Michael's, Jo-Ann release financials; Phonebook publishers post gains; Isle of Capri debt firms

By Stephanie N. Rotondo

Portland, Ore., Aug. 27 - Quarterly earnings put pressure on Michael's Stores Inc.'s debt structure during midweek trading.

Market players reported that the arts and crafts company's term loan, as well as its bonds, declined some in trading. The term loan fell about a point, while the bonds lost around 5 points on the day.

Jo-Ann Stores Inc., another arts and crafts retailer, also came out with numbers. Though traders called Michael's figures not so great, Jo-Ann's were deemed a little better. However, as the results came out after the market closed, sources did not yet see much action in the name.

Meanwhile, phonebook publishers R.H. Donnelley Corp. and Idearc Inc. both posted gains in their debt during the session. There was no recent news to spark the increase, but one source speculated that the catalyst came from comments made by Donnelley last week.

Next week, Isle of Capri Casinos will release its first-quarter earnings. On Wednesday, the casino operator's debt edged higher. It was not clear if the bond movement is tied to the pending earnings news.

With the week half over, many in the distressed market are preparing for a long weekend. The market is scheduled to close early on Friday in preparation for a full close on Monday for Labor Day.

Michael's lower on numbers

Michael's Stores' term loan and bonds lost some ground on the back of its quarterly and first half of the fiscal year numbers during the midweek session.

The term loan was quoted at 76 3/8 bid, 77 7/8 offered, down from Tuesday's levels of 77½ bid, 78½ offered, a trader said.

On the bond side, a trader quoted the 10% senior notes due 2014 at 74 and the 11 3/8% subordinated notes due 2016 at 64.

"They are down 5 points since they reported [late Tuesday]," he said.

Another trader said the earnings "did not look great," also calling the bonds down "5-ish" points. He pegged the seniors at 74.5, down from around 80 previously, and the subordinated paper at "64-ish," down from 69 bid, 71 offered last week.

"The subs lost 3 points yesterday [after the earnings came out] and 3 points today," the trader said.

For the second quarter, the company reported a net loss of $25 million, compared to a $44 million loss for the second quarter of 2007. Net sales for the quarter increased 1% to $796 million from $788 million last year, with same-store sales declining 2.6%.

Operating income for the quarter was $27 million, or as a percent to sales flat to last year at 3.4%.

Adjusted EBITDA for the second quarter declined about $17 million to $73 million, or 9.2% of sales, from $90 million, or 11.4% of sales, for the same period last year.

Second-quarter debt levels totaled $4.034 billion, down $64 million from last year's second-quarter balance of $4.098 billion. During the quarter, the company made a $5.9 million amortization payment on its senior secured term loan.

For the six months ended Aug. 2, the company reported a loss of $45 million, compared to a $67 million loss for the first half of fiscal 2007.

Net sales for first half of the fiscal year increased 1% to $1.643 billion from $1.627 billion for the corresponding period of the prior year, with same-store sales declining 2.8%.

Year-to-date fiscal 2008 operating income was $75 million, or 4.6% of sales, versus $87 million, or 5.3% of sales, last year.

Adjusted EBITDA for the six-month period was $170 million, or 10.3% of sales, versus $203 million, or 12.5% of sales, in the first half of fiscal 2007.

"Overall, the soft economic environment continues to adversely affect the business, particularly with respect to certain high-ticket discretionary items and home-related categories. While a number of our product categories performed well, such as Kids Crafts, Jewelry & Bead making, and Bakeware, sales declines in home-related categories including Floral, Home Decor, and Custom Framing businesses more than offset these increases on a comparable-store basis," said Brian Cornell, chief executive officer, in the release.

As for an outlook on performance, the company said that low consumer confidence and increased economic volatility are expected to have a continued adverse effect on the business for the remainder of the year, causing the forecasting of results with any level of certainty to be difficult.

However, the Irving, Texas-based company also said that it expects the first-half trends for same-store sales, adjusted EBITDA, net income and cash flow from operations to continue for the second half.

Elsewhere in the sector, Jo-Ann Stores Inc.'s numbers came out after the market closed Wednesday, and a conference call was scheduled for 4:30 p.m. ET.

One market source said he was not sure what kind of figures were expected, but "they don't look too bad."

The trader also said that the Hudson, Ohio-based company's 7½% notes due 2012 remained around 92, where he said they had been for a while. He added that the issue was not yet trading very actively.

However, according to NASD Trace, the notes last traded on Monday at 88.5, down 3.5 points.

For its second quarter of fiscal 2009, the fabric and crafts store posted a net loss of $11.7 million, compared to a net loss of $18.4 million for the same period of fiscal 2008. Net sales increased 3.7% to $403 million from $388.5 million, while same-store sales gained 3.3% versus a 7% increase in 2008.

For the six months ended Aug. 2, net sales moved up to $849.1 million from $812.7 million in 2008. Same-store sales increased 3.9% versus a 4.2% increase the previous year.

"Our balance sheet continues to grow stronger each quarter, with improving cash flow, lower inventory levels, and reductions in debt. While the economic environment remains uncertain, I am confident that by continuing to revitalize our stores, while keeping a tight focus on expenses and inventories, we will not only weather this economic downturn, but strengthen our competitive position in both crafts and sewing," said Darrell Webb, chairman, president and chief executive officer.

Meanwhile, Burlington Coat Factory Warehouse Corp.'s 11 1/8% notes due 2015 were "a little lower" at 72, trader said.

"A lot of the other [retailers] are pretty quiet," he said.

At another desk, a trader saw the bonds at 71.5 bid, 72.5 offered.

"They are not off drastically, but they continue to slide," the trader said.

Phonebook publishers see gains

R.H. Donnelley and Idearc saw their bonds gain during trading, though it was not clear what prompted the move.

Donnelley's bonds went up about a point, a trader said, with the 8 7/8% notes due 2017 at 52 and the 9 7/8% notes due 2013 at 77.5. At another desk, Donnelley's Dex Media Inc. subsidiary saw its 8% notes due 2013 gain 1.5 points to close at 59.5 bid.

Idearc's 8% notes due 2016 closed at 45.5, the first trader said, also up a point. Another source called the bonds up nearly 1.5 points at 45 bid.

The first trader said Donnelley's debt might have gained momentum after "positive comments about cash flow" last week from the phonebook publisher. Also last week, a Barron's article called Donnelley's stock worth the risk.

Isle of Capri bonds better

Isle of Capri's 7% notes due 2014 inched up Wednesday, market sources reported.

One source called the Isle of "Debris" bonds better at 71.5 bid, 71.75 offered. Another source deemed the notes up slightly at 72.25 bid.

The St. Louis-based casino operator will release its first-quarter results on Sept. 3 before the market opens. A conference call to discuss the results will be held at 11 a.m. ET.

Sara Rosenberg contributed to this article.

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