The Michaels Cos. Inc. Downgraded To 'B' On Anticipated Weakness Amid Coronavirus Outbreak; Outlook Negative

  • Irving, Texas-based arts and crafts specialty retailer The Michaels Cos. Inc. faces extraordinarily challenging environment amid the COVID-19 outbreak.
  • We are downgrading Michaels to 'B' from 'B+'.
  • At the same time, we are lowering our issue-level rating on the company's term loan to 'B+' from 'BB-'. The '2' recovery rating is unchanged. We are also lowering our issue-level rating on the company's senior unsecured notes to 'CCC+' from 'B-'. The '6' recovery rating is unchanged.
  • The negative outlook reflects the potential for a lower rating if Michaels underperforms our forecast because of prolonged social distancing norms or weaker-than-expected recovery.
NEW YORK (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took 
the rating actions listed above. We anticipate a significant impact to 
Michaels' operations as a result of the coronavirus pandemic. While the full 
impact of the outbreak is uncertain at this time, we expect revenues to be 
pressured throughout the year, with particular weakness in the first fiscal 
quarter of fiscal 2020 as many states mandate closures of nonessential 
businesses. We believe temporary closure of most stores is likely, whether 
mandated or otherwise. At stores that remain open, we expect steep traffic 
declines in the high-double-digit percent area over the next several weeks as 
consumers practice social distancing. In our view, the company's online 
presence, which represents about 5% of sales and includes its buy online 
pickup in store program, will be insufficient to generate meaningful cash flow 
while stores are closed. Once the pandemic subsides, we expect a protracted 
return of transaction volumes, likely to be weakened as a result of a 
deteriorating economy, while tariff pressures continue.

The negative outlook reflects uncertainty surrounding the impact of the 
coronavirus and ensuing recessionary environment, which could hinder Michaels' 
ability to maintain leverage below 5x in fiscal 2021 and beyond. 

We could lower the rating if we believe credit metrics will not recover from 
the coronavirus shock, such that we expect leverage to remain above 5x. For 
example, this could occur if economic weakness or social distancing norms 
result in weak traffic at Michaels' stores and profitability does not improve 
in line with our forecast. 

We could revise the outlook to stable if we see a clear path to sustainable 
revenue and profit recovery, with leverage below 5x. For this to occur, we 
expect the coronavirus pandemic to have been resolved, with additional 
certainty around macroeconomic conditions.
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