands could adversely affect our sales;

·significant increases in inflation or commodity prices such as petroleum, natural gas, electricity, steel and paper may adversely affect our costs, including cost of merchandise;

·our suppliers may fail us;

·risks associated with the vendors from whom our products are sourced could materially adversely affect our revenue and gross profit;

·product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our operations, merchandise offerings, reputation, results of operation, cash flow, and financial condition;

·unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our sales, results of operations, cash flow and financial condition;

·improvements to our supply chain may not be fully successful;

·changes in customer demand could materially adversely affect our sales, results of operations, and cash flow;

·how well we manage our business;

19

·competition could negatively impact our business;

·failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information and data breaches could materially adversely affect our financial condition and operating results;

·our information systems may prove inadequate;

·failure to attract or retain senior management could adversely affect our operations;

·a weak fourth quarter would materially adversely affect our results of operations;

·changes in newspaper subscription rates may result in reduced exposure to our circular advertisements;

·changes in regulations or enforcement may adversely impact our business;

·restrictions in our debt agreements that limit our flexibility in operating our business, as our senior secured credit facilities and the indentures governing our notes contain various covenants that limit our ability to engage in specified types of transactions and require that we maintain specified financial ratios upon the occurrence of certain events;

·disruptions in the capital markets could increase our costs of doing business;

·our real estate leases generally obligate us for long periods, which subjects us to various financial risks;

·we have co-sourced certain of our information technology, accounts payable, payroll, accounting and human resources functions, and may co-source other administrative functions, which makes us more dependent upon third parties;

·we are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries;

·failure to attract and retain quality sales, distribution center and other associates in appropriate numbers as well as experienced buying and management personnel could adversely affect our performance;

·our results may be adversely affected by serious disruptions or catastrophic events, including geo-political events and weather; and

·the interests of our Sponsors may conflict with the interests of our debt holders.

For more details on factors that may cause actual results to differ materially from such forward-looking statements, please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013, and other reports from time to time filed with or furnished to the Securities and Exchange Commission (“SEC”). We disclaim any intention to, and undertake no obligation to, update or revise any forward-looking statement.

General

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31.  All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014 and all references to “fiscal 2012” relate to the 53 weeks ended February 2, 2013. In addition, all references herein to “the first quarter of fiscal 2013” relate to the 13 weeks ended May 4, 2013 and all references to “the first quarter of fiscal 2012” relate to the 13 weeks ended April 28, 2012.

20

The following table sets forth certain of our unaudited operating data:

	Quarter Ended
	May 4,			April 28,
	2013			2012
Michaels stores:
Retail stores open at beginning of period	1,099			1,064
Retail stores opened during the period	15			2
Retail stores opened (relocations) during the period	4			6
Retail stores closed during the period	(1		)	—
Retail stores closed (relocations) during the period	(4		)	(6		)
Retail stores open at end of period	1,113			1,066
Aaron Brothers stores:
Retail stores open at beginning of period	125			134
Retail stores opened (relocations) during the period	1			—
Retail stores closed during the period	(3		)	(4		)
Retail stores closed (relocations) during the period	(1		)	—
Retail stores open at end of period	122			130
Total store count at end of period	1,235			1,196
Other operating data:
Average inventory per Michaels store (in thousands) (1)	$	723		$	786
Comparable store sales (decrease) increase (2)	(0.7		)%	1.5		%

(1)The calculation of average inventory per Michaels store excludes our Aaron Brothers stores.

(2)Comparable store sales (decrease) increase represents the (decrease) increase in Net sales for Michaels and Aaron Brothers 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. A store temporarily closed more than two weeks is not considered comparable during the month it closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes comparable in its 14th month of operation after its reopening.

Results of Operations

The following table sets forth the percentage relationship to Net sales of each line item of our unaudited consolidated Statements of Comprehensive Income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes, contained herein.

21

	Quarter Ended
	May 4,		April 28,
	2013		2012
Net sales	100.0	%	100.0	%
Cost of sales and occupancy expense	59.0		57.9
Gross profit	41.0		42.1
Selling, general, and administrative expense	27.3		26.6
Related party expenses	0.4		0.3
Store pre-opening costs	0.2		0.1
Operating income	13.1		15.1
Interest expense	4.7		6.7
Refinancing costs and losses on early extinguishment of debt	0.7		—
Other (income) and expense, net	—		(0.1	)
Income before income taxes	7.7		8.5
Provision for income taxes	2.9		3.1
Net income	4.8	%	5.4	%

Quarter Ended May 4, 2013 Compared to the Quarter Ended April 28, 2012

Net Sales—Net sales increased for the first quarter of fiscal 2013 by $15 million, or 1.5%, over the first quarter of fiscal 2012 due primarily to $21 million of incremental revenue from our non-comparable store sales, partially offset by a $6 million decrease in comparable store sales. Comparable store sales decreased 0.7% driven by a 3% decrease in customer transactions, partially offset by a 1.7% increase in the average ticket and a positive impact of 0.6% from deferred custom framing revenue.  The fluctuation in the exchange rates between the United States and Canadian dollars adversely impacted the average ticket by 20 basis points.  Our strongest categories were custom framing and yarn.  The increase in custom framing was primarily because promotional events occurred earlier in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 as well as production efficiencies.  Our yarn growth is primarily driven by positive customer response to trend products.

Cost of Sales and Occupancy Expense—Cost of sales and occupancy expense increased $20 million to $586 million in the first quarter of fiscal 2013 from $566 million in the first quarter of fiscal 2012.  Cost of sales increased by $9 million due primarily to an $8 million increase in merchandise costs and a $5 million increase in inventory markdown expense mainly due to an increase in discontinued stock keeping units associated with planned merchandise resets.  This is partially offset by a $5 million decrease in our freight and distribution expenses and improved efficiencies and new product offerings in our vertically integrated framing operations. In addition, we had an $11 million increase in rent and related expenses, including $5 million from opening new stores and a $3 million increase from the timing of maintenance costs.

Cost of sales and occupancy expense increased 110 basis points as a percentage of Net sales to 59.0% for the first quarter of fiscal 2013 from 57.9% for the first quarter of fiscal 2012. Occupancy costs increased 90 basis points due to the timing of maintenance costs as well as lease expenses on new stores. In addition, we had a 20 basis point increase in cost of sales due to 60 basis points of inventory reserves partially offset by a 30 basis point improvement in efficiencies and new product offerings in our vertically integrated framing operations and 20 basis points from lower distribution and freight costs.

Selling, General and Administrative Expense—Selling, general and administrative expense was $271 million in the first quarter of fiscal 2013 compared to $260 million in the first quarter of fiscal 2012. Selling, general and administrative expense increased $7  million due to incremental store costs related to operating 51 new Michaels stores at the end of the first quarter of fiscal 2013 compared to the end of the first quarter of fiscal 2013, including $5 million in labor and payroll-related expenses.  Additionally, Selling, general and administrative expenses increased by $2 million for executive signing costs, $2 million for higher strategic initiative consulting fees, $2 million for increased advertising and $2 million for payroll and payroll-related costs.  These amounts were partially offset by $4 million in savings for bonus and share-based compensation expense.

As a percentage of Net sales, Selling, general and administrative expense increased 70 basis points due to a 70 basis point increase in new store costs, 30 basis points of payroll and payroll-related expenses, 20 basis points of advertising and 20 bps of consulting fees.  These amounts were partially offset by a 40 basis point decrease in share-based compensation and bonuses.

22

Related Party Expenses—Related party expenses were $4 million and $3 million in the first quarter of fiscal 2013 and fiscal 2012, respectively, consisting of management fees and associated expenses paid to affiliates of two investment firms: Bain Capital Partners, LLC and The Blackstone Group, L.P. (collectively, together with their applicable affiliates, the “Sponsors”) and Highfields Capital Management, LP.

Interest Expense—Interest expense decreased $19 million to $47 million in the first quarter of fiscal 2013 from $66 million in the first quarter of fiscal 2012. The decrease is attributable to a $405 million reduction in our total debt outstanding and by a lower average interest rate associated with our amended senior secured term loan facility.

Refinancing Costs and Losses on Early Extinguishment of Debt—We recorded a loss on the early extinguishment of debt of $7 million during the first quarter of fiscal 2013, consisting of a $5 million redemption premium and $2 million to write off debt issuance costs related to the redemption of $137 million in aggregate principal amount of our 113/8% Senior Subordinated Notes due November 1, 2016 (the “Senior Subordinated Notes”).  See Note 2 to the consolidated financial statements for further discussion.

Provision for Income Taxes—The effective tax rate was 38.2% for the first quarter of fiscal 2013. The effective tax rate was 36.1% for the first quarter of fiscal 2012. The current year tax rate is higher than the prior year tax rate primarily due to the prior year favorable impact related to our reserve for uncertain tax positions.  We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.7%.

Liquidity and Capital Resources

We require cash principally for day-to-day operations, to finance capital investments, to purchase inventory, to service our outstanding debt, and for seasonal working capital needs. We expect that our available cash, cash flow generated from operating activities, and funds available under our senior secured asset-based revolving credit facility (“Restated Revolving Credit Facility”) will be sufficient to fund planned capital expenditures, working capital requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable future. Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely affected by the occurrence of any of the events described under Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 or our failure to meet our debt covenants as described in “—Liquidity and Capital Resources—Cash Flow from Financing Activities”. Our Restated Revolving Credit Facility provides senior secured financing of up to $650 million, subject to a borrowing base. As of May 4, 2013, the borrowing base was $650 million, of which we had $182 million in outstanding borrowings, $62 million of outstanding letters of credit and $406 million of unused borrowing capacity. Our cash and equivalents decreased $1 million from $56 million at February 2, 2013 to $55 million at May 4, 2013.

Our substantial indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk, and prevent us from meeting our obligations. Management reacts strategically to changes in economic conditions and monitors compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and flexibility.

The Company intends to use excess operating cash flows to repay portions of its indebtedness, depending on market conditions and growth opportunities. If the Company uses its excess cash flows to repay its debt, it will reduce the amount of excess cash available for additional capital expenditures.

As of February 2, 2013, we had an aggregate principal amount of $393 million of our Senior Subordinated Notes scheduled to mature in November 2016.  On February 27, 2013, we redeemed $137 million in aggregate principal amount of the outstanding Senior Subordinated Notes with cash on hand and borrowings made under our Restated Revolving Credit Facility for an aggregate redemption price (including the applicable redemption premium and accrued and unpaid interest) of $147 million.  The 7 3/4% Senior Notes mature in 2018 (“2018 Senior Notes”), and the senior secured term loan facility (“Restated Term Loan Credit Facility”) matures in or after 2018. Although no assurance can be given, depending on market conditions and other factors, we plan to repay or refinance such indebtedness prior to maturity.

We and our subsidiaries, affiliates, and significant shareholders may continue from time to time to seek to retire or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.

23

Cash Flow from Operating Activities

Cash flow provided by operating activities during the first three months of fiscal 2013 was $2 million compared to $41 million during the first three months of fiscal 2012. The $39 million change was primarily due to a $67 million decrease for the timing of interest payments, a $20 million decrease due to the timing of income tax payments and a $1 million increase in Net income before consideration of the $7 million refinancing cost expensed and losses on early extinguishment of debt.  These amounts were partially offset by the $57 million increase due to the timing of inventory purchases.

Average inventory per Michaels store (including supporting distribution centers) decreased 8.0% from $786,000 at April 28, 2012 to $723,000 at May 4, 2013, primarily driven by decreasing inventory in the distribution centers and the timing of in-transit inventory.

Cash Flow from Investing Activities

Cash flow used in investing activities represents the following capital expenditure activities:

	Quarter Ended
	May 4,		April 28,
	2013		2012
	(in millions)
New and relocated stores and stores not yet opened (1)	$	9	$	5
Existing stores	4		3
Information systems	6		8
Corporate and other	3		2
	$	22	$	18

(1)In the first three months of fiscal 2013, we incurred capital expenditures related to the opening of 15 Michaels stores in addition to the relocation of 4 Michaels stores. In the first three months of fiscal 2012, we incurred capital expenditures related to the opening of 2 Michaels stores in addition to the relocation of 6 Michaels stores.

Cash Flow from Financing Activities

Cash flow provided by financing activities during the first three months of fiscal 2013 was $19 million compared to cash used in financing activities of $9 million during the first three months of fiscal 2012. Cash flow used in financing activities for the first three months of fiscal 2013 was impacted by the redemption of the $137 million of Senior Subordinated Notes at a redemption price of 103.792%, or a total of $142 million, and net borrowings of $181 million under our Restated Revolving Credit Facility.

Non-GAAP Measures

The following table sets forth the Company’s Earnings before Interest, Taxes, Depreciation, Amortization, and Loss on early extinguishment of debt (“EBITDA excluding refinancing costs and losses on early extinguishment of debt”). The Company defines EBITDA (excluding refinancing costs and losses on early extinguishment of debt) as Net income before interest, income taxes, depreciation, amortization and loss on early extinguishment of debt. Additionally, the table presents Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”).  The Company defines Adjusted EBITDA as EBITDA (excluding refinancing costs and losses on early extinguishment of debt) adjusted for certain defined amounts that are added to, or subtracted from, EBITDA (excluding refinancing costs and losses on early extinguishment of debt)  (collectively, the “Adjustments”) in accordance with the Company’s Restated Term Loan Credit Facility and Restated Revolving Credit Facility. The Adjustments are described in further detail in the table and the footnotes to the table below.

24

The Company has presented EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA to provide investors with additional information to evaluate our operating performance and our ability to service our debt.  The Company uses EBITDA (excluding refinancing costs and losses on early extinguishment of debt), among other metrics, to evaluate operating performance, to plan and forecast future periods’ operating performance and as an element of its incentive compensation targets. Adjusted EBITDA is a required calculation under the Company’s Restated Term Loan Credit Facility and its Restated Revolving Credit Facility. As it relates to the Restated Term Loan Credit Facility, Adjusted EBITDA is used in the calculations of fixed charge coverage and leverage ratios, which, under certain circumstances may result in limitations on the Company’s ability to make restricted payments as well as the determination of mandatory repayments of the loans. Under the Restated Term Loan Credit Facility, Adjusted EBITDA is used in the calculation of fixed charge coverage ratios, which under certain circumstances, may restrict the Company’s ability to make certain payments (characterized as restricted payments), investments (including acquisitions) and debt repayments.

As EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA are not measures of operating performance or liquidity calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), these measures should not be considered in isolation of, or as a substitute for, Net income, as an indicator of operating performance, or net cash provided by operating activities as an indicator of liquidity.  Our computation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA may differ from similarly titled measures used by other companies. As EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA exclude certain financial information compared with Net income and Net cash provided by operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded.

25

The table below shows a reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA to Net income and Net cash provided by operating activities.

	Quarter Ended
	May 4,			April 28,
	2013			2012
	(in millions)
Net cash provided by operating activities	$	2		$	41
Depreciation and amortization	(25		)	(24		)
Share-based compensation	1			(1		)
Debt issuance costs amortization	(2		)	(4		)
Refinancing costs and losses on early extinguishments of debt	(7		)	—
Changes in assets and liabilities	78			41
Net income	47			53
Interest expense	47			66
Refinancing costs and losses on early extinguishment of debt	7			—
Provision for income taxes	29			30
Depreciation and amortization	25			24
EBITDA (excluding refinancing costs and losses on early extinguishment of debt)	155			173
Adjustments:
Share-based compensation	(1		)	1
Sponsor fees	4			3
Termination expense	—			—
Store pre-opening costs	2			1
Foreign currency transaction losses (gains)	—			(1		)
Other (1)	2			—
Adjusted EBITDA	$	162		$	177

(1)Other adjustments relate to items such as the moving & relocation expenses, franchise taxes and signing bonuses.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries. Our sales, costs and expenses of our Canadian subsidiaries, when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of May 4, 2013, a 10% increase or decrease in the exchange rate of the U.S. and Canadian dollar would have a minimal impact on Net income.

We have market risk exposure arising from changes in interest rates on our Restated Term Loan Credit Facility and our Restated Revolving Credit Facility, together the (“ Senior Secured Credit Facilities”) The interest rates on our Senior Secured Credit Facilities will reprice periodically, which will impact our earnings and cash flow. The interest rates on our 2018 Senior Notes and Senior Subordinated Notes are fixed.  Based on our overall interest rate exposure to variable rate debt outstanding as of May 4, 2013, a 1% increase or decrease in interest rates would increase or decrease income before income taxes by $18 million. A 1% increase in interest rates would decrease the fair value of our long-term fixed rate debt by $17 million. A 1% decrease in interest rates would increase the fair value of our long-term fixed rate debt by $17 million. A change in interest rates would not materially affect the fair value of our variable rate debt as the debt reprices periodically.

26

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the SEC under the Securities Exchange Act of 1934 that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  We note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Change in Internal Control Over Financial Reporting

There has not been any change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the SEC under the Securities Exchange Act of 1934) during the quarter covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

27

MICHAELS STORES, INC.

Part II—OTHER INFORMATION

Item 1.  Legal Proceedings.

Information regarding legal proceedings is incorporated herein by reference from Note 6 to our Consolidated Financial Statements.

ITEM 5.  Other Information

Submission of Matters to a Vote of Security Holders

By a written consent dated March 14, 2013, holders of 93.14% of the common stock of the Company voted their shares to increase the size of the Company’s board of directors to nine directors, elect Carl S. Rubin to the board of directors with an effective appointment date of March 18, 2013, and to ratify transactions with the Company’s affiliates for fiscal year 2012. The affirmative vote of more than 50% of the stockholders was required to take such action.

Iran Sanctions Related Disclosure

Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, which added Section 13(r) of the Securities Exchange Act of 1934, we are required to include certain disclosures in our periodic reports if we or any of our “affiliates” knowingly engaged in certain specified activities during the period covered by this Quarterly Report on Form 10-Q. Because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us (“control” is also construed broadly by the SEC). We do not believe we and our consolidated subsidiaries have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the quarter ended May 4, 2013.

The Blackstone Group L.P., one of our Sponsors, informed us of disclosures publicly filed and/or provided to them by Hilton Worldwide, Inc., SunGard Capital Corp., SunGard Capital Corp. II, SunGard Data Systems Inc., and Travelport Limited, which may be considered their affiliates. These disclosures are included in, and the Company hereby incorporates by reference herein, Exhibit 99.1 to this this Quarterly Report on Form 10-Q.

Item 6.  Exhibits.

(a) Exhibits:

Exhibit Number	Description of Exhibit
10.1	Employment Agreement, dated February 13, 2013, between Michaels Stores, Inc. and Carl S. Rubin (filed herewith).*
10.2	Restricted Stock Award Agreements, dated March 18, 2013, between Michaels Stores, Inc. and Carl S. Rubin (filed herewith).*
10.3	Stock Option Agreements, dated March 18, 2013, between Michaels Stores, Inc. and Carl S. Rubin (filed herewith).*
31.1	Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certifications of Charles M. Sonsteby pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.1	Section 13 (r) Disclosure.

28

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

*Management contract or compensatory plan or arrangement.

29

MICHAELS STORES, INC.

SIGNATURES

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 thereunto duly authorized.

	MICHAELS STORES, INC.
	By:	/s/ Carl S. Rubin
		Carl S. Rubin
		Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Charles M. Sonsteby
		Charles M. Sonsteby
		Chief Administrative Officer & Chief Financial Officer
		(Principal Financial Officer)
Dated: May 24, 2013

30

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
10.1	Employment Agreement, dated February 13, 2013, between Michaels Stores, Inc. and Carl S. Rubin (filed herewith).*
10.2	Restricted Stock Award Agreements, dated March 18, 2013, between Michaels Stores, Inc. and Carl S. Rubin (filed herewith).
10.3	Stock Option Agreements, dated March 18, 2013, between Michaels Stores, Inc. and Carl S. Rubin (filed herewith).
31.1	Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certifications of Charles M. Sonsteby pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.1	Section 13 (r) Disclosure.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

*Management contract or compensatory plan or arrangement.

31

EX-10.1

Exhibit 10.1

Execution Version

AGREEMENT

AGREEMENT made and entered into by and between Michaels Stores, Inc. (the “Company”) and Carl Rubin (the “Executive”), this 13th day of February, 2013.

WHEREAS, the operations of the Company and its Affiliates are a complex matter requiring direction and leadership;

WHEREAS, the Executive is possessed of certain experience and expertise that qualify him to provide the direction and leadership required by the Company and its Affiliates; and

WHEREAS, subject to the terms and conditions hereinafter set forth, the Company therefore wishes to employ the Executive as its Chief Executive Officer and the Executive wishes to accept such employment;

NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree:

1.Employment.  Subject to the terms and conditions set forth in this Agreement, the Company hereby offers, and the Executive hereby accepts, employment.

2.Term.  The Executive’s employment under this Agreement shall commence on March 18, 2013 or on such earlier date as the Company and the Executive may agree (the “Effective Date”) and shall continue in effect until terminated in accordance with Section 5.  The term of this Agreement is hereafter referred to as “the term of this Agreement” or “the term hereof.”

3.Capacity and Performance.

(a)During the term hereof, the Executive shall serve the Company as its Chief Executive Officer (“CEO”).  In addition, and without further compensation, the Executive will be appointed as a member of the board of directors of the Company (the “Board”) and agrees to serve as a director and/or officer of one or more of the Company’s Immediate Affiliates (as defined in Section 13 hereof) if so elected or appointed from time to time.  If the Executive’s employment with the Company terminates for any reason, then concurrently with such termination, the Executive will be deemed to have resigned from the Board and any director, officer, trustee, or other positions he may hold with the Company, the Company’s Affiliates, or any of their respective related committees, trusts, foundations, or other similar entities, in each case unless otherwise agreed in writing by the Company and the Executive.

(b)During the term hereof, the Executive shall report to the Board.

(c)During the term hereof, the Executive shall be employed by the Company on a full-time basis and shall perform the duties and responsibilities of his position, including, without limitation, general oversight and direction of the operations of the Company and such other duties and responsibilities on behalf of the Company consistent with the responsibilities of a Chief Executive Officer, as well as the duties and responsibilities reasonably related to other positions on behalf of the Immediate Affiliates, as may be designated from time to time by the Board or by its Chair or other designee.

(d)During the term hereof, the Executive shall devote substantially all of his business time and his best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and, if so elected or appointed, its Immediate Affiliates and to the discharge of his duties and responsibilities hereunder.  The Company hereby agrees that the Executive may participate in appropriate trade associations.  In addition, he may engage in appropriate civic, charitable, religious or personal activities that do not conflict or interfere with the proper performance of his duties hereunder or violate Sections 7, 8, or 9 of this Agreement.  However, the Executive shall not engage in any other business activity or serve in any industry, professional, governmental or academic position during the term of this Agreement, except as may be expressly approved in advance by the Board in writing.

4.Compensation and Benefits.  As compensation for all services performed by the Executive under and during the term hereof and subject to performance of the Executive’s duties and of the obligations of the Executive to the Company and its Immediate Affiliates, pursuant to this Agreement or otherwise:

(a)Base Salary.  During the term hereof, the Company shall pay the Executive a base salary at the rate of One Million One Hundred Dollars ($1,100,000) per annum, payable in accordance with the payroll practices of the Company for its executives and subject to increase from time to time by the Board, in its sole discretion.  Such base salary, as from time to time increased, is hereafter referred to as the “Base Salary”.

(b)Bonuses.  For each fiscal year completed during the term hereof, the Executive shall be eligible to earn an annual bonus under the Company’s annual performance-based bonus plan as from time to time in effect, subject to the achievement of such performance targets as shall be determined in the discretion of the Board.  The Executive’s target bonus shall be one hundred percent (100%) of Base Salary, with a maximum bonus potential of two hundred percent (200%) of Base Salary for performance in excess of the performance targets and with the actual amount of bonus, if any, to be determined by the Board in its sole discretion.  Such bonus is hereafter referred to as the “Annual Bonus.”  Subject to Section 5, Executive shall be eligible for a Annual Bonus in respect of the full fiscal year 2013.

(c)Vacations.  During the term hereof, the Executive shall be entitled to earn vacation at the rate of five (5) weeks per year, to be taken at such times and intervals as shall be determined by the Executive, subject to the reasonable business needs of the Company.  Vacation shall otherwise be governed by the policies of the Company, as in effect from time to time.

(d)Other Benefits.  During the term hereof, the Executive shall be entitled to participate in any and all Employee Benefit Plans from time to time in effect for the Chief Executive Officer of the Company (including a premium car lease) or senior executives of the Company generally, except to the extent any Employee Benefit Plan provides benefits otherwise of a type otherwise provided to the Executive hereunder (e.g., a severance pay plan), in which case such benefits will be provided exclusively pursuant to this Agreement.  Such participation in the Company’s Employee Benefit Plans shall be subject to the terms of the applicable plan documents and generally applicable Company policies.  For purposes of this Agreement, “Employee Benefit Plan” shall have the meaning ascribed to such term in Section 3(3) of ERISA, as amended from time to time.

2

(e)Business Expenses.  The Company shall pay or reimburse the Executive for all reasonable, customary and necessary business expenses incurred or paid by the Executive in the performance of his duties and responsibilities hereunder, subject to such reasonable substantiation and documentation as may be specified by the Company from time to time.  Such expenses shall include, without limitation, the following:

(i)reasonable expenses associated with relocation of Executive, his family and household goods to Texas and with obtaining suitable housing in Texas, all in accordance with the Company’s current executive relocation plan;

(ii)reasonable legal fees incurred in connection with his negotiation with the Company of this Agreement and the option and restricted stock award documents described in (f) and (g) below; and

(iii)reasonable travel expenses, including business class airfare when available.

(f)Restricted Stock Grants.  On or promptly following the Effective Date, the Company shall grant to Executive two-hundred thousand (200,000) shares of restricted stock pursuant to the form of Restricted Stock Award Agreement attached as Exhibit A.  Promptly following the date that the Board or a committee of the Board determines the fair market value of a share of the Company’s common stock as of February 2, 2013 (the “Fourth Quarter FMV”), the Company shall grant to the Executive pursuant to the form of Restricted Stock Award Agreement attached as Exhibit B an additional number of shares of restricted stock equal to (i) the Fourth Quarter FMV minus $25.69, multiplied by (ii) twenty-one thousand three hundred fifty seven (21,357).

(g)Option Grant.  On or promptly following the Effective Date, the Company will grant to Executive an option to purchase one million two-hundred and fifty thousand (1,250,000) shares of common stock pursuant to the form of Stock Option Agreement attached as Exhibit C.

(h)Price Protection Payment.  For ninety (90) days beginning the day after the Executive’s employment with Ulta Salon, Cosmetics & Fragrance, Inc. (“Ulta”) terminates (which period shall be extended to the extent the underlying post-employment exercise period of the options is extended for any “blackout period” in which the Executive is prohibited under Ulta policy or applicable law, including any stock exchange listing requirement, from engaging in any sale of Ulta stock (a “Blackout Period”)) (such ninety (90)-day period as it may be extended, if at all, the “Sale Window”) the Executive agrees upon the direction of the Board (or its designee) to exercise his options to purchase shares of Ulta stock and promptly sell any such shares of Ulta stock received by the Executive upon such exercise, provided that at the time of such direction to exercise and sell, the Executive is not subject to a Blackout Period.  If at the time the Board (or its designee) directs the Executive to sell such Ulta shares owned by the Executive, the executed sale price is below $90.00 per share, the Company agrees to pay the Executive a cash amount, less applicable withholding, equal to the difference between $90.00 per share and the per share sale price of any such shares up to 130,000 shares (as such number of shares may be reduced below) (the “Price Protection Payment”).  In the event that the Executive does not exercise and sell such Ulta shares as directed by the Board (or its designee) by the end of the next trading day following receipt of such notice, the Executive shall not be entitled to a Price Protection Payment with respect to those shares.  Any Price Protection Payment payable to the Executive by the Company pursuant to this Section 4(h) shall be paid to him in a lump sum within fourteen (14) days following the close of the Sale Window, provided, however, that if the Executive resigns without Good Reason or his employment is terminated by the Company for Cause before or on the second anniversary of the Effective Date, the Executive shall be obligated to repay the Price Protection Payment in full to the Company, together with interest at an annualized rate equal to the rate on the two-year treasury constant maturity rate as published by the Federal Reserve Board on the date closest to the date of such termination date, within sixty (60) days of his termination date.

3

(i)Inducement Bonus.  Promptly following the filing of the Ulta proxy statement for its 2013 annual meeting, and no later than fourteen (14) days following such date, the Company shall pay the Executive a lump-sum cash amount equal to the bonus that the Executive would have been entitled to receive under the Ulta annual bonus plan in which the Executive participated (the “Ulta STIP”) had he remained employed by Ulta through the date Ulta pays its 2012 Ulta STIP bonuses, less applicable withholding (the “2012 Bonus”), provided, however, that the Company will not be required to pay the 2012 Bonus to the extent it is paid by Ulta.

(j)Investment in the Company.  The Executive will have the opportunity to purchase up to $3,000,000 of common stock of the Company up until the sixtieth (60th) day following the Effective Date at the purchase date per share fair market value of the Company’s common stock, as determined by the Board of Directors, subject to his executing customary agreements in connection with the foregoing, including subscription documents and the Amended and Restated Stockholders Agreement among the Company and certain stockholders of the Company dated as of October 31, 2006, as such agreement may be amended from time to time.

5.Termination of Employment and Severance Benefits.  The Executive’s employment hereunder shall terminate under the following circumstances:

(a)Death.  In the event of the Executive’s death prior to his termination of employment under any other section this Agreement, the Executive’s employment hereunder shall immediately and automatically terminate.  In such event, the Company shall pay to the Executive’s designated beneficiary or, if no beneficiary has been designated by the Executive in a written notice delivered to the Company, to his estate, (i) any Base Salary earned but not paid through the date of termination; (ii) pay for any vacation time earned but not used through the date of termination; (iii) any Annual Bonus earned for the fiscal year preceding that in which termination occurs, but unpaid on the date of termination (payable at the time provided in the Company’s then applicable annual performance-based bonus plan); and (iv) any business expenses incurred by the Executive but un-reimbursed on the date of termination, provided that such expenses and required substantiation and documentation are submitted within sixty (60) days of termination that such expenses are reimbursable under Company policy, and that such expenses are reimbursed not later than the applicable deadline specified in the Company’s then applicable reimbursement policy (all of the foregoing, “Final Compensation”).  The portion of the Final Compensation specified in clauses (i) and (ii) above shall be paid within thirty (30) days following the date of termination.  In addition, in the event of the Executive’s termination of employment under this Section 5(a), the Company shall pay to the Executive’s designated beneficiary or, if no beneficiary has been designated by the Executive in a written notice delivered to the Company, to his estate, a pro-rated Annual Bonus for the year in which termination occurs, based on the actual Annual Bonus that the Executive would have received for such year had he remained employed by the Company for the full year and determined based on the Company’s actual results for such year (payable at the time provided in the Company’s then applicable annual performance-based bonus plan) (the “Pro-Rata Bonus”).  The Company shall have no further obligation to the Executive hereunder.

4

(b)Disability.

(i)The Company may terminate the Executive’s employment hereunder, upon notice to the Executive, in the event that the Executive becomes disabled during his employment hereunder through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of his duties and responsibilities hereunder, notwithstanding the provision of any reasonable accommodation, for one hundred and twenty (120) days during any period of three hundred and sixty-five (365) consecutive calendar days.  In the event of such termination, the Company shall have no further obligation to the Executive, other than for payment of Final Compensation and the Pro-Rata Bonus (which shall be paid at the same time or times as in the case of a termination by reason of death).

(ii)The Board may designate another employee to act in the Executive’s place during any period of the Executive’s disability.  Notwithstanding any such designation, the Executive shall continue to receive the Base Salary in accordance with Section 4(a) and to participate in the Company’s Employee Benefit Plans in accordance with Section 4(d), to the extent permitted by the then-current terms of such plans, until the Executive becomes eligible for disability income benefits under the Company’s disability income plan or until the termination of his employment, whichever shall first occur.

(iii)While receiving disability income payments under the Company’s disability income plan, the Executive shall not be entitled to receive any Base Salary under Section 4(a) hereof, but shall continue to participate in the Company’s Employee Benefit Plans in accordance with Section 4(d), to the extent permitted by the then-current terms of such plans, until the termination of his employment.

(iv)If any question shall arise as to whether during any period the Executive is disabled through any illness, injury, accident or condition of either a physical or psychological nature so as to be unable to perform substantially all of his duties and responsibilities hereunder, the Executive may, and at the request of the Company shall, submit to a medical examination by a physician selected by the Company to whom the Executive or his duly appointed guardian, if any, has no reasonable objection to determine whether the Executive is so disabled and such determination shall for the purposes of this Agreement be conclusive of the issue.  If such question shall arise and the Executive shall fail to submit to such medical examination, the Company’s determination of the issue shall be binding on the Executive.

5

(c)By the Company for Cause.  The Company may terminate the Executive’s employment hereunder for Cause at any time upon written notice to the Executive by the Board setting forth in reasonable detail the nature of such Cause.  “Cause” shall mean the following events or conditions, as determined by the Board in its reasonable judgment:  (i) the Executive’s willful failure to perform (other than by reason of disability), or gross negligence in the performance of, his material duties and responsibilities to the Company or any of its Affiliates, or willful failure to follow or carry out any lawful and reasonable direction of the Board, and the continuance of such willful failure or gross negligence for a period of twenty-five (25) days after delivery of written notice to the Executive; (ii) the willful material breach by the Executive of any provision of this Agreement or any other material agreement between the Executive and the Company or any of its Affiliates and the continuance of such material breach for a period of twenty-five (25) days after delivery of written notice to the Executive; (iii) fraud, embezzlement, theft or other dishonesty by the Executive with respect to the Company or any of its Affiliates; (iv) the conviction of, or a plea of nolo contendere by, the Executive for any felony or any other crime involving dishonesty or moral turpitude; and (v) any other conduct that involves a willful and material breach of fiduciary obligation on the part of the Executive.  Upon the giving of notice of termination of the Executive’s employment hereunder for Cause or the expiration of the twenty-five (25)-day cure period (without cure), as applicable, the Company shall have no further obligation to the Executive, other than for Final Compensation (which shall be paid at the same time or times as in the case of a termination by reason of death) and continued medical and dental coverage to the extent required by the so-called “COBRA” coverage continuation rules and permitted under the Company’s medical and dental policies.

(d)By the Company Other than for Cause.  The Company may terminate the Executive’s employment hereunder other than for Cause at any time upon notice to the Executive.  In the event of such termination, in addition to Final Compensation (which shall be paid at the same time or times as in the case of a termination by reason of death), then for the period of two (2) years following the date of termination, the Company shall provide the Executive the following (in the aggregate, the “Severance Benefits”) as follows:  (i) the Company will pay the Executive severance pay (the “Severance Pay”) equal to the sum of (A) the Base Salary at the annual rate in effect on the date of termination and (B) the Executive’s target Annual Bonus determined in accordance with Section 4(b) hereof and (ii) it shall provide the Executive with continued medical and dental coverage to the extent required by the so-called “COBRA” coverage continuation rules and shall pay to the Executive, at the same time as it pays the first severance payment under clause (i)(A), a lump sum amount equal in its reasonable estimation to what would have been the Company’s premium cost subject only to the Executive’s payment of the employee portion (determined on the same basis as applied to the Executive on the date of termination for the Executive and the Executive’s family members), minus any required withholding.  Any obligation of the Company to provide the Severance Benefits under this Section 5(d) or Section 5(e) below is conditioned, however, on the Executive signing and returning to the Company (without revoking) a timely and effective release of claims substantially in the form attached as Exhibit D by the deadline specified therein, all of which (including the lapse of the period for revoking the release of claims as specified in the release of claims) shall have occurred no later than the sixtieth (60th) calendar day following the date of termination (any such release submitted by such deadline, the “Release of Claims”) and on the Executive’s continued compliance with his obligations to the Company and its Affiliates that survive his termination of employment, including without limitation those set forth in Sections 7, 8, and 9 hereof.  The Release of Claims creates legally binding obligations on the part of the Executive, and the Company and its Affiliates therefore advise the Executive to seek the advice of an attorney before signing the Release of Claims.  Only if the foregoing conditions to payment are satisfied, and subject to Section 5(g) below, the Severance Pay shall be paid in installments on a pro-rated basis in accordance with the Company’s regular payroll practices commencing on the first regular payroll date that follows the date of termination by sixty (60) days, with the first such payment to include all amounts that would have been paid under Section 5(d)(i) had payment commenced on the first payroll date after termination of employment.

6

(e)By the Executive for Good Reason.  The Executive may terminate his employment hereunder for Good Reason pursuant to the procedures hereinafter specified.  The following, if occurring without the Executive’s consent or other than for tax or other regulatory reasons, shall constitute Good Reason for termination by the Executive:

(i)removal of the Executive from the position of CEO or director of the Company (or a successor corporation), or removal of the Executive from a director or officer position of an Immediate Affiliate;

(ii)material diminution in the nature or scope of the Executive’s responsibilities, duties or authority, including the appointment or election of a Board Chairman who is also an executive officer of the Company, other than the Executive, a change in the Executive’s direct reporting to the full Board or a change in reporting relationships resulting from the direct or indirect control of the Company (or a successor corporation) by another corporation or other entity or resulting from an acquisition by a person or entity of at least fifty percent (50%) of the equity, property or other assets of the Company or any of its Affiliates; provided, however, that any material diminution of the business of the Company or any of its Affiliates shall not constitute “Good Reason”;

(iii)material failure of the Company to provide the Executive the Base Salary and Annual Bonus opportunity in accordance with the terms of Section 4 hereof; or

(iv)relocation of the Executive’s office to an area outside of a fifty (50)- mile radius from the Company’s current headquarters in Irving, Texas.

To qualify as a termination for Good Reason under this Section 5(e), the Executive must have given notice to the Company, setting forth in reasonable detail the condition purportedly giving rise to the Good Reason within ninety (90) days of the initial existence or occurrence of the condition, the Company must have failed to cure the condition within thirty (30) days of receiving such notice, and the Executive must terminate his employment within thirty (30) days following the expiration of the thirty (30)-day cure period.  In the event of termination in accordance with this Section 5(e), the Executive will be entitled to the Severance Payments to which he would have been entitled had he been terminated by the Company other than for Cause, subject to the same conditions to payment as are specified in Section 5(d) above and with any payments and benefits to be paid or provided at the same time and in the same manner as prescribed in Section 5(d) above.

7

(f)By the Executive Other than for Good Reason.  The Executive may terminate his employment hereunder at any time upon thirty (30) days’ prior written notice to the Company. In the event the Executive terminates his employment pursuant to this Section 5(f), the Board may elect to waive the period of notice, or any portion thereof, and, if the Board so elects, the Company will pay the Executive his Base Salary for the period so waived.  The Company shall have no further obligation to the Executive, other than for any Final Compensation due to him (which shall be paid at the same time or times as in the case of termination by reason of death).

(g)Timing of Payments and 409A.

(i)For purposes of determining whether any payment or series of payment owed to the Executive hereunder qualify for the “short-term deferral” exception under Section 409A of the Code, each such payment (and each payment in a series of payments) shall be treated as a separate payment.

(ii)For purposes of this Agreement, all references to “termination of employment” and correlative phrases shall be construed to require a “separation from service” (as defined in Section 1.409A-1(h) of the Treasury Regulations after giving effect to the presumptions contained therein).

(iii)If at the time of the Executive’s termination of employment, the Executive is a “specified employee” (as defined below), any payments hereunder that are payable on account of such separation from service that would (but for this provision) be payable within six (6) months following the date of termination, shall instead be paid on the next business day following the expiration of such six (6)-month period or, if earlier, upon the Executive’s death except (A) to the extent of amounts that do not constitute a deferral of compensation within the meaning of Treasury Regulations Section 1.409A-1(b) (including without limitation by reason of the safe harbor set forth in Section 1.409A-1(b)(9)(iii), as determined by the Company in its good faith discretion); (B) benefits that qualify as excepted welfare benefits pursuant to Treasury Regulations Section 1.409A-1(a)(5); or (C) other amounts or benefits that are not subject to the requirements of Section 409A.

(iv)Any reimbursement for expenses that would constitute nonqualified deferred compensation subject to Section 409A shall be subject to the following additional rules: (A) no reimbursement of any such expense shall affect the Executive’s right to reimbursement of any such expense in any other taxable year; (B) reimbursement of the expense shall be made, if at all, promptly, but not later than the end of the calendar year following the calendar year in which the expense was incurred; and (C) the right to reimbursement shall not be subject to liquidation or exchange for any other benefit.

6.Effect of Termination.  The provisions of this Section 6 shall apply to any termination, whether pursuant to Section 5 or otherwise.

8

(a)In the event of the termination of the Executive’s employment hereunder, payment by the Company of any Final Compensation or Severance Benefits due the Executive in accordance with the applicable termination provision of Section 5 hereof shall constitute the entire obligation of the Company to the Executive.  The Executive shall promptly give the Company notice of all facts necessary for the Company to determine the amount and duration of its obligations in connection with any termination pursuant to Section 5 hereof.

(b)Except for any right of the Executive to continue medical and dental plan participation in accordance with applicable law or as expressly provided in Section 5(d)(ii)(A), the Executive’s participation in all benefit plans shall terminate pursuant to the terms of the applicable benefit plans based on the date of termination of the Executive’s employment without regard to any continuation of Base Salary as Severance Pay under Sections 5(d) or (e), for notice waived pursuant to Section 5(f), or otherwise or to any other payment to the Executive following such date of termination.

(c)Provisions of this Agreement shall survive any termination of the term hereof, if so provided in this Agreement or if necessary or desirable to accomplish the purposes of other surviving provisions, including without limitation the obligations of the Executive under Sections 7, 8 and 9 hereof.  Any obligation of the Company otherwise to make payments to or on behalf of the Executive under Section 5(d) or 5(e) hereof is expressly conditioned upon the Executive’s continued full performance of his obligations under Sections 7, 8 and 9 hereof.  The Executive recognizes that no compensation is earned after termination of his employment hereunder, except as otherwise expressly provided in accordance with Section 5(d), 5(e) or 5(f) (for any portion of the notice period waived).

7.Confidential Information.

(a)The Executive acknowledges that the Company and its Affiliates continually develop Confidential Information; that the Executive may develop Confidential Information for the Company or its Affiliates; and that the Executive may learn of Confidential Information during the course of employment.  The Executive agrees that all Confidential Information which the Executive creates or to which he has access as a result of his employment or other associations with the Company or any of its Affiliates is and shall remain the sole and exclusive property of the Company or its Affiliate, as applicable.  The Executive will comply with the policies and procedures of the Company and its Affiliates for protecting Confidential Information and shall not disclose to any Person or use any Confidential Information obtained by the Executive incident to his employment or other association with the Company or any of its Affiliates, other than as required for the proper performance of the Executive’s duties and responsibilities to the Company and its Affiliates or as required by applicable law or legal process after notice to the Company and a reasonable opportunity for it to seek protection of such Confidential Information prior to disclosure.  The Executive understands that these restrictions shall continue to apply after his employment terminates, regardless of the reason for such termination.  The confidentiality obligation under this Section 7 shall not apply to information which is generally known or readily available to the public at the time of disclosure or becomes generally known through no wrongful act on the part of the Executive or any other Person having an obligation of confidentiality to the Company or any of its Affiliates.

9

(b)All documents, records, tapes and other media of every kind and description relating to the business, present or otherwise, of the Company or its Affiliates and any copies or derivatives (including without limitation electronic), in whole or in part, thereof (the “Documents”), whether or not prepared by the Executive, shall be the sole and exclusive property of the Company and its Affiliates.  The Executive shall safeguard all Documents and other property of the Company or any of its Affiliates and all documents, records and files of the distributors, vendors and other Persons with whom the Company or any of its Affiliates does business (the “Third-Party Documents”) then in the Executive’s possession or control.  The Executive also agrees that, upon request of any duly authorized officer of the Company, the Executive shall disclose all passwords and passcodes necessary or desirable to enable the Company or any of its Affiliates or the Persons with whom the Company or any of its Affiliates do business to obtain access to the Documents and Third-Party Documents.

8.Assignment of Rights to Intellectual Property.  The Executive shall promptly and fully disclose all Intellectual Property to the Company.  The Executive hereby assigns and agrees to assign to the Company (or as otherwise directed by the Company) the Executive’s full right, title and interest in and to all Intellectual Property.  The Executive agrees to execute any and all applications for domestic and foreign patents, copyrights or other proprietary rights and to do such other acts (including without limitation the execution and delivery of instruments of further assurance or confirmation) requested by the Company to assign the Intellectual Property to the Company and to permit the Company to enforce any patents, copyrights or other proprietary rights to the Intellectual Property. The Executive will not charge the Company for time spent in complying with these obligations.  All copyrightable works that the Executive creates shall be considered “work made for hire” and shall, upon creation, be owned exclusively by the Company.

9.Restricted Activities.  The Executive acknowledges the importance to the Company and its Affiliates of protecting their trade secrets and other Confidential Information and their other legitimate business interests, including without limitation the valuable trade secrets, other Confidential Information and goodwill that they have developed or acquired and which they shall continue to develop and acquire while the Executive’s employment continues.  The Company agrees, in consideration of the Executive’s acceptance of the restrictions set forth below, to grant the Executive access to trade secrets and other Confidential Information of the Company and its Immediate Affiliates and to their valuable business relationships and their goodwill.  The Executive acknowledges and agrees that the restrictions on his activities during and after his employment set forth below are necessary to protect the goodwill, Confidential Information and other legitimate interests of the Company and its Affiliates:

10

(a)The Executive agrees that, during his employment with the Company and for the period of twenty-four (24) months immediately following the termination of his employment, regardless of the basis or timing of such termination, the Executive will not, directly or indirectly, alone or in association with others, anywhere in the Territory, own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, investor, principal, joint venturer, shareholder, partner, director, consultant, agent or otherwise with, or have any financial interest (through stock or other equity ownership, investment of capital, the lending of money or otherwise) in, any business, venture or activity that (i) directly or indirectly competes, or is in planning, or has undertaken any preparation, to compete, with the Business of the Company or any of its Immediate Affiliates or (ii) is identified by agreement between the Executive and the Board (in either case, a “Competitor”), except that nothing contained in this Section 9(a) shall prevent the Executive’s wholly passive ownership of two percent (2%) or less of the equity securities of any Competitor that is a publicly-traded company.  For purposes of this Agreement, the “Business of the Company or any of its Immediate Affiliates” or “Business” is that of retail sales of arts and crafts products; provided, that the term “Competitor” shall not include any business, venture or activity whose gross receipts derived from the retail sale of arts and crafts products (aggregated with the gross receipts derived from the retail sale of arts and crafts projects of any related business, venture or activity) are less than the lesser of $100,000,000 or ten percent (10%) of the aggregate gross receipts of such businesses, ventures or activities.  For purposes of this Agreement, the “Territory” is those states within the United States and those provinces of Canada in which the Company or any of its Immediate Affiliates is doing or actively planning to do business at any time during the Executive’s employment or, with respect to his obligations hereunder following termination of his employment with the Company, at any time during the six (6) months immediately preceding such termination.

(b)The Executive agrees that, during his employment with the Company, he will comply with any and all codes of ethics or business conduct of the Company applicable to his position, as in effect from time to time, and will not undertake any outside activity, whether or not competitive with the business of the Company or its Affiliates, that could reasonably give rise to a conflict of interest or otherwise interfere with his duties and obligations to the Company or any of its Affiliates.

(c)The Executive agrees that, during his employment and during the period  of twenty-four (24) months immediately following termination of his employment, regardless of the basis or timing of such termination, the Executive will not, and will not assist any other Person to, (i) hire or solicit for hire any employee of the Company or any of its Immediate Affiliates or seek to persuade any employee of the Company or any of its Immediate Affiliates to discontinue employment or (ii) solicit or encourage any independent contractor providing services to the Company or any of its Immediate Affiliates to terminate or diminish its relationship with them; provided, however, that, after termination of the Executive’s employment with the Company, these restrictions shall apply only with respect to employees of, and independent contractors providing services to, the Company or any of its Immediate Affiliates on the date the Executive’s employment with the Company terminates or at any time during the preceding twelve (12) months.

(d)The Executive agrees that, during his employment and during the period  of  twenty-four (24) months immediately following termination of his employment, regardless of the basis or timing of such termination, the Executive will not directly or indirectly solicit or encourage any distributor or vendor to the Company or any of its Immediate Affiliates to terminate or breach any agreement with the Company or any of its Immediate Affiliates or to terminate or diminish its relationship with the Company or any of its Immediate Affiliates;  provided, however, that, after termination of the Executive’s employment with the Company, these restrictions shall apply only with respect to those distributors and vendors who were doing business with the Company or any of its Affiliates on the date the Executive’s employment terminates or at any time during the preceding twelve (12) months.

11

10.Notification Requirement.  Until the conclusion of twenty-four (24) months following termination of his employment with the Company, the Executive shall give notice to the Company of each new business activity he plans to undertake if it involves, directly or indirectly, the retail sales of arts and crafts products at least ten (10) business days prior to beginning any such activity.  Such notice shall state the name and address of the Person for whom such activity is undertaken and the nature of the Executive’s business relationship(s) and position(s) with such Person.  The Executive shall provide the Company with such other pertinent information concerning such business activity as the Company may reasonably request in order to determine the Executive’s continued compliance with his obligations under Sections 7, 8 and 9 hereof.

11.Enforcement of Covenants.  The Executive acknowledges that he has carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed upon him pursuant to Sections 7, 8 and 9 hereof.  The Executive agrees without reservation that each of the restraints contained herein is necessary for the reasonable and proper protection of the goodwill, Confidential Information and other legitimate interests of the Company and its Affiliates; that each and every one of those restraints is reasonable in respect to subject matter, length of time and geographic area; and that these restraints, individually or in the aggregate, will not prevent him from obtaining other suitable employment during the period in which the Executive is bound by these restraints.  The Executive further agrees that he will never assert, or permit to be asserted on his behalf, in any forum, any position contrary to the foregoing.   The Executive further acknowledges that, were he to breach any of the covenants contained in Sections 7, 8 or 9 hereof, the damage to the Company and its Affiliates would be irreparable.  The Executive therefore agrees that the Company, in addition to any other remedies available to it, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by the Executive of any of said covenants, without having to post bond.  The parties further agree that, in the event that any provision of Section 7, 8 or 9 hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, such provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law.  The Executive agrees that the restricted period set forth in Section 9(a), (c) and (d) hereof shall be tolled, and shall not run, during any period of time in which he is in violation of the terms thereof, in order that the Company and its Affiliates shall have all of the agreed-upon temporal protection recited herein.  No breach of any provision of this Agreement by the Company, or any other claimed breach of contract or violation of law, or change in the nature or scope of the Executive’s employment relationship with the Company, shall operate to extinguish the Executive’s obligation to comply with Sections 7, 8 and 9 hereof.

12.Conflicting Agreements.  The Executive hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder will not breach or be in conflict with any other agreement to which the Executive is a party or is bound and that the Executive is not now subject to any covenants against competition or similar covenants or any court order or other legal obligation that would affect the performance of his obligations hereunder.  The Executive will not disclose to or use on behalf of the Company any proprietary information of a third party without such party’s consent.

12

13.Definitions.  Words or phrases which are initially capitalized or are within quotation marks shall have the meanings provided in this Section and as provided elsewhere herein.  For purposes of this Agreement, the following definitions apply:

(a)“Affiliates” means all persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where control may be by either management authority, contract or equity interest.

(b)“Code” means the Internal Revenue Code of 1986, as amended.

(c)“Confidential Information” means any and all information of the Company and its Affiliates that is not generally known by those Persons with whom they compete or do business, or with whom any of them plans to compete or do business and any and all information, publicly known in whole or in part or not, which, if disclosed by the Company or its Affiliates would assist in competition against them. Confidential Information includes without limitation such information relating to (i) the development, research, testing, manufacturing, marketing and financial activities of the Company and its Affiliates; (ii) the products and services of the Company and its Affiliates; (iii) the costs, sources of supply, financial performance and strategic plans of the Company and its Affiliates; (iv) the identity and special needs of the customers of the Company and its Affiliates and (v) the people and organizations with whom the Company and its Affiliates have business relationships and those relationships.  Confidential Information also includes any information that the Company or any of its Affiliates have received, or may receive hereafter, belonging to customers or others with any understanding, express or implied, that the information would not be disclosed.

(d)“Immediate Affiliates” means those Affiliates which are one of the following: (i) a direct or indirect subsidiary of the Company, (ii) a parent to the Company or (iii) a direct or indirect subsidiary of such a parent.

(e)“Intellectual Property” means inventions, discoveries, developments, methods, processes, compositions, works, concepts and ideas (whether or not patentable or copyrightable or constituting trade secrets) conceived, made, created, developed or reduced to practice by the Executive (whether alone or with others, whether or not during normal business hours or on or off Company premises) during the Executive’s employment that relate to the Business of the Company or any of its Immediate Affiliates or to any prospective activity of the Company or any of its Immediate Affiliates or to any work performed by the Executive for the Company or any of its Immediate Affiliates or that make use of  Confidential Information or any of the equipment or facilities or other resources of the Company or any of its Immediate Affiliates.

(f)“Person” means an individual, a corporation, a limited liability company, an association, a partnership, an estate, a trust and any other entity or organization, other than the Company or any of its Affiliates.

15.Withholding.  All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law.

13

16.Assignment.  Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this Agreement without the consent of the Executive in the event that the Executive is transferred to a position with any of the Affiliates or in the event that the Company shall hereafter effect a reorganization, consolidate with, or merge into, any Person or transfer all or substantially all of its properties or assets to any Person.  This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns.

17.Severability.  If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

18.Waiver.  No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party.  The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach.

19.Notices.  Any and all notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be effective when delivered in person, consigned to a reputable national courier service or deposited in the United States mail, postage prepaid, registered or certified, and addressed to the Executive at his last known address on the books of the Company or, in the case of the Company, at its principal place of business, attention of the Chair of the Board, or to such other address as either party may specify by notice to the other actually received.

20.Entire Agreement.  This Agreement constitutes the entire agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of the Executive’s employment.

21.Amendment.  This Agreement may be amended or modified only by a written instrument signed by the Executive and by a expressly authorized representative of the Board.

22.Headings.  The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement.

23.Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument.

14

24.Governing Law.  This is a Texas contract and shall be construed and enforced under and be governed in all respects by the laws of the State of Texas, without regard to the conflict of laws principles thereof.  In the event of any alleged breach or threatened breach of the covenants in Sections 7, 8 or 9 of this Agreement, the Executive hereby consents and submits to the jurisdiction of the federal and state courts in and of the State of Texas.

25.Resolution of Non-Covenant Disputes.  Subject to Section 24, any and all disputes, controversies and/or claims arising in the future between the Executive and the Company or any of its Affiliates related to this Agreement shall be resolved through final and binding arbitration before a single arbitrator in the Dallas, Texas metropolitan area, conducted in accordance with the National Rules for the Resolution of Employment Disputes (“Employment Rules”) of the American Arbitration Association (“AAA”) then in effect and will permit discovery in accordance with the Employment Rules.  The parties to the arbitration shall jointly appoint the arbitrator within thirty (30) days after initiation of the arbitration.  If the parties fail to appoint an arbitrator as provided above, an arbitrator with substantial experience in executive employment matters shall be appointed by the AAA as provided in the Employment Rules.  The arbitrator’s sole authority shall be to interpret and apply the provisions of this Agreement, and the arbitrator shall have no authority, power or right to alter, change, amend, modify, add to or subtract from any of the provisions of this Agreement.  The only claims not covered by this agreement to arbitrate are claims to enforce the Executive’s obligations under Sections 7, 8 or 9 of this Agreement by temporary or permanent injunction.  To the extent arbitration is required, no party asserting a claim has the right to resort to any federal, state or local court or administrative agency concerning the claim unless expressly provided by federal statute, and the decision of the arbitrator shall be a complete defense to any action or proceeding instituted in any tribunal or agency with respect to any dispute, unless precluded by federal statute.  Both the Executive and the Company expressly waive all rights to a jury trial in court on all statutory or other claims within the scope of this agreement to arbitrate, including, without limitation, those identified in this Section 25.  Judgment on any arbitration award obtained hereunder may be entered into any court having jurisdiction thereof.  The provisions of this Section 25 shall survive the termination or expiration of this Agreement and shall be binding upon any successor to the Company.

[Signature page follows immediately.]

15

IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by the Executive, as of the date first above written.

THE EXECUTIVE:	THE COMPANY:
	MICHAELS STORES, INC.
/s/ Carl S. Rubin	By:	Michael J. Veitenheimer
Carl Rubin
	Title:	SVP — General Counsel & Secretary

Signature Page to Employment Agreement

EX-10.2

Exhibit 10.2

Carl S. Rubin

MICHAELS STORES, INC.
2006 EQUITY INCENTIVE PLAN

Form of Restricted Stock Award Agreement

Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063

Attn:       Michael J. Veitenheimer

Ladies and Gentlemen:

The undersigned (i) acknowledges that he or she has received an award (the “Award”) of restricted stock from Michaels Stores, Inc. (the “Company”) under the Michaels Stores, Inc. 2006 Equity Incentive Plan (the “Plan”), subject to the terms set forth below and in the Plan; (ii) further acknowledges receipt of a copy of the Plan as in effect on the date hereof; and (iii) agrees with the Company as follows:

1.Effective Date.  This Agreement shall take effect as of March 18, 2013, which is the date of grant of the Award.

2.Shares Subject to Award.  The Award consists of 200,000 shares (the “Shares”) of common stock of the Company (“Stock”).  The undersigned’s rights to the Shares are subject to the restrictions described in this Agreement and the Plan (which is incorporated herein by reference with the same effect as if set forth herein in full) in addition to such other restrictions, if any, as may be imposed by law.

3.Meaning of Certain Terms.  Except as otherwise expressly provided, all terms used herein shall have the same meaning as in the Plan.  The term “vest” as used herein with respect to any Share means the lapsing of the restrictions described herein with respect to such Share.

4.Nontransferability of Shares.  The Shares acquired by the undersigned pursuant to this Agreement shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of except as provided below and in the Plan.

5.Vesting of Shares.  The shares acquired hereunder shall vest in accordance with the provisions of this Paragraph 5 and applicable provisions of the Plan, as follows: one-fifth of the Shares on each of the first through fifth anniversaries of the effective date set forth in Paragraph 1 above.  Notwithstanding the foregoing, no shares shall vest on any vesting date specified above unless the undersigned is then, and since the date of grant has continuously been, employed by the Company or its subsidiaries.

A-1

6.Forfeiture Risk.  Except as provided in Paragraph 5 above, if the undersigned ceases to be employed by the Company and its subsidiaries for any reason, any then outstanding and unvested Shares acquired by the undersigned hereunder shall be automatically and immediately forfeited.  The undersigned hereby (i) appoints the Company as the attorney-in-fact of the undersigned to take such actions as may be necessary or appropriate to effectuate a transfer of the record ownership of any such shares that are unvested and forfeited hereunder, (ii) agrees to deliver to the Company, as a precondition to the issuance of any certificate or certificates with respect to unvested Shares hereunder, one or more stock powers, endorsed in blank, with respect to such Shares, and (iii) agrees to sign such other powers and take such other actions as the Company may reasonably request to accomplish the transfer or forfeiture of any unvested Shares that are forfeited hereunder.

7.Retention of Certificates.  Any certificates representing unvested Shares shall be held by the Company.  If unvested Shares are held in book entry form, the undersigned agrees that the Company may give stop transfer instructions to the depository to ensure compliance with the provisions hereof.

8.Effect of Certain Transactions.  In the event of a Change of Control (as defined in the Stockholders Agreement), all then outstanding and unvested Shares acquired by the undersigned hereunder shall automatically and immediately vest.

9.Joinder to Agreements.  The undersigned acknowledges and agrees that the Shares acquired hereunder will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements.  By executing this Agreement, the undersigned hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of the undersigned, the Company or any other Person.

10.Legend.  Any certificates representing unvested Shares shall be held by the Company, and any such certificate shall contain a legend substantially in the following form:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE MICHAELS STORES, INC. 2006 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND MICHAELS STORES, INC.  COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF MICHAELS STORES, INC.

As soon as practicable following the vesting of any such Shares the Company shall cause a certificate or certificates covering such Shares, without the aforesaid legend, to be issued and delivered to the undersigned.  If any Shares are held in book-entry form, the Company may take such steps as it deems necessary or appropriate to record and manifest the restrictions applicable to such Shares.

A-2

11.Dividends, etc..  The undersigned shall be entitled to (i) receive any and all dividends or other distributions paid with respect to those Shares of which he is the record owner on the record date for such dividend or other distribution, and (ii) vote any Shares of which he is the record owner on the record date for such vote; provided, however, that any property distributed with respect to a share of Stock (the “associated share”) acquired hereunder, including without limitation a distribution of Stock by reason of a stock dividend, stock split or otherwise, or a distribution of other securities with respect to an associated share, shall, except as the Administrator may otherwise determine, be subject to the restrictions of this Agreement in the same manner and for so long as the associated share remains subject to such restrictions, and shall be promptly forfeited if and when the associated share is so forfeited;  and further provided, that the Administrator may require that any cash distribution with respect to the Shares other than a normal cash dividend be placed in escrow or otherwise made subject to such restrictions as the Administrator deems appropriate to carry out the intent of the Plan.  References in this Agreement to the Shares shall refer, mutatis mutandis, to any such restricted amounts.

12.Sale of Vested Shares.  The undersigned understands that he will be free to sell any Share once it has vested, subject to (i) satisfaction of any applicable tax withholding requirements with respect to the vesting or transfer of such Share; (ii) the completion of any administrative steps (for example, but without limitation, the transfer of certificates) that the Company may reasonably impose; (iii) applicable requirements of federal and state securities laws; (iv) the Stockholders Agreement and (v) the Registration Rights Agreement.

13.Certain Tax Matters.  The undersigned expressly acknowledges the following:

a.The undersigned has been advised to confer promptly with a professional tax advisor to consider whether the undersigned should make a so-called “83(b) election” with respect to the Shares.  Any such election, to be effective, must be made in accordance with applicable regulations and within thirty (30) days following the date of this Award.  The Company has made no recommendation to the undersigned with respect to the advisability of making such an election.

b.The award or vesting of the Shares acquired hereunder, and the payment of dividends with respect to such Shares, may give rise to “wages” subject to withholding.  The undersigned expressly acknowledges and agrees that his rights hereunder are subject to his promptly paying to the Company in cash (or by such other means as may be acceptable to the Company in its discretion, including, if the Administrator so determines, by the delivery of previously acquired Stock or shares of Stock acquired hereunder or by the withholding of amounts from any payment hereunder) all taxes required to be withheld in connection with such award, vesting or payment.

Very truly yours,

/s/ Carl S. Rubin

Carl S. Rubin

Dated:  March 18, 2013

The foregoing Restricted Stock Award Agreement is hereby accepted:

MICHAELS STORES, INC.

By:	/s/ Michael J. Veitenheimer
	Michael J. Veitenheimer
	SVP, General Counsel & Secretary

A-3

Carl S. Rubin

MICHAELS STORES, INC.
2006 EQUITY INCENTIVE PLAN

Form of Restricted Stock Award Agreement

Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063

Attn:       Michael J. Veitenheimer

Ladies and Gentlemen:

The undersigned (i) acknowledges that he or she has received an award (the “Award”) of restricted stock from Michaels Stores, Inc. (the “Company”) under the Michaels Stores, Inc. 2006 Equity Incentive Plan (the “Plan”), subject to the terms set forth below and in the Plan; (ii) further acknowledges receipt of a copy of the Plan as in effect on the date hereof; and (iii) agrees with the Company as follows:

1.Effective Date.  This Agreement shall take effect as of March 18, 2013, which is the date of grant of the Award.

2.Shares Subject to Award.  The Award consists of 26,483 shares (the “Shares”) of common stock of the Company (“Stock”).  The undersigned’s rights to the Shares are subject to the restrictions described in this Agreement and the Plan (which is incorporated herein by reference with the same effect as if set forth herein in full) in addition to such other restrictions, if any, as may be imposed by law.

3.Meaning of Certain Terms.  Except as otherwise expressly provided, all terms used herein shall have the same meaning as in the Plan.  The term “vest” as used herein with respect to any Share means the lapsing of the restrictions described herein with respect to such Share.

4.Nontransferability of Shares.  The Shares acquired by the undersigned pursuant to this Agreement shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of except as provided below and in the Plan.

5.Vesting of Shares.  The shares acquired hereunder shall vest in accordance with the provisions of this Paragraph 5 and applicable provisions of the Plan, as follows: one-fifth of the Shares on each of the first through fifth anniversaries of the effective date set forth in Paragraph 1 above.  Notwithstanding the foregoing, no shares shall vest on any vesting date specified above unless the undersigned is then, and since the date of grant has continuously been, employed by the Company or its subsidiaries.

B-1

6.Forfeiture Risk.  Except as provided in Paragraph 5 above, if the undersigned ceases to be employed by the Company and its subsidiaries for any reason, any then outstanding and unvested Shares acquired by the undersigned hereunder shall be automatically and immediately forfeited.  The undersigned hereby (i) appoints the Company as the attorney-in-fact of the undersigned to take such actions as may be necessary or appropriate to effectuate a transfer of the record ownership of any such shares that are unvested and forfeited hereunder, (ii) agrees to deliver to the Company, as a precondition to the issuance of any certificate or certificates with respect to unvested Shares hereunder, one or more stock powers, endorsed in blank, with respect to such Shares, and (iii) agrees to sign such other powers and take such other actions as the Company may reasonably request to accomplish the transfer or forfeiture of any unvested Shares that are forfeited hereunder.

7.Retention of Certificates.  Any certificates representing unvested Shares shall be held by the Company.  If unvested Shares are held in book entry form, the undersigned agrees that the Company may give stop transfer instructions to the depository to ensure compliance with the provisions hereof.

8.Effect of Certain Transactions.  In the event of a Change of Control (as defined in the Stockholders Agreement), all then outstanding and unvested Shares acquired by the undersigned hereunder shall automatically and immediately vest.

9.Joinder to Agreements.  The undersigned acknowledges and agrees that the Shares acquired hereunder will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements.  By executing this Agreement, the undersigned hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of the undersigned, the Company or any other Person.

10.Legend.  Any certificates representing unvested Shares shall be held by the Company, and any such certificate shall contain a legend substantially in the following form:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE MICHAELS STORES, INC. 2006 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND MICHAELS STORES, INC.  COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF MICHAELS STORES, INC.

As soon as practicable following the vesting of any such Shares the Company shall cause a certificate or certificates covering such Shares, without the aforesaid legend, to be issued and delivered to the undersigned.  If any Shares are held in book-entry form, the Company may take such steps as it deems necessary or appropriate to record and manifest the restrictions applicable to such Shares.

B-2

11.Dividends, etc..  The undersigned shall be entitled to (i) receive any and all dividends or other distributions paid with respect to those Shares of which he is the record owner on the record date for such dividend or other distribution, and (ii) vote any Shares of which he is the record owner on the record date for such vote; provided, however, that any property distributed with respect to a share of Stock (the “associated share”) acquired hereunder, including without limitation a distribution of Stock by reason of a stock dividend, stock split or otherwise, or a distribution of other securities with respect to an associated share, shall, except as the Administrator may otherwise determine, be subject to the restrictions of this Agreement in the same manner and for so long as the associated share remains subject to such restrictions, and shall be promptly forfeited if and when the associated share is so forfeited;  and further provided, that the Administrator may require that any cash distribution with respect to the Shares other than a normal cash dividend be placed in escrow or otherwise made subject to such restrictions as the Administrator deems appropriate to carry out the intent of the Plan.  References in this Agreement to the Shares shall refer, mutatis mutandis, to any such restricted amounts.

12.Sale of Vested Shares.  The undersigned understands that he will be free to sell any Share once it has vested, subject to (i) satisfaction of any applicable tax withholding requirements with respect to the vesting or transfer of such Share; (ii) the completion of any administrative steps (for example, but without limitation, the transfer of certificates) that the Company may reasonably impose; (iii) applicable requirements of federal and state securities laws; (iv) the Stockholders Agreement and (v) the Registration Rights Agreement.

13.Certain Tax Matters.  The undersigned expressly acknowledges the following:

a.The undersigned has been advised to confer promptly with a professional tax advisor to consider whether the undersigned should make a so-called “83(b) election” with respect to the Shares.  Any such election, to be effective, must be made in accordance with applicable regulations and within thirty (30) days following the date of this Award.  The Company has made no recommendation to the undersigned with respect to the advisability of making such an election.

B-3

b.The award or vesting of the Shares acquired hereunder, and the payment of dividends with respect to such Shares, may give rise to “wages” subject to withholding.  The undersigned expressly acknowledges and agrees that his rights hereunder are subject to his promptly paying to the Company in cash (or by such other means as may be acceptable to the Company in its discretion, including, if the Administrator so determines, by the delivery of previously acquired Stock or shares of Stock acquired hereunder or by the withholding of amounts from any payment hereunder) all taxes required to be withheld in connection with such award, vesting or payment.

Very truly yours,

/s/ Carl S. Rubin

Carl S. Rubin

Dated:  March 18, 2013

The foregoing Restricted Stock Award Agreement is hereby accepted:

MICHAELS STORES, INC.

By:	/s/ Michael J. Veitenheimer
	Michael J. Veitenheimer
	SVP, General Counsel & Secretary

B-4

EX-10.3

Exhibit 10.3

MICHAELS STORES, INC.

FORM OF STOCK OPTION AGREEMENT

Optionee:  Carl S. Rubin

No. of Shares:  1,250,000

Date of Grant:  March 18, 2013

Expiration Date:  March 17, 2021

This Option and any securities issued upon exercise of this Option are subject to restrictions on voting and transfer and other provisions as set forth in the Amended and Restated Stockholders Agreement among Michaels Stores, Inc. and certain investors, originally dated as of October 31, 2006, as amended and restated on February 16, 2007 and amended from time to time thereafter (the “Stockholders Agreement”) and the terms of the Registration Rights Agreement referred to therein (the “Registration Rights Agreement”).  This Option and any securities issued upon exercise of this Option constitute an Option and Shares, respectively, as defined in the Stockholders Agreement.

This Stock Option Agreement (this “Agreement”) is hereby entered into between Michaels Stores, Inc., a Delaware corporation (the “Company”), and the Optionee named above pursuant to the Company’s 2006 Equity Incentive Plan, as amended from time to time (the “Plan”).  For the purpose of this Agreement, the “Grant Date” shall mean the date hereof, March 18, 2013.

1.Grant of Option.  This Agreement evidences the grant by the Company on the Grant Date to the Optionee of an option (the “Option”) to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of 1,250,000 shares of Common Stock of the Company, par value $.10 per share (the “Shares”), at $26.93 per Share.  The Option evidenced by this Agreement is intended not to qualify as an incentive stock option under Section 422 of the Internal Revenue Code (the “Code”).

2.Vesting.  During the Optionee’s Employment, the Option will vest and become exercisable (i) with respect to 20% of the Shares subject to the Option on each of the first through fifth anniversaries of the Grant Date or (ii) if earlier, with respect to any unvested portion of the Option, upon a Change of Control (as defined in the Stockholders Agreement).

3.Exercise of Option.

(a)Details of Exercise.  Each election to exercise this Option shall be subject to the terms and conditions of the Plan and shall be in writing, signed by the Optionee or by his or her executor or administrator or by the Person or Persons to whom this Option is transferred by will or the applicable laws of descent and distribution (the “Legal Representative”), and made pursuant to and in accordance with the terms and conditions set forth in the Plan.  The latest date on which this Option may be exercised (the “Final Exercise Date”) is the date which is the seventh (7th) anniversary of the Grant Date, subject to earlier termination in accordance with the terms and provisions of the Plan and this Agreement.

C-1

Exhibit C

(b)Payment of Exercise Price.  The following are permitted forms of payment for the exercise of this Option and for the remittance of withholding taxes pursuant to Section 8: (a) cash or check acceptable to the Administrator, (b) actual or constructive transfer to the Company of shares of Stock owned by the Optionee for at least six months (or, with the consent of the Administrator, for less than six months) having an aggregate Fair Market Value at the date of exercise equal to the aggregate exercise price of the Award, (c) authorization by the Optionee of the Company to withhold a number of shares of Stock otherwise issuable to the Optionee under this Option having an aggregate Fair Market Value on the date of exercise equal to the aggregate exercise price of this Option and, if applicable, the amount of any withholding tax, (d) at such time, if any, as the Stock is publicly traded through a broker-assisted “cashless” exercise program acceptable to the Administrator, and (e) by a combination of such methods of payment.

4.Effect of Certain Transactions.  In the event of a Change of Control (as defined in the Stockholders Agreement), unless earlier terminated or forfeited, this Option will vest and become fully exercisable.

5.Representations and Warranties of Optionee.  Optionee represents and warrants that:

(a)Authorization.  Optionee has full legal capacity, power, and authority to execute and deliver this Agreement and to perform Optionee’s obligations hereunder.  This Agreement has been duly executed and delivered by Optionee and is the legal, valid, and binding obligation of Optionee enforceable against Optionee in accordance with the terms hereof.

(b)No Conflicts.  The execution, delivery, and performance by Optionee of this Agreement and the consummation by Optionee of the transactions contemplated hereby will not, with or without the giving of notice or lapse of time, or both (i) violate any provision of law, statute, rule or regulation to which Optionee is subject, (ii) violate any order, judgment or decree applicable to Optionee, or (iii) conflict with, or result in a breach of default under, any term or condition of any agreement or other instrument to which Optionee is a party or by which Optionee is bound.

(c)Thorough Review, etc.  Optionee has thoroughly reviewed the Plan, this Agreement, the Stockholders Agreement and the Registration Rights Agreement in their entirety.  Optionee has had an opportunity to obtain the advice of counsel (other than counsel to the Company or its Affiliates) prior to executing this Agreement, and fully understands all provisions of the Plan and this Agreement.

(d)Knowledge.  Optionee has been advised that neither this Option nor the Shares received upon this Option’s exercise have been registered under the Securities Act or any state securities laws and, therefore, none of those securities can be resold unless they are registered under the Securities Act and applicable state securities laws or unless an exemption from such registration requirements is available.  Except to the extent provided in the Stockholders Agreement and the Registration Rights Agreement, such Optionee is aware that the Company is under no obligation to effect any such registration with respect to any such securities or to file for or comply with any exemption from registration.  Such Optionee is acquiring and holding the Option and any Shares received upon the Option’s exercise for its own account and not with a view to, or for resale in connection with, the distribution thereof in violation of the Securities Act.  Such Optionee is either an “accredited investor” as defined in Regulation D under the Securities Act or possesses such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of an investment in the securities of the Company described in this Agreement.

C-2

6.Joinder to Agreements.  Optionee acknowledges and agrees that the Shares received upon exercise of this Option will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements.  By executing this Agreement, Optionee hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of Optionee, the Company or any other Person.

7.Legends.  Certificates evidencing any Shares issued upon exercise of the Option granted hereby may bear the following legends, in addition to any legends which may be required by the Stockholders Agreement or by the Registration Rights Agreement:

“The securities represented by this certificate were issued in a private placement, without registration under the Securities Act of 1933, as amended (the “Act”), and may not be sold, assigned, pledged, or otherwise transferred in the absence of an effective registration under the Act covering the transfer or an opinion of counsel, satisfactory to the issuer, that registration under the Act is not required.”

8.Withholding.  No Shares will be issued, sold or transferred pursuant to the exercise of this Option unless and until the Person exercising this Option shall have remitted to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements, or shall have made other arrangements satisfactory to the Company with respect to such taxes.

9.Nontransferability of Option.  This Option is not transferable by the Optionee other than by will or the applicable laws of descent and distribution, and is exercisable during the Optionee’s lifetime only by the Optionee.

10.Status Change.  Upon the termination of the Optionee’s Employment, this Option shall continue or terminate as, and to the extent provided in the Plan.

11.Effect on Employment.  Neither the grant of this Option, nor the issuance of Shares upon exercise of this Option, will give the Optionee any right to be retained in the employ of the Company or its Affiliates, affect the right of the Company or its Affiliates to discharge or discipline such Optionee at any time, or affect any right of such Optionee to terminate his or her Employment at any time.

12.Indemnity.  Optionee hereby indemnifies and agrees to hold the Company harmless from and against all losses, damages, liabilities and expenses (including without limitation reasonable attorneys fees and charges) resulting from any breach of any representation, warranty, or agreement of Optionee in this Agreement or any misrepresentation of Optionee in this Agreement.

13.Provisions of the Plan.  This Agreement is subject in its entirety to the provisions of the Plan, which are incorporated herein by reference.  A copy of the Plan as in effect on the Grant Date has been furnished to the Optionee.  By exercising all or any part of this Option, the Optionee agrees to be bound by the terms of the Plan and this Agreement.  In the event of any conflict between the terms of this Agreement and the Plan, the terms of this Agreement shall control.

14.Definitions.  Initially capitalized terms not otherwise defined herein have the meaning provided in the Plan.

15.General.  For purposes of this Agreement and any determinations to be made by the Administrator hereunder, the determinations by the Administrator shall be binding upon the Optionee and any transferee.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

C-3

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer.

	MICHAELS STORES, INC.
	By:	/s/ Michael J. Veitenheimer
		Michael J. Veitenheimer
		SVP, General Counsel & Secretary
Dated:  March 18, 2013

The undersigned acknowledges and agrees to the terms of this Agreement and acknowledges and agrees that by the undersigned’s execution below, the undersigned is also joining and becoming a party to the Stockholders Agreement and the Registration Rights Agreement:

/s/ Carl S. Rubin

Carl S. Rubin

C-4

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Carl S. Rubin, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 24, 2013	/s/ Carl S. Rubin
	Carl S. Rubin
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Charles M. Sonsteby, certify that

1.I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 24, 2013	/s/ Charles M. Sonsteby
	Charles M. Sonsteby
	Chief Administrative Officer & Chief Financial Officer
	( Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO § 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report on Form 10-Q of Michaels Stores, Inc., a Delaware corporation (the “Company”), for the period ended May 4, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 24, 2013	/s/ Carl S. Rubin
	Carl S. Rubin
	Chief Executive Officer
	(Principal Executive Officer)

/s/ Charles M. Sonsteby

Charles M. Sonsteby

Chief Administrative Officer & Chief Financial Officer

(Principal Financial Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-99.1

Exhibit 99.1

SECTION 13(r) DISCLOSURE

Hilton Worldwide Inc., which may be considered an affiliate of one of our Sponsors, The Blackstone Group L.P., provided the disclosure reproduced below in connection with activities during the first fiscal quarter of 2013. We have no involvement in or control over the activities of Hilton Worldwide Inc., any of its predecessor companies or any of its subsidiaries, and we have not independently verified or participated in the preparation of this disclosure.

“During the reporting period, the Iranian Ministry of Youth and Sports purchased a number of room nights at the Hilton Ankara, Turkey, which is leased by a foreign affiliate of Hilton. Revenue received by Hilton for these hotel stays was approximately $4,360 and net profit was approximately $1,700. During calendar year 2012, the Embassy of Iran purchased a number of room nights at the hotel and organized a concert event in the hotel ballroom. Revenue received by Hilton for the services provided to the Embassy of Iran in 2012 was approximately $11,070 and net profit was approximately $4,300. Hilton believes that the hotel stays were exempt from the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560, pursuant to the International Emergency Economic Powers Act (“IEEPA”). The Hilton Ankara intends to continue engaging in future similar transactions to the extent they remain permissible under IEEPA.

Also during the reporting period, certain individual employees at two Hilton-branded hotels in the United Arab Emirates received routine wage payments as direct deposits to their personal accounts at Bank Melli, an entity identified on the Specially Designated Nationals and Blocked Persons List (“SDN List”) maintained by the Office of Foreign Assets Control in the U.S. Department of the Treasury. In addition, certain individual employees at these hotels received routine wage payments as direct deposits to their personal accounts at Bank Melli during calendar year 2012. Both of these hotels are owned by a third party, staffed by employees of the third-party owner and operated pursuant to a management agreement between the owner and a Hilton affiliate. In each case, these payments originated from the third-party owner’s account to the personal accounts of the employees at their chosen bank. No revenues or net profits are associated with these transactions. Both hotels have advised Hilton that they will discontinue making direct deposits to accounts at Bank Melli.

During the reporting period, several individuals stayed at the DoubleTree Kuala Lumpur, Malaysia, pursuant to a rate agreement between the hotel and Mahan Air, an entity identified on the SDN List. This hotel is staffed by employees of the third-party owner and operated pursuant to a management agreement between the owner and a Hilton affiliate. Under the agreement, which was entered into in the name of the owner, the hotel reserved a number of rooms for Mahan Air crew members at the DoubleTree Kuala Lumpur several times each week. Revenue received by Hilton attributable to Mahan Air crew hotel stays during the reporting period was approximately $1,550. The DoubleTree Kuala Lumpur also reserved a number of rooms for Mahan Air crew members during calendar year 2012. Revenue received by Hilton attributable to Mahan Air crew hotel stays in 2012 was approximately $3,820. Hilton considers its net profit on management fees to be approximately the same as its revenue. The DoubleTree Kuala Lumpur has terminated the agreement and does not intend to engage in any future transactions with Mahan Air.”

SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. (collectively referred to herein as “SunGard”), which may be considered an affiliate of The Blackstone Group L.P., provided the disclosure reproduced below in connection with activities during the first fiscal quarter of 2013. We have no involvement in or control over the activities of SunGard, any of their predecessor companies or any of their subsidiaries, and we have not independently verified or participated in the preparation of this disclosure.

“As previously reported on our Annual Report on Form 10-K for the year ended December 31, 2012, pursuant to Section 13(r)(1)(D)(i) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during 2012 a U.K. subsidiary of ours provided certain limited disaster recovery services and hosted co-location of some hardware at our premises in London for Bank Saderat PLC, a bank incorporated and based in the U.K. Bank Saderat PLC is identified on the U.S. Treasury Department’s List of Specially Designated Nationals and Blocked Persons pursuant to Executive Order No. 13224. Our subsidiary terminated this contract in the first quarter of 2013, and we do not otherwise intend to enter into any Iran-related activity. The gross revenue and net profits attributable to these activities in the first quarter of 2013 were less then £5,000 each.”

Additionally, after the Company filed its Form 10-K for fiscal year 2012, SunGard included the disclosure reproduced below in its Form 10-K for fiscal year 2012. We have not independently verified or participated in the preparation of this disclosure.

“Pursuant to Section 13(r)(1)(D)(i) of the Exchange Act, we note that during 2012 a U.K. subsidiary of ours provided certain limited disaster recovery services and hosted co-location of some hardware at our premises in London for Bank Saderat PLC, a bank incorporated and based in the UK. Bank Saderat PLC is identified on the U.S. Treasury Department’s List of Specially Designated Nationals and Blocked Persons pursuant to Executive Order No. 13224. The intent of the services was to facilitate the ability of the UK-based employees of Bank Saderat PLC to continue local operations in the event of a disaster or other unplanned event in the UK, including use of shared work space and recovery of the Bank’s local UK data. The gross revenue and net profits attributable to these activities in 2012 was £16,300 and approximately £5,700, respectively. During 2012, no disaster or unplanned event occurred causing Bank Saderat PLC to make use of our recovery facilities in London, but Bank Saderat PLC did perform annual testing on-site. Our subsidiary has terminated this contract in the first quarter of 2013, and we do not otherwise intend to enter into any Iran-related activity.”

Travelport Limited, which may be considered an affiliate of The Blackstone Group L.P., provided the disclosure reproduced below in connection with activities during the first fiscal quarter of 2013. We have no involvement in or control over the activities of Travelport Limited, any of its predecessor companies or any of its subsidiaries, and we have not independently verified or participated in the preparation of this disclosure.

“As part of our global business in the travel industry, we provide certain passenger travel-related GDS and airline IT services to Iran Air. We also provide certain airline IT services to Iran Air Tours. All of these services are either exempt from applicable sanctions prohibitions pursuant to a statutory exemption permitting transactions ordinarily incident to travel or, to the extent not otherwise exempt, specifically licensed by the U.S. Office of Foreign Assets Control. Subject to any changes in the exempt/licensed status of such activities, we intend to continue these business activities, which are directly related to and promote the arrangement of travel for individuals.

The gross revenue and net income attributable to these activities in the quarter ended March 31, 2013 were approximately $37,800 and $32,100, respectively.”

XML

Condensed Consolidating Financial Information (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013	Apr. 28, 2012
Net sales	$ 993	$ 978
Cost of sales and occupancy expense	586	566
Gross profit	407	412
Selling, general, and administrative expense	271	260
Related party expenses	4	3
Store pre-opening costs	2	1
Operating income	130	148
Interest expense	47	66
Refinancing costs and losses on early extinguishment of debt	7
Other (income) and expense, net		(1)
Income before income taxes	76	83
Provision for income taxes	29	30
Net income	47	53
Other comprehensive income, net of tax:
Actuarial loss on pension plan	(1)
Foreign currency translation adjustment		2
Comprehensive income	46	55
Parent Company
Net sales	869	861
Cost of sales and occupancy expense	556	536
Gross profit	313	325
Selling, general, and administrative expense	233	225
Related party expenses	4	3
Store pre-opening costs	2	1
Operating income	74	96
Interest expense	47	66
Refinancing costs and losses on early extinguishment of debt	7
Other (income) and expense, net		(1)
Intercompany charges (income)	13	17
Equity in earnings of subsidiaries	69	69
Income before income taxes	76	83
Provision for income taxes	29	30
Net income	47	53
Other comprehensive income, net of tax:
Actuarial loss on pension plan	(1)
Foreign currency translation adjustment		2
Comprehensive income	46	55
Guarantor Subsidiaries
Net sales	547	549
Cost of sales and occupancy expense	453	462
Gross profit	94	87
Selling, general, and administrative expense	38	35
Operating income	56	52
Intercompany charges (income)	(13)	(17)
Income before income taxes	69	69
Provision for income taxes	26	25
Net income	43	44
Other comprehensive income, net of tax:
Comprehensive income	43	44
Eliminations
Net sales	(423)	(432)
Cost of sales and occupancy expense	(423)	(432)
Equity in earnings of subsidiaries	(69)	(69)
Income before income taxes	(69)	(69)
Provision for income taxes	(26)	(25)
Net income	(43)	(44)
Other comprehensive income, net of tax:
Comprehensive income	$ (43)	$ (44)

XML

Comprehensive Income (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013	Apr. 28, 2012
Comprehensive Income
Balance at the beginning of the period	$ 6	$ 8
Actuarial loss on pension plan	(1)
Balance at the end of the period	$ 5	$ 8

XML

Fair Value Measurements

3 Months Ended

May 04, 2013

Fair Value Measurements

Fair Value Measurements

Note 4. Fair Value Measurements

As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

· Level 1 — Quoted prices for identical instruments in active markets;

· Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

· Level 3 — Instruments with significant unobservable inputs.

We apply fair value techniques on a non-recurring basis for the establishment of potential impairment loss related to goodwill pursuant to ASC 350, Intangibles—Goodwill and Other and determining the fair value of long-lived assets pursuant to ASC 360, Property, Plant, and Equipment. During the quarter ended May 4, 2013, there were no events or changes in circumstances indicating the carrying amounts of our goodwill or long-lived assets may not be recoverable.

The table below provides the carrying and fair values of our senior secured term loan facility (“Restated Term Loan Credit Facility”), our 73/4% Senior Notes that mature in 2018 (“2018 Senior Notes”) and our Senior Subordinated Notes, (together, with our 2018 Senior Notes, “our notes” ) as of May 4, 2013. The fair value of our Restated Term Loan Credit Facility was determined based on quoted market prices of similar instruments which are considered Level 2 inputs within the fair value hierarchy. The fair value of our notes was determined based on recent trades which are considered Level 1 inputs within the fair value hierarchy.

	Carrying Value		Fair Value
	(in millions)
Senior secured term loan	$	1,640	$	1,661
Senior notes	1,007		1,100
Senior subordinated notes	256		269

XML

Segments and Geographic Information (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013 item	Apr. 28, 2012	Feb. 02, 2013
Segments and Geographic Information
Number of reportable segments	1
Number of reportable segments if net sales, operating income or loss, or total assets of the online scrapbooking operating segment exceeds 10% of the consolidated amounts	2
Sales and assets by country
Net sales	$ 993	$ 978
Total Assets	1,519	1,865	1,541
United States
Sales and assets by country
Net sales	899	891
Total Assets	1,427	1,750	1,432
Canada
Sales and assets by country
Net sales	94	87
Total Assets	$ 92	$ 115	$ 109

XML

Commitments and Contingencies (Details) (USD $) In Millions, unless otherwise specified		0 Months Ended	3 Months Ended	12 Months Ended	0 Months Ended		1 Months Ended	0 Months Ended	3 Months Ended
	May 04, 2013	Mar. 20, 2009 Employee Claims Adams Claim item	May 04, 2013 Employee Claims Adams Claim item	Jan. 29, 2011 Employee Claims Adams Claim item	Feb. 10, 2011 Consumer Class Action Claims Zip Code Claims item	May 04, 2013 Consumer Class Action Claims Zip Code Claims item	Apr. 30, 2012 Consumer Class Action Claims Pricing and Promotion Maximum	May 18, 2011 Consumer Class Action Claims Payment Card Terminal Tampering item	May 04, 2013 Consumer Class Action Claims Payment Card Terminal Tampering item	Jan. 28, 2012 Consumer Class Action Claims Payment Card Terminal Tampering item	May 03, 2011 Consumer Class Action Claims Payment Card Terminal Tampering item
Commitments and Contingencies
Aggregate estimate of possible loss	$ 14
Commitments and Contingencies
Number of plaintiffs		114
Number of additional plaintiffs			15	8
Additional purported class action lawsuits				2	3			2	4
Number of cases subject to the consolidation order						2			4
Damages, penalties and fees sought by plaintiff							$ 5
Number of payment card terminals tampered											90
Number of payment card terminals removed and replaced										7,100

XML

Segments and Geographic Information (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013	Apr. 28, 2012
Segment and Geographic Information
Net income	$ 47	$ 53
Interest expense	47	66
Refinancing costs and losses on early extinguishment of debt	7
Provision for income taxes	29	30
Depreciation and amortization	25	24
Reporting segment
Segment and Geographic Information
Net income	47	53
Interest expense	47	66
Refinancing costs and losses on early extinguishment of debt	7
Provision for income taxes	29	30
Depreciation and amortization	25	24
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$ 155	$ 173

XML

Related Party Transactions (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013	Apr. 28, 2012	Feb. 02, 2013
Related Party Transactions
Expenses recognized	$ 4	$ 3
Long-term debt held	3,085	3,490	3,041
Bain Capital Partners, LLC | Print procurement services received from an external vendor
Related Party Transactions
Expenses recognized	1	2
The Blackstone Group | Senior secured term loan
Related Party Transactions
Long-term debt held	34
The Blackstone Group | Lease services of certain properties from a vendor
Related Party Transactions
Expenses recognized	1	1
The Blackstone Group | Store inventory counting services received from an external vendor
Related Party Transactions
Expenses recognized	1	2
The Blackstone Group | Candy-type items in stores received from an external vendor
Related Party Transactions
Expenses recognized	6	5
The Sponsors
Related Party Transactions
Annual management fees	12
Highfields Capital Management LP
Related Party Transactions
Annual management fees	$ 1

XML

Comprehensive Income

3 Months Ended

May 04, 2013

Comprehensive Income

Comprehensive Income

Note 3.  Comprehensive Income

Accumulated other comprehensive income, net of tax, is reflected in the Consolidated Balance Sheets as follows:

	Foreign Currency
	Translation
	and Other
	(in millions)
Balance at February 2, 2013	$	6
Actuarial loss on pension plan	(1		)
Balance at May 4, 2013	$	5

XML

Condensed Consolidating Financial Information (Details) (USD $) In Millions, unless otherwise specified	May 04, 2013	Feb. 02, 2013	Apr. 28, 2012	Jan. 28, 2012
Current assets:
Cash and equivalents	$ 55	$ 56	$ 385	$ 371
Merchandise inventories	842	865	874
Other	130	126	124
Total current assets	1,027	1,047	1,383
Property and equipment, net	341	338	310
Goodwill	94	94	95
Other assets	57	62	77
Total assets	1,519	1,541	1,865
Current liabilities:
Accounts payable	232	263	280
Accrued liabilities and other	300	367	388
Current portion of long-term debt	198	150	127
Other	35	44	29
Total current liabilities	765	824	824
Long-term debt	2,887	2,891	3,363
Other long-term liabilities	81	85	96
Total stockholders' deficit	(2,214)	(2,259)	(2,418)
Total liabilities and stockholders' deficit	1,519	1,541	1,865
Parent Company
Current assets:
Cash and equivalents	32	37	372	363
Merchandise inventories	588	590	577
Other	108	105	104
Total current assets	728	732	1,053
Property and equipment, net	272	271	250
Goodwill	94	94	95
Investment in subsidiaries	451	301	563
Other assets	54	59	74
Total assets	1,599	1,457	2,035
Current liabilities:
Accounts payable	4	5	10
Accrued liabilities and other	177	235	269
Current portion of long-term debt	198	150	127
Intercompany payable	442	323	570
Other	35	39	29
Total current liabilities	856	752	1,005
Long-term debt	2,887	2,891	3,363
Other long-term liabilities	70	73	85
Total stockholders' deficit	(2,214)	(2,259)	(2,418)
Total liabilities and stockholders' deficit	1,599	1,457	2,035
Guarantor Subsidiaries
Percentage of equity ownership owned	100.00%
Current assets:
Cash and equivalents	23	19	13	8
Merchandise inventories	254	275	297
Intercompany receivables	442	323	570
Other	22	21	20
Total current assets	741	638	900
Property and equipment, net	69	67	60
Other assets	3	3	3
Total assets	813	708	963
Current liabilities:
Accounts payable	228	258	270
Accrued liabilities and other	123	132	119
Other		5
Total current liabilities	351	395	389
Other long-term liabilities	11	12	11
Total stockholders' deficit	451	301	563
Total liabilities and stockholders' deficit	813	708	963
Eliminations
Current assets:
Intercompany receivables	(442)	(323)	(570)
Total current assets	(442)	(323)	(570)
Investment in subsidiaries	(451)	(301)	(563)
Total assets	(893)	(624)	(1,133)
Current liabilities:
Intercompany payable	(442)	(323)	(570)
Total current liabilities	(442)	(323)	(570)
Total stockholders' deficit	(451)	(301)	(563)
Total liabilities and stockholders' deficit	$ (893)	$ (624)	$ (1,133)

XML

CONSOLIDATED BALANCE SHEETS (USD $) In Millions, unless otherwise specified	May 04, 2013	Feb. 02, 2013	Apr. 28, 2012
Current assets:
Cash and equivalents	$ 55	$ 56	$ 385
Merchandise inventories	842	865	874
Prepaid expenses and other	85	86	77
Deferred income taxes	37	37	42
Income tax receivable	8	3	5
Total current assets	1,027	1,047	1,383
Property and equipment, at cost	1,527	1,502	1,405
Less accumulated depreciation and amortization	(1,186)	(1,164)	(1,095)
Property and equipment, net	341	338	310
Goodwill	94	94	95
Debt issuance costs, net of accumulated amortization of $52, $54, and $78, respectively	42	46	55
Deferred income taxes	13	13	18
Other assets	2	3	4
Total non-current assets	151	156	172
Total assets	1,519	1,541	1,865
Current liabilities:
Accounts payable	232	263	280
Accrued liabilities and other	300	367	388
Current portion of long-term debt	198	150	127
Deferred income taxes	4	4	1
Income taxes payable	31	40	28
Total current liabilities	765	824	824
Long-term debt	2,887	2,891	3,363
Deferred income taxes	2	2	11
Other long-term liabilities	79	83	85
Total long-term liabilities	2,968	2,976	3,459
Total liabilities	3,733	3,800	4,283
Commitments and contingencies
Stockholders' deficit:
Common Stock, $0.10 par value, 220,000,000 shares authorized; 118,417,069 shares issued and outstanding at May 4, 2013; 118,414,727 shares issued and outstanding at February 2, 2013; 118,420,253 shares issued and outstanding at April 28, 2012	12	12	12
Additional paid-in capital	48	49	49
Accumulated deficit	(2,279)	(2,326)	(2,487)
Accumulated other comprehensive income	5	6	8
Total stockholders' deficit	(2,214)	(2,259)	(2,418)
Total liabilities and stockholders' deficit	$ 1,519	$ 1,541	$ 1,865

XML

Summary of Significant Accounting Policies

3 Months Ended

May 04, 2013

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1.  Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Michaels Stores, Inc. and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of the “Company”, “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

Because of the seasonal nature of our business, the results of operations for the quarter ended May 4, 2013 are not indicative of the results to be expected for the entire year.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014, and all references to”fiscal 2012” relate to the 53 weeks ended February 2, 2013. In addition, all references herein to “the first quarter of fiscal 2013” relate to the 13 weeks ended May 4, 2013, and all references to “the first quarter of fiscal 2012” relate to the 13 weeks ended April 28, 2012.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to Accounting Standards Codification (“ASC”) 220, Comprehensive Income. ASU No. 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other items not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  This standard, which is prospective, is effective for reporting periods beginning after December 15, 2012, with earlier adoption permitted.  We adopted all requirements of this standard on February 3, 2013, the beginning of fiscal 2013.

XML

Debt (Details) (USD $) In Millions, unless otherwise specified	May 04, 2013	Feb. 02, 2013	Jan. 28, 2013	Apr. 28, 2012
Debt
Total debt	$ 3,085	$ 3,041		$ 3,490
Less current portion	198	150		127
Long-term debt	2,887	2,891		3,363
Senior secured term loan
Debt
Total debt	1,640	1,640		1,996
Senior notes
Debt
Total debt	1,007	1,007		795
Interest rate (as a percent)	7.75%
Senior subordinated notes
Debt
Total debt	256	393		393
Interest rate (as a percent)	11.375%		11.375%
Subordinated discount notes
Debt
Total debt				306
Interest rate (as a percent)				13.00%
Asset-based revolving credit facility
Debt
Total debt	$ 182	$ 1

XML

Debt (Details 3) (Restated Revolving Credit Facility, USD $) In Millions, unless otherwise specified	May 04, 2013
Restated Revolving Credit Facility
Asset-based Revolving Credit Facility
Borrowing base amount	$ 650
Outstanding borrowings	182
Outstanding letters of credit	62
Unused borrowing capacity	$ 406

XML

Debt

3 Months Ended

May 04, 2013

Debt

Debt

Note 2.  Debt

Our outstanding debt is detailed in the table below.  We were in compliance with the terms and conditions of all debt agreements for all periods presented.

	May 4, 2013		February 2, 2013		April 28, 2012		Interest Rate
	(in millions)
Senior secured term loan	$	1,640	$	1,640	$	1,996	Variable
Senior notes	1,007		1,007		795		7.750%
Senior subordinated notes	256		393		393		11.375%
Subordinated discount notes	—		—		306		13.000%
Asset-based revolving credit facility	182		1		—		Variable
Total debt	3,085		3,041		3,490
Less current portion	198		150		127
Long-term debt	$	2,887	$	2,891	$	3,363

113/8% Senior Subordinated Notes due 2016

On January 28, 2013, we caused to be delivered to the holders of our outstanding 113/8% Senior Subordinated Notes due November 1, 2016 (the “Senior Subordinated Notes”) an irrevocable notice relating to the redemption of $137 million in aggregate principal amount of the Senior Subordinated Notes. On February 27, 2013, we redeemed the $137 million of Senior Subordinated Notes at a redemption price equal to 103.792%.  In accordance with ASC 470 Debt, we recorded a loss on early extinguishment of debt of approximately $7 million related to the partial redemption of our Senior Subordinated Notes. The $7 million loss is comprised of a $5 million redemption premium and $2 million to write off related debt issuance costs.

Restated Revolving Credit Facility

As of May 4, 2013, the borrowing base of our restated senior secured asset-based revolving credit facility (“the Restated Revolving Credit Facility”) was $650 million, of which we had $182 million in borrowings, $62 million of outstanding letters of credit and the unused borrowing capacity was $406 million.

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Millions, except Share data, unless otherwise specified	May 04, 2013	Feb. 02, 2013	Apr. 28, 2012
CONSOLIDATED BALANCE SHEETS
Debt issuance costs, accumulated amortization (in dollars)	$ 52	$ 54	$ 78
Common Stock, par value (in dollars per share)	$ 0.10	$ 0.10	$ 0.10
Common Stock, shares authorized	220,000,000	220,000,000	220,000,000
Common Stock, shares issued	118,417,069	118,414,727	118,420,253
Common Stock, shares outstanding	118,417,069	118,414,727	118,420,253

XML

Comprehensive Income (Tables)

3 Months Ended

May 04, 2013

Comprehensive Income

Schedule of accumulated other comprehensive income, net of tax

	Foreign Currency
	Translation
	and Other
	(in millions)
Balance at February 2, 2013	$	6
Actuarial loss on pension plan	(1		)
Balance at May 4, 2013	$	5

XML

Document and Entity Information	3 Months Ended
	May 04, 2013	May 21, 2013
Document and Entity Information
Entity Registrant Name	MICHAELS STORES INC
Entity Central Index Key	0000740670
Document Type	10-Q
Document Period End Date	May 04, 2013
Amendment Flag	false
Current Fiscal Year End Date	--02-01
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		118,687,391
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q1

XML

Fair Value Measurements (Tables)

3 Months Ended

May 04, 2013

Fair Value Measurements

Schedule of carrying and fair values of debt

	Carrying Value		Fair Value
	(in millions)
Senior secured term loan	$	1,640	$	1,661
Senior notes	1,007		1,100
Senior subordinated notes	256		269

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013	Apr. 28, 2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net sales	$ 993	$ 978
Cost of sales and occupancy expense	586	566
Gross profit	407	412
Selling, general, and administrative expense	271	260
Related party expenses	4	3
Store pre-opening costs	2	1
Operating income	130	148
Interest expense	47	66
Refinancing costs and losses on early extinguishment of debt	7
Other (income) and expense, net		(1)
Income before income taxes	76	83
Provision for income taxes	29	30
Net income	47	53
Other comprehensive income, net of tax:
Foreign currency translation adjustment		2
Actuarial loss on pension plan	(1)
Comprehensive income	$ 46	$ 55

XML

Segments and Geographic Information

3 Months Ended

May 04, 2013

Segments and Geographic Information

Segments and Geographic Information

Note 7.  Segments and Geographic Information

We consider our Michaels — U.S., Michaels — Canada, Aaron Brothers and online scrapbooking business operations to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting. We determined that our Michaels — U.S., Michaels — Canada, and Aaron Brothers operating segments have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine those operating segments into one reporting segment.  As of May 4, 2013, the online scrapbooking business operating segment was immaterial to the financial statements as a whole. Accordingly, we will report in two reportable segments if Net sales, Operating income or loss, or Total assets of the online scrapbooking operating segment exceeds 10% of the consolidated amounts.

Our sales and assets by country are as follows:

	Quarter Ended
	May 4, 2013		April 28, 2012
	(in millions)
Net Sales:
United States	$	899	$	891
Canada	94		87
Consolidated Total	$	993	$	978

	May 4, 2013		February 2, 2013		April 28, 2012
	(in millions)
Total Assets:
United States	$	1,427	$	1,432	$	1,750
Canada	92		109		115
Consolidated Total	$	1,519	$	1,541	$	1,865

Our chief operating decision makers evaluate historical operating performance, plan and forecast future periods’ operating performance based on earnings before interest, income taxes, depreciation, amortization, and refinancing costs and losses on early extinguishment of debt (“EBITDA (excluding refinancing costs and losses on early extinguishment of debt)”). We believe EBITDA (excluding refinancing costs and losses on early extinguishment of debt) represents the financial measure that more closely reflects the operating effectiveness of factors over which management has control. As such, an element of base incentive compensation targets for certain management personnel are based on EBITDA (excluding refinancing costs and losses on early extinguishment of debt). A reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) to Net income is presented below.

	Quarter Ended
	May 4, 2013		April 28, 2012
	(in millions)
Net income	$	47	$	53
Interest expense	47		66
Refinancing costs and losses on early extinguishments of debt	7		—
Provision for income taxes	29		30
Depreciation and amortization	25		24
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$	155	$	173

XML

Commitments and Contingencies

3 Months Ended

May 04, 2013

Commitments and Contingencies

Commitments and Contingencies

Note 6.  Commitments and Contingencies

We are involved in ongoing legal and regulatory proceedings.  Other than those described in the following paragraphs, there were no material changes to our disclosures of commitments and contingencies from our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

Employee Claims

Adams Claim

On March 20, 2009, 114 individuals commenced an action against the Company styled Adams, et al. v. Michaels Stores, Inc. in the U.S. District Court for the Central District of California. The complaint was later amended to add 15 additional plaintiffs.  In 2010, two additional lawsuits making the same allegations were filed in the Central District Court by eight additional plaintiffs, styled Borgen, et al. v. Michaels Stores, Inc. and Langstaff v. Michaels Stores, Inc., and were later consolidated with the Adams suit.  The Adams consolidated suit (“Adams”) alleges that the plaintiffs, certain former and current store managers in California, were improperly classified as exempt employees and, as such, Michaels failed to pay overtime wages, provide meal and rest periods (or compensation in lieu thereof), accurately record hours worked and provide itemized employee wage statements. The Adams suit additionally alleges that the foregoing conduct was in breach of California’s unfair competition law. The plaintiffs seek injunctive relief, damages for unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. We have entered into settlement agreements with virtually all of the individual plaintiffs for an amount that will not have a material effect on our consolidated financial statements.

Ragano Claim

On July 11, 2011, the Company was served with a lawsuit filed in the California Superior Court in and for the County of San Mateo by Anita Ragano, as a purported class action proceeding on behalf of herself and all current and former hourly retail employees employed by Michaels stores in California. We removed the matter to the U.S. District Court for the Northern District of California on August 9, 2011. The complaint was subsequently amended to add an additional named plaintiff, Terri McDonald. The lawsuit alleges that Michaels stores failed to pay all wages and overtime, failed to provide its hourly employees with adequate meal and rest breaks (or compensation in lieu thereof), failed to timely pay final wages, unlawfully withheld wages and failed to provide accurate wage statements and further alleges that the foregoing conduct was in breach of various laws, including California’s unfair competition law. The plaintiffs sought injunctive relief, compensatory damages, meal and rest break penalties, waiting time penalties, interest, and attorneys’ fees and costs. On August 10, 2012, we reached a class-wide settlement with plaintiffs and the Court granted final approval on April 22, 2013. The settlement will not have a material effect on our consolidated financial statements.

Consumer Class Action Claims

California Zip Code Claims

On August 15, 2008, Linda Carson, a consumer, filed a purported class action proceeding against Michaels Stores, Inc. in the Superior Court of California, County of San Diego (“San Diego Superior Court”), on behalf of herself and all similarly-situated California consumers. The Carson lawsuit alleges that Michaels unlawfully requested and recorded personally identifiable information (i.e., her zip code) as part of a credit card transaction. The plaintiff sought statutory penalties, costs, interest, and attorneys’ fees. We contested certification of this claim as a class action and filed a motion to dismiss the claim. On March 9, 2009, the Court dismissed the case with prejudice. The plaintiff appealed this decision to the California Court of Appeals for the Fourth District, San Diego. On July 22, 2010, the Court of Appeals upheld the dismissal of the case. The plaintiff appealed this decision to the Supreme Court of California (“California Supreme Court”). On September 29, 2010, the California Supreme Court granted the plaintiff’s petition for review; however, it stayed any further proceedings in the case until another similar zip code case pending before the court, Pineda v. Williams-Sonoma, was decided. On February 10, 2011, the California Supreme Court ruled, in the Williams-Sonoma case, that zip codes are personally identifiable information and therefore the Song-Beverly Credit Card Act of 1971, as amended (“Song Act”), prohibits businesses from requesting or requiring zip codes in connection with a credit card transaction. On or about April 6, 2011, the Supreme Court transferred the Carson case back to the Court of Appeals with directions to the Court to reconsider its decision in light of the Pineda decision. Upon reconsideration, the Court of Appeals remanded the case back to the San Diego Superior Court on May 31, 2011.

Additionally, since the California Supreme Court decision on February 10, 2011, three additional purported class action lawsuits alleging violations of the Song Act have been filed against the Company: Carolyn Austin v. Michaels Stores, Inc. and Tiffany Heon v. Michaels Stores, Inc., both in the San Diego Superior Court and Sandra A. Rubinstein v. Michaels Stores, Inc. in the Superior Court of California, County of Los Angeles, Central Division. The Rubinstein case was transferred to the San Diego Superior Court.  An order coordinating the cases has been entered and plaintiffs filed a Consolidated Complaint on April 24, 2012.  Plaintiffs seek damages, civil penalties, common settlement fund recovery, attorney fees, costs of suit and prejudgment interest.  The parties mediated the matter in March and a tentative settlement has been reached for an amount that will not have a material effect on our consolidated financial statements.

Massachusetts Zip Code Claims

Relying in part on the California Supreme Court decision, an additional purported class action lawsuit was filed on May 20, 2011 against the Company: Melissa Tyler v. Michaels Stores, Inc. in the U.S. District Court-District of Massachusetts, alleging violation of a Massachusetts statute regarding the collection of personally identification information in connection with a credit card transaction.   On March 11, 2013, the Massachusetts Supreme Judicial Court ruled on certified questions on the interpretation of the statute and remanded the case to the U.S. District Court for further proceedings.  Following the Judicial Court’s decision, an additional purported class action lawsuit asserting the same allegations in Tyler was filed in the U.S. District Court-District of Massachusetts by Susan D’Esposito, and the two cases have been consolidated.   We believe we have meritorious defenses to the claims and we are unable, at this time, to estimate a range of loss, if any.

Pricing and Promotion

On April 30, 2012, William J. Henry, a consumer, filed a purported class action proceeding against Michaels Stores, Inc. in the Court of Common Pleas, Lake County, Ohio, on behalf of himself and all similarly-situated Ohio consumers who purchased framing products and/or services from Michaels during weeks where Michaels was advertising a discount for framing products and/or services. The lawsuit alleges that Michaels advertised discounts on its framing products and/or services without actually providing a discount to its customers. The plaintiff is claiming violation of Ohio law ORC 1345.01 et seq., unjust enrichment and fraud. The plaintiff has alleged damages, penalties and fees not to exceed $5 million, exclusive of interest and costs. We believe we have meritorious defenses and intend to defend the lawsuit vigorously. We do not believe the resolution of this lawsuit will have a material effect on our consolidated financial statements.

Data Breach Claims

Payment Card Terminal Tampering

On May 3, 2011, we were advised by the U.S. Secret Service that they were investigating certain fraudulent debit card transactions that occurred on accounts that had been used for legitimate purchases in selected Michaels stores. A subsequent internal investigation revealed that approximately 90 payment card terminals in certain Michaels stores had been physically tampered with, potentially resulting in customer debit and credit card information to be compromised. We have since removed and replaced approximately 7,100 payment card terminals comparable to the identified tampered payment card terminals from our Michaels stores.

On May 18, 2011, Brandi F. Ramundo, a consumer, filed a purported class action proceeding against Michaels Stores, Inc. in the U.S. District Court for the Northern District of Illinois, on behalf of herself and all similarly- situated U.S. consumers alleging that Michaels failed to take commercially reasonable steps to protect consumer financial data, and was in breach of contract and laws, including the Federal Stored Communications Act and the Illinois Consumer Fraud and Deceptive Practices Act.  A number of additional purported class action lawsuits significantly mirroring the claims in the Ramundo complaint were filed against the Company, and subsequently these cases and the Ramundo case  were consolidated and transferred to the Northern District of Illinois.

On August 20, 2012, we reached a tentative class-wide settlement with plaintiffs for an amount that will not have a material effect on our consolidated financial statements and the Court granted final approval on April 17, 2013.

General

In addition to the litigation discussed above, we are, and in the future, may be involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources.

ASC 450, Contingencies, governs the disclosure and recognition of loss contingencies, including potential losses from litigation and regulatory matters. It imposes different requirements for the recognition and disclosure of loss contingencies based on the likelihood of occurrence of the contingent future event or events. It distinguishes among degrees of likelihood using the following three terms: “probable”, meaning that “the future event or events are likely to occur”; “remote”, meaning that “the chance of the future event or events occurring is slight”; and “reasonably possible”, meaning that “the chance of the future event or events occurring is more than remote but less than likely”. In accordance with ASC 450, the Company accrues for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the loss cannot be reasonably estimated we estimate the range of amounts, and if no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a material loss has been incurred. No accrual or disclosure is required for losses that are remote.

For some of the matters disclosed above, as well as other matters previously disclosed in the Company’s filings with the Securities and Exchange Commission (“SEC”), the Company is currently able to estimate a reasonably possible loss or range of loss in excess of amounts accrued (if any). For some of the matters included within this estimation, an accrual has been made because a loss is believed to be both probable and reasonably estimable, but an exposure to loss exists in excess of the amount accrued; in these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, although estimable, is believed to be reasonably possible, but not probable; in these cases the estimate reflects the reasonably possible loss or range of loss within the ranges identified. For the various ranges identified, the aggregate of these estimated amounts is approximately $14 million, which is also inclusive of amounts accrued by the Company.

For other matters disclosed above or as previously disclosed in the Company’s filings with the SEC, the Company is not currently able to estimate the reasonably possible loss or range of loss, and has indicated such. Many of these matters remain in preliminary stages (even in some cases where a substantial period of time has passed since the commencement of the matter), with few or no substantive legal decisions by the court defining the scope of the claims, the class (if any), or the potentially available damages, and fact discovery is still in progress or has not yet begun. For all these reasons, the Company cannot at this time estimate the reasonably possible loss or range of loss, if any, for these matters.

It is the opinion of the Company’s management, based on current knowledge and after taking into account its current legal accruals, the eventual outcome of all matters described in this Note would not be likely to have a material impact on the consolidated financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.

XML

Debt (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended	0 Months Ended
	May 04, 2013	Feb. 27, 2013 11 3/8% Senior Subordinated Notes due 2016	May 04, 2013 11 3/8% Senior Subordinated Notes due 2016	Jan. 28, 2013 11 3/8% Senior Subordinated Notes due 2016
Debt
Stated interest rate (as a percent)			11.375%	11.375%
Aggregate principal amount of debt instrument for which the entity delivered an irrevocable notice relating to the redemption				$ 137
Principal amount of notes repurchased		137
Redemption price of debt instrument as a percentage of principal amount		103.792%
Loss related to the early extinguishment of the repurchased notes	7	7
Redemption premiums included in loss on extinguishment of debt		5
Unamortized debt issuance costs written-off related to loss on early extinguishment of debt		$ 2

XML

Segments and Geographic Information (Tables)

3 Months Ended

May 04, 2013

Segments and Geographic Information

Schedule of sales and assets by country

	Quarter Ended
	May 4, 2013		April 28, 2012
	(in millions)
Net Sales:
United States	$	899	$	891
Canada	94		87
Consolidated Total	$	993	$	978

	May 4, 2013		February 2, 2013		April 28, 2012
	(in millions)
Total Assets:
United States	$	1,427	$	1,432	$	1,750
Canada	92		109		115
Consolidated Total	$	1,519	$	1,541	$	1,865

Schedule of reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) to Net income

	Quarter Ended
	May 4, 2013		April 28, 2012
	(in millions)
Net income	$	47	$	53
Interest expense	47		66
Refinancing costs and losses on early extinguishments of debt	7		—
Provision for income taxes	29		30
Depreciation and amortization	25		24
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$	155	$	173

XML

Summary of Significant Accounting Policies (Policies)

3 Months Ended

May 04, 2013

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The consolidated financial statements include the accounts of Michaels Stores, Inc. and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of the “Company”, “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

Because of the seasonal nature of our business, the results of operations for the quarter ended May 4, 2013 are not indicative of the results to be expected for the entire year.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014, and all references to”fiscal 2012” relate to the 53 weeks ended February 2, 2013. In addition, all references herein to “the first quarter of fiscal 2013” relate to the 13 weeks ended May 4, 2013, and all references to “the first quarter of fiscal 2012” relate to the 13 weeks ended April 28, 2012.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to Accounting Standards Codification (“ASC”) 220, Comprehensive Income. ASU No. 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other items not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  This standard, which is prospective, is effective for reporting periods beginning after December 15, 2012, with earlier adoption permitted.  We adopted all requirements of this standard on February 3, 2013, the beginning of fiscal 2013.

XML

Related Party Transactions

3 Months Ended

May 04, 2013

Related Party Transactions

Related Party Transactions

Note 8.  Related Party Transactions

We pay annual management fees to Bain Capital Partners, LLC (“Bain Capital”) and The Blackstone Group L.P. (“The Blackstone Group” and, together with Bain Capital, the “Sponsors”) and Highfields Capital Management LP in the amount of $12 million and $1 million, respectively. We recognized $4 million and $3 million of expense related to annual management fees during the first quarter of fiscal 2013 and fiscal 2012, respectively. These expenses are included in related party expenses on the Consolidated Statements of Comprehensive Income.

Bain Capital owns a majority equity position in LogicSource, an external vendor we utilize for print procurement services.  Payments associated with this vendor during each of the first quarters of fiscal 2013 and fiscal 2012 were $1 million and $2 million, respectively.  These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in Brixmor Properties Group, a vendor we utilize to lease certain properties. Payments associated with this vendor during each of the first quarters of fiscal 2013 and fiscal 2012 were $1 million.  These expenses are included in Cost of sales and occupancy expense in the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in RGIS, an external vendor we utilize to count our store inventory. Payments associated with this vendor during the first quarters of fiscal 2013 and fiscal 2012 were $1 million and $2 million, respectively. These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in Vistar, an external vendor we utilize for all of the candy-type items in our stores.  Payments associated with this vendor during the first quarter of fiscal 2013 and fiscal 2012 were $6 million and $5 million, respectively. These expenses are recognized in cost of sales as the sales are recorded.

Our current directors (other than Jill A. Greenthal) are affiliates of Bain Capital or The Blackstone Group.  As such, some or all of such directors may have an indirect material interest in payments with respect to debt securities of the Company that have been purchased by affiliates of Bain Capital and The Blackstone Group.  As of May 4, 2013, affiliates of The Blackstone Group held $34 million of our senior secured term loan.

XML

Condensed Consolidating Financial Information

3 Months Ended

May 04, 2013

Condensed Consolidating Financial Information

Condensed Consolidating Financial Information

Note 9.  Condensed Consolidating Financial Information

All obligations of Michaels Stores, Inc. under our notes, the Restated Revolving Credit Facility and the Rested Term Loan Credit Facility are guaranteed by each of our subsidiaries other than Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC. As of May 4, 2013, the financial statements of Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC were immaterial. Each subsidiary guarantor is 100% owned by the parent and all guarantees are joint and several and full and unconditional.

The following condensed consolidating financial information represents the financial information of Michaels Stores, Inc. and its wholly-owned subsidiary guarantors, prepared on the equity basis of accounting.  The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X.  The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had the subsidiary guarantors operated as independent entities.

Supplemental Condensed Consolidating Balance Sheet

	May 4, 2013
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	32		$	23	$	—		$	55
Merchandise inventories	588			254		—			842
Intercompany receivables	—			442		(442		)	—
Other	108			22		—			130
Total current assets	728			741		(442		)	1,027
Property and equipment, net	272			69		—			341
Goodwill	94			—		—			94
Investment in subsidiaries	451			—		(451		)	—
Other assets	54			3		—			57
Total assets	$	1,599		$	813	$	(893	)	$	1,519
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	4		$	228	$	—		$	232
Accrued liabilities and other	177			123		—			300
Current portion of long-term debt	198			—		—			198
Intercompany payable	442			—		(442		)	—
Other	35			—		—			35
Total current liabilities	856			351		(442		)	765
Long-term debt	2,887			—		—			2,887
Other long-term liabilities	70			11		—			81
Total stockholders’ deficit	(2,214		)	451		(451		)	(2,214		)
Total liabilities and stockholders’ deficit	$	1,599		$	813	$	(893	)	$	1,519

Supplemental Condensed Consolidating Balance Sheet

	February 2, 2013
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	37		$	19	$	—		$	56
Merchandise inventories	590			275		—			865
Intercompany receivables	—			323		(323		)	—
Other	105			21		—			126
Total current assets	732			638		(323		)	1,047
Property and equipment, net	271			67		—			338
Goodwill	94			—		—			94
Investment in subsidiaries	301			—		(301		)	—
Other assets	59			3		—			62
Total assets	$	1,457		$	708	$	(624	)	$	1,541
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5		$	258	$	—		$	263
Accrued liabilities and other	235			132		—			367
Current portion of long-term debt	150			—		—			150
Intercompany payable	323			—		(323		)	—
Other	39			5		—			44
Total current liabilities	752			395		(323		)	824
Long-term debt	2,891			—		—			2,891
Other long-term liabilities	73			12		—			85
Total stockholders’ deficit	(2,259		)	301		(301		)	(2,259		)
Total liabilities and stockholders’ deficit	$	1,457		$	708	$	(624	)	$	1,541

Supplemental Condensed Consolidating Balance Sheet

	April 28, 2012
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	372		$	13	$	—		$	385
Merchandise inventories	577			297		—			874
Intercompany receivables	—			570		(570		)	—
Other	104			20		—			124
Total current assets	1,053			900		(570		)	1,383
Property and equipment, net	250			60		—			310
Goodwill	95			—		—			95
Investment in subsidiaries	563			—		(563		)	—
Other assets	74			3		—			77
Total assets	$	2,035		$	963	$	(1,133	)	$	1,865
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	10		$	270	$	—		$	280
Accrued liabilities and other	269			119		—			388
Current portion of long-term debt	127			—		—			127
Intercompany payable	570			—		(570		)	—
Other	29			—		—			29
Total current liabilities	1,005			389		(570		)	824
Long-term debt	3,363			—		—			3,363
Other long-term liabilities	85			11		—			96
Total stockholders’ deficit	(2,418		)	563		(563		)	(2,418		)
Total liabilities and stockholders’ deficit	$	2,035		$	963	$	(1,133	)	$	1,865

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended May 4, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	869		$	547		$	(423	)	$	993
Cost of sales and occupancy expense	556			453			(423		)	586
Gross profit	313			94			—			407
Selling, general, and administrative expense	233			38			—			271
Related party expenses	4			—			—			4
Store pre-opening costs	2			—			—			2
Operating income	74			56			—			130
Interest expense	47			—			—			47
Refinancing costs and losses on early extinguishment of debt	7			—			—			7
Intercompany charges (income)	13			(13		)	—			—
Equity in earnings of subsidiaries	69			—			(69		)	—
Income before income taxes	76			69			(69		)	76
Provision for income taxes	29			26			(26		)	29
Net income	47			43			(43		)	47
Other comprehensive income, net of tax:
Actuarial loss on pension plan	(1		)	—			—			(1		)
Comprehensive income	$	46		$	43		$	(43	)	$	46

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended April 28, 2012
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	861		$	549		$	(432	)	$	978
Cost of sales and occupancy expense	536			462			(432		)	566
Gross profit	325			87			—			412
Selling, general, and administrative expense	225			35			—			260
Related party expenses	3			—			—			3
Store pre-opening costs	1			—			—			1
Operating income	96			52			—			148
Interest expense	66			—			—			66
Other (income) and expense, net	(1		)	—			—			(1		)
Intercompany charges (income)	17			(17		)	—			—
Equity in earnings of subsidiaries	69			—			(69		)	—
Income before income taxes	83			69			(69		)	83
Provision for income taxes	30			25			(25		)	30
Net income	53			44			(44		)	53
Other comprehensive income, net of tax:
Foreign currency translation adjustment	2			—			—			2
Comprehensive income	$	55		$	44		$	(44	)	$	55

Supplemental Condensed Consolidating Statement of Cash Flows

	Quarter Ended May 4, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash provided by operating activities	$	(8	)	$	34		$	(24	)	$	2
Investing activities:
Cash paid for property and equipment	(16		)	(6		)	—			(22		)
Net cash used in investing activities	(16		)	(6		)	—			(22		)
Financing activities:
Net repayments of short-term debt	39			—			—			39
Intercompany dividends	—			(24		)	24			—
Other financing activities	(20		)	—			—			(20		)
Net cash used in financing activities	19			(24		)	24			19
Decrease in cash and equivalents	(5		)	4			—			(1		)
Beginning cash and equivalents	37			19			—			56
Ending cash and equivalents	$	32		$	23		$	—		$	55

Supplemental Condensed Consolidating Statement of Cash Flows

	Quarter Ended April 28, 2012
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash provided by operating activities	$	33		$	25		$	(17	)	$	41
Investing activities:
Cash paid for property and equipment	(15		)	(3		)	—			(18		)
Net cash used in investing activities	(15		)	(3		)	—			(18		)
Financing activities:
Intercompany dividends	—			(17		)	17			—
Other financing activities	(9		)	—			—			(9		)
Net cash used in financing activities	(9		)	(17		)	17			(9		)
Increase in cash and equivalents	9			5			—			14
Beginning cash and equivalents	363			8			—			371
Ending cash and equivalents	$	372		$	13		$	—		$	385

XML

Debt (Tables)

3 Months Ended

May 04, 2013

Debt

Schedule of outstanding debt

	May 4, 2013		February 2, 2013		April 28, 2012		Interest Rate
	(in millions)
Senior secured term loan	$	1,640	$	1,640	$	1,996	Variable
Senior notes	1,007		1,007		795		7.750%
Senior subordinated notes	256		393		393		11.375%
Subordinated discount notes	—		—		306		13.000%
Asset-based revolving credit facility	182		1		—		Variable
Total debt	3,085		3,041		3,490
Less current portion	198		150		127
Long-term debt	$	2,887	$	2,891	$	3,363

XML

Condensed Consolidating Financial Information (Details 3) (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013	Apr. 28, 2012
Operating activities:
Net cash provided by operating activities	$ 2	$ 41
Investing activities:
Cash paid for property and equipment	(22)	(18)
Net cash used in investing activities	(22)	(18)
Financing activities:
Net repayments of short-term debt	39
Other financing activities	(20)	(9)
Net cash provided by (used in) financing activities	19	(9)
Net (decrease) increase in cash and equivalents	(1)	14
Cash and equivalents at beginning of period	56	371
Cash and equivalents at end of period	55	385
Parent Company
Operating activities:
Net cash provided by operating activities	(8)	33
Investing activities:
Cash paid for property and equipment	(16)	(15)
Net cash used in investing activities	(16)	(15)
Financing activities:
Net repayments of short-term debt	39
Other financing activities	(20)	(9)
Net cash provided by (used in) financing activities	19	(9)
Net (decrease) increase in cash and equivalents	(5)	9
Cash and equivalents at beginning of period	37	363
Cash and equivalents at end of period	32	372
Guarantor Subsidiaries
Operating activities:
Net cash provided by operating activities	34	25
Investing activities:
Cash paid for property and equipment	(6)	(3)
Net cash used in investing activities	(6)	(3)
Financing activities:
Intercompany dividends	(24)	(17)
Net cash provided by (used in) financing activities	(24)	(17)
Net (decrease) increase in cash and equivalents	4	5
Cash and equivalents at beginning of period	19	8
Cash and equivalents at end of period	23	13
Eliminations
Operating activities:
Net cash provided by operating activities	(24)	(17)
Financing activities:
Intercompany dividends	24	17
Net cash provided by (used in) financing activities	$ 24	$ 17

XML

Summary of Significant Accounting Policies (Details)	3 Months Ended		12 Months Ended
	May 04, 2013 item	Apr. 28, 2012 item	Feb. 01, 2014 item	Feb. 02, 2013 item
Fiscal year
Number of weeks in a fiscal year	13	13	52	53

XML

Fair Value Measurements (Details) (USD $) In Millions, unless otherwise specified	May 04, 2013
Carrying Value | Senior secured term loan
Fair Value Measurements
Long-term loans and notes	$ 1,640
Carrying Value | Senior notes
Fair Value Measurements
Long-term loans and notes	1,007
Carrying Value | Senior subordinated notes
Fair Value Measurements
Long-term loans and notes	256
Fair Value | Senior secured term loan
Fair Value Measurements
Long-term loans and notes	1,661
Fair Value | Senior notes
Fair Value Measurements
Long-term loans and notes	1,100
Fair Value | Senior subordinated notes
Fair Value Measurements
Long-term loans and notes	$ 269

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Millions, unless otherwise specified	3 Months Ended
	May 04, 2013	Apr. 28, 2012
Operating activities:
Net income	$ 47	$ 53
Adjustments:
Depreciation and amortization	25	24
Share-based compensation	(1)	1
Debt issuance costs amortization	2	4
Refinancing costs expensed and losses on early extinguishment of debt	7
Changes in assets and liabilities:
Merchandise inventories	23	(34)
Prepaid expenses and other	1	3
Accounts payable	(14)	(15)
Accrued interest	(30)	37
Accrued liabilities and other	(39)	(37)
Income taxes	(15)	5
Other long-term liabilities	(4)
Net cash provided by operating activities	2	41
Investing activities:
Additions to property and equipment	(22)	(18)
Net cash used in investing activities	(22)	(18)
Financing activities:
Redemption of senior subordinated notes due 2016	(142)
Borrowings on asset-based revolving credit facility	306
Payments on asset-based revolving credit facility	(125)
Repurchase of common stock		(2)
Proceeds from stock options exercised		2
Payment of capital leases	(1)
Change in cash overdraft	(19)	(9)
Net cash provided by (used in) financing activities	19	(9)
Net (decrease) increase in cash and equivalents	(1)	14
Cash and equivalents at beginning of period	56	371
Cash and equivalents at end of period	55	385
Supplemental Cash Flow Information:
Cash paid for interest	75	25
Cash paid for income taxes	$ 44	$ 24

XML

Income Taxes

3 Months Ended

May 04, 2013

Income Taxes

Income Taxes

Note 5.  Income Taxes

The effective tax rate was 38.2% for the first quarter of fiscal 2013. The effective tax rate was 36.1% for the first quarter of fiscal 2012. The current year tax rate is higher than the prior year tax rate due primarily to the prior year favorable impact related to our reserve for uncertain tax positions..  We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.7%.

XML

Income Taxes (Details)	3 Months Ended		12 Months Ended
	May 04, 2013	Apr. 28, 2012	Feb. 01, 2014 Annualized Estimate
Effective tax rate from continuing operations
Effective tax rate (as a percent)	38.20%	36.10%	37.70%

XML

Condensed Consolidating Financial Information (Tables)

3 Months Ended

May 04, 2013

Condensed Consolidating Financial Information

Schedule of Supplemental Condensed Consolidating Balance Sheet

	May 4, 2013
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	32		$	23	$	—		$	55
Merchandise inventories	588			254		—			842
Intercompany receivables	—			442		(442		)	—
Other	108			22		—			130
Total current assets	728			741		(442		)	1,027
Property and equipment, net	272			69		—			341
Goodwill	94			—		—			94
Investment in subsidiaries	451			—		(451		)	—
Other assets	54			3		—			57
Total assets	$	1,599		$	813	$	(893	)	$	1,519
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	4		$	228	$	—		$	232
Accrued liabilities and other	177			123		—			300
Current portion of long-term debt	198			—		—			198
Intercompany payable	442			—		(442		)	—
Other	35			—		—			35
Total current liabilities	856			351		(442		)	765
Long-term debt	2,887			—		—			2,887
Other long-term liabilities	70			11		—			81
Total stockholders’ deficit	(2,214		)	451		(451		)	(2,214		)
Total liabilities and stockholders’ deficit	$	1,599		$	813	$	(893	)	$	1,519

	February 2, 2013
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	37		$	19	$	—		$	56
Merchandise inventories	590			275		—			865
Intercompany receivables	—			323		(323		)	—
Other	105			21		—			126
Total current assets	732			638		(323		)	1,047
Property and equipment, net	271			67		—			338
Goodwill	94			—		—			94
Investment in subsidiaries	301			—		(301		)	—
Other assets	59			3		—			62
Total assets	$	1,457		$	708	$	(624	)	$	1,541
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5		$	258	$	—		$	263
Accrued liabilities and other	235			132		—			367
Current portion of long-term debt	150			—		—			150
Intercompany payable	323			—		(323		)	—
Other	39			5		—			44
Total current liabilities	752			395		(323		)	824
Long-term debt	2,891			—		—			2,891
Other long-term liabilities	73			12		—			85
Total stockholders’ deficit	(2,259		)	301		(301		)	(2,259		)
Total liabilities and stockholders’ deficit	$	1,457		$	708	$	(624	)	$	1,541

	April 28, 2012
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	372		$	13	$	—		$	385
Merchandise inventories	577			297		—			874
Intercompany receivables	—			570		(570		)	—
Other	104			20		—			124
Total current assets	1,053			900		(570		)	1,383
Property and equipment, net	250			60		—			310
Goodwill	95			—		—			95
Investment in subsidiaries	563			—		(563		)	—
Other assets	74			3		—			77
Total assets	$	2,035		$	963	$	(1,133	)	$	1,865
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	10		$	270	$	—		$	280
Accrued liabilities and other	269			119		—			388
Current portion of long-term debt	127			—		—			127
Intercompany payable	570			—		(570		)	—
Other	29			—		—			29
Total current liabilities	1,005			389		(570		)	824
Long-term debt	3,363			—		—			3,363
Other long-term liabilities	85			11		—			96
Total stockholders’ deficit	(2,418		)	563		(563		)	(2,418		)
Total liabilities and stockholders’ deficit	$	2,035		$	963	$	(1,133	)	$	1,865

Schedule of Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended May 4, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	869		$	547		$	(423	)	$	993
Cost of sales and occupancy expense	556			453			(423		)	586
Gross profit	313			94			—			407
Selling, general, and administrative expense	233			38			—			271
Related party expenses	4			—			—			4
Store pre-opening costs	2			—			—			2
Operating income	74			56			—			130
Interest expense	47			—			—			47
Refinancing costs and losses on early extinguishment of debt	7			—			—			7
Intercompany charges (income)	13			(13		)	—			—
Equity in earnings of subsidiaries	69			—			(69		)	—
Income before income taxes	76			69			(69		)	76
Provision for income taxes	29			26			(26		)	29
Net income	47			43			(43		)	47
Other comprehensive income, net of tax:
Actuarial loss on pension plan	(1		)	—			—			(1		)
Comprehensive income	$	46		$	43		$	(43	)	$	46

	Quarter Ended April 28, 2012
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	861		$	549		$	(432	)	$	978
Cost of sales and occupancy expense	536			462			(432		)	566
Gross profit	325			87			—			412
Selling, general, and administrative expense	225			35			—			260
Related party expenses	3			—			—			3
Store pre-opening costs	1			—			—			1
Operating income	96			52			—			148
Interest expense	66			—			—			66
Other (income) and expense, net	(1		)	—			—			(1		)
Intercompany charges (income)	17			(17		)	—			—
Equity in earnings of subsidiaries	69			—			(69		)	—
Income before income taxes	83			69			(69		)	83
Provision for income taxes	30			25			(25		)	30
Net income	53			44			(44		)	53
Other comprehensive income, net of tax:
Foreign currency translation adjustment	2			—			—			2
Comprehensive income	$	55		$	44		$	(44	)	$	55

Schedule of Supplemental Condensed Consolidating Statement of Cash Flows

	Quarter Ended May 4, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash provided by operating activities	$	(8	)	$	34		$	(24	)	$	2
Investing activities:
Cash paid for property and equipment	(16		)	(6		)	—			(22		)
Net cash used in investing activities	(16		)	(6		)	—			(22		)
Financing activities:
Net repayments of short-term debt	39			—			—			39
Intercompany dividends	—			(24		)	24			—
Other financing activities	(20		)	—			—			(20		)
Net cash used in financing activities	19			(24		)	24			19
Decrease in cash and equivalents	(5		)	4			—			(1		)
Beginning cash and equivalents	37			19			—			56
Ending cash and equivalents	$	32		$	23		$	—		$	55

	Quarter Ended April 28, 2012
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash provided by operating activities	$	33		$	25		$	(17	)	$	41
Investing activities:
Cash paid for property and equipment	(15		)	(3		)	—			(18		)
Net cash used in investing activities	(15		)	(3		)	—			(18		)
Financing activities:
Intercompany dividends	—			(17		)	17			—
Other financing activities	(9		)	—			—			(9		)
Net cash used in financing activities	(9		)	(17		)	17			(9		)
Increase in cash and equivalents	9			5			—			14
Beginning cash and equivalents	363			8			—			371
Ending cash and equivalents	$	372		$	13		$	—		$	385