The Michaels Companies Inc. (MIK) Q2 2020 Earnings Call Transcript

The Michaels Companies Inc. (NASDAQ: MIK) Q2 2020 earnings call dated Sep. 03, 2020

Corporate Participants:

Jim Mathias — Director, IR

Ashley Buchanan — Chief Executive Officer

Jennifer Robinson — Senior Vice President Finance

Michael Diamond — Executive Vice President and Chief Financial Officer

Analysts:

Christopher Horvers — JPMorgan — Analyst

Seth Sigman — Credit Suisse — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Steve Kovalsky — Guggenheim — Analyst

Cristina Fernandez — Telsey Advisory Group — Analyst

Carla Casella — JPMorgan — Analyst

Kate McShane — Goldman Sachs — Analyst

Laura Champine — Loop Capital — Analyst

William Reuter — Bank of America — Analyst

Elizabeth Suzuki — Bank of America — Analyst

Presentation:

Operator

Good morning, my name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to The Michaels Companies’ Second Quarter 2020 Earnings Conference Call. [Operator Instructions]Thank you. And now I’d like to turn the call over to your host, Jim Mathias, Director of Investor Relations. Mr. Mathias, you may begin the conference.

Jim Mathias — Director, IR

I’d like to welcome you to our fiscal 2020 second quarter financial results conference call. Presenting on this morning’s call are our CEO, Ashley Buchanan, Jennifer Robinson, our SVP, Finance and Treasury. Also in the room with us today is Mike Diamond, our Chief Financial Officer, and Jim Sullivan, our SVP and Chief Accounting Officer.

For today’s call, the supplemental slide deck available on our Investor Relations website contains additional financial content to support today’s discussion. Before we begin our discussion, let me remind you that the comments made on this call as well as supplemental information provided on our website, may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and the risk factors in our latest Annual Report on Form 10-K filed with the SEC as well as in our other SEC filings. These forward-looking statements are only as of today, September 3, 2020 and the Company assumes no obligation to update these statements except as required by law.

Investors are cautioned not to place undue reliance on these forward-looking statements. Also, please note that we will reference non-GAAP financial measures on today’s call. A reconciliation of these measures to the corresponding GAAP measures are detailed in today’s earnings release as well as supplemental slides.

I’d now like to turn the call over to our CEO, Ashley.

Ashley Buchanan — Chief Executive Officer

Thank you for joining us this morning. We delivered strong second quarter results and are effectively positioning Michaels for the future. As our stores reopened in the quarter, we saw an immediate and sustained recovery in demand that largely kept pace with what we had initially seen in May. Our entire store base has been open since beginning of July, now I will discuss in a moment, we’ll continue to prioritize the safety of our team members and our customers as they return to shop in our physical locations.

We were extremely pleased by the demand and sales trends in our stores and with how well our team members executed. I want to extend my gratitude to our entire team and to our makers for their ongoing commitment and support in this unprecedented environment. I also want to take a moment and welcome Mike Diamond, our CFO, who joined us officially just a few days ago. I look forward to working closer to the Mike and believe his experience will be valuable in supporting our ongoing efforts to position Michaels for long-term success. He is here in the room with us today and he will introduce himself later in the call.

I’m sure many of you will have an opportunity to speak with Mike and get to know him over the coming months. Back to our results, we believe that COVID-19 is providing some strong tailwinds for our business resulting from lifestyle changes, such as more time at home and the need for creative outlets, as well as the same broader macro trends, in fact in the rest of the market.

Additionally factors including federal stimulus are difficult to predict and may introduce some variability as we move forward. I will start today by briefly providing an update on the three key focus areas that I outlined last quarter. First, as I mentioned, we remain focused on the health and safety of our team members and customers. The protocols we implemented across our stores earlier this year is still in place. This includes social distancing, increased cleaning and sanitation measures, Plexiglass shields at checkout, mass requirements and more, creating a safer environment inside our stores as our team members and customers can work and shop with confidence, remain a key priority for our team.

Second, we have solidified and improved our financial position. Based on a strong trajectory of our business in the second quarter, we repaid the remaining $300 million outstanding in our revolving credit facility, which is undrawn and fully available credit facility and a strong free cash flow of over $300 million generated during the second quarter. We ended the period with $1.3 billion of liquidity. I’m very pleased to report, with this strong cash generation our total liquidity has increased by approximately $100 million since the beginning of the fiscal year.

And third, we have continued to expand and improve our digital and omnichannel capabilities to provide makers a more seamless shopping experience. We are taking an agile approach to developing and deploying new capabilities quickly. We are capturing sales, delivering a high level of customer satisfaction and building on our earlier progress. During the second quarter, we enhanced curbside to provide an even smoother contactless pickup experience, we optimized our ship from store network, we introduced product bundling for e-commerce orders to make customer purchasing easier and additionally, initial results from our internal testing of the shop and scan are encouraging.

We expect our contactless in-store shopping experience powered by the Michaels app to be a huge differentiator for us as customers increasingly prioritize convenience and safety. And finally, in August we launched Michaels Pro as a critical extension of our assortment. This offering allows makers to purchase competitively priced bulk supplies, which customer feedback is indicated to be an essential need. This is part of our omnichannel strategy to attract new makers and gain a larger share of wallet. Overall, I’m very pleased with this quarter’s progress in reducing friction points in the shopping experience.

Importantly, we have significant runway and we’ll continue to iterate and innovate in the coming quarters. Next, I will provide an update on the pillars to underpin our Maker strategy, which include, one, strengthen our retail foundation, two, modernizing the omnichannel experience and three, establishing our position as the expert for Makers. Importantly, as we work on these pillars, we are prioritizing opportunity to expand our value proposition to better serve our Maker customers. We are listening to them, we are executing on their feedback. And as a result, we are meeting more of their expectations.

With regard to our foundation, we are improving execution across our retail business. Goal here is very simple, to have right product at the right price where and how the customers are expected. In these efforts, we begin to optimize the flow of merchandise from truck to shelf to ensure inventory availability and limit out of stocks. To enhance our in-store shopping experience, we are improving our visual merchandising, product placement and sight lines.

Our customers also want also engage on team members, we are simplifying in-store task to increase the efficiency of our team members and free up labor hours that can be redeployed to more customer-facing activities. In addition to this foundation retail work, we plan to open our acquired A.C Moore stores as Michaels stores in 2021 and capitalize on the resulting sales transfer opportunity.

Hand in hand with improvement in retail execution, we are rapidly modernizing, and involving our omnichannel capabilities to provide an increasingly frictionless customer experience. This evolution is happening far faster than expected, and combined with strong demand across our 1,270 physical locations is creating positive tangible results for our business.

And finally, we are working to position Michaels as the expert brand for our Maker in order to deepen our customer relationships and foster long-term value and engagement. Our recently introduced marketing campaign Made by You, teaching real makers and their creative works have been well received by our customers. We’re doing more to provide ideas, inspiration and instruction that encourage creativity and connect making community to our brand.

A significant offering of virtual classes and other interactive content is an important element extending impact of our branding. With little to — travel this summer and then absent of in-person summer camps and other activities for children, our customers spend increased amount of time at home and looked to Michaels for positive and inspiring outlets for self-expression or simply just to fill-up the day.

We offered an online kids club camp creativity featuring 21 days of free crafting for our mini makers. Our online class content has been very well received and we are increasing that content available offering up to 25 weekly classes in September, up from only 4 in April. Viewership for these classes are growing, between parents and kids, over — only a four timeframe, we record over 200,000 signups for online classes, further foster and drive interest in a cohesive maker community. We’re also continuing to increase our user personalized emails, reaching the 70% milestone in July, up only 20% at the end of 2019.

Additionally in early August, we launched our revamped Michaels Rewards loyalty program, which is designed to create long-term engagement with our program members, help strengthen our relationship across the maker community. We remain committed to looking for ways to enhance this program to better serve and engage with our members and while it’s still very early, we are pleased with the initial results.

I’ll hand the call over to Jennifer Robinson to review our second quarter financial results in greater detail.

Jennifer Robinson — Senior Vice President Finance

Thanks, Ashley. Michaels continues to make great progress against our key initiatives, which enabled us to capture strong customer demand in the quarter. Our second quarter results were impacted by several tailwinds, including impacts from government stimulus and the fact our customers are spending more time at home.

Our second quarter revenue was negatively impacted by not having all our stores open until the beginning of July as well as broader macro uncertainty. For these reasons, forecasting remains difficult, but we are encouraged by our second quarter performance and note that the overall third quarter sales trends observed through today’s call remains strong. We will continue to monitor developments across our business closely as we move through the coming weeks and months.

For the quarter, sales totaled $1.1 billion, an increase of 11% on a year-over-year basis. Comp store sales grew 12% year-over-year, the 12% quarterly comp was driven by a combination of existing customers with higher basket size, an increase in new customers and continued strength in e-commerce results, even as our stores reopened to strong demand and improving foot traffic. We are particularly encouraged by the new customer additions, which were up of more than 15% year-over-year. And we are working to retain and engage with these new customers. Moving down the income statement. Cost related to COVID-19 totaled $9 million and were primarily SG&A related with the majority driven by hazard pay and other employee safety-related cost.

Gross profit for the quarter was $343 million, the year-over-year decline was primarily due to the charges related to the closure of our wholesale business as well as a higher mix of e-commerce sales and the impact of tariffs. We will begin to lap the tariff impacts in the second half of 2020. Occupancy cost leverage as a result of higher sell as well as benefits from our ongoing pricing and sourcing initiatives offset this decline.

Excluding the costs related to our wholesale business, gross profit would have been approximately $388 million, representing a year-over-year increase of $21 million or 6%. Rent for the quarter totaled approximately $100 million. SG&A for the quarter was 25.2% of sales and down slightly in absolute dollars year-over-year. SG&A this quarter benefited from the actions we have taken to rationalize spending across the company. Operating income for the quarter were $53 million, which was ahead of our expectations and driven by strong customer demand.

On an adjusted basis, excluding the impact of our wholesale business, operating income was approximately $106 million, up over 40% from 2019. Moving to tax, the increase in tax expense in the quarter was due primarily to a change in the estimated impact of the CARES Act and a tax benefit associated with a tax income settlement in the second quarter of 2019. On an adjusted basis, EPS in the quarter was $0.30, up almost 58% versus prior year.

Cash flow was strong in the quarter. We generated positive free cash flow of $331 million and ended the quarter with approximately $1.3 billion in total liquidity, comprised of a cash balance of $650 million and full availability on our revolving bank facility. We will continue to manage our cash and liquidity, while we invest in our omnichannel capabilities to meet the growing customer demand. During the first half of the year, we significantly changed the working capital profile of our business and we’re seeing the benefits of a shorter cash conversion cycle in these results.

Please note that we will still see some volatility in our cash flow generation during the year, driven by the underlying seasonality of our business. Importantly, with more liquidity now versus at the beginning of our fiscal year, we are very confident in our ability to invest for growth, satisfy all debt obligations and generate significant excess cash, which gives us additional flexibility. We’ll talk more about our plans here during our upcoming Investor Day. Finally from an inventory perspective, we feel good about our current position as we head into the back half of the year.

Now I’ll turn the call back over to Ashley.

Ashley Buchanan — Chief Executive Officer

Thanks, Jennifer. As we sit here today, a month into the third quarter, I’m encouraged by our progress against the backdrop of considerable uncertainty. Our focus remains on executing against our Maker strategy and gaining market share as we attract and retain new customers and deepen our connection with existing customers through focused merchandising, marketing and omnichannel initiatives.

The significant strides we have made in a short period of time demonstrate that we have the right strategic vision with the right talent and executional capabilities to deliver. We will go into much greater detail on our strategic plans and progress on our virtual Investor Day on September 24. On behalf of Michaels executive team, I want to invite you to join us as we discuss our addressable market, go-forward strategy, future omnichannel plans, as well as merchandising priorities.

We will provide a longer-term financial algorithm for Michaels and discuss our capital allocation priorities. There will also be an opportunity for you to engage with our management team during the live Q&A session. Please visit Michaels Investor Relations website to pre-register. Before we move to Q&A portion of the call, I want to take a moment to thank Jennifer Robinson, Jim Sullivan and the whole finance team for doing a fantastic job, it was a very challenging time for the company. Thanks to your leadership and hard work. We haven’t missed a beat and made considerable progress over the last eight months.

Now I’d like to invite our new CFO, Mike Diamond to briefly introduce himself. Mike?

Michael Diamond — Executive Vice President and Chief Financial Officer

Thank you, Ashley. It’s really a pleasure to be here this morning and I am very excited to be joining the Michaels team as the new CFO. I’m looking forward to working with Ashley and the team to further expand on the Company’s success. Importantly, I look forward to meeting and getting to know many of you over the coming months. I firmly believe that Michaels is an exceptional company that is well positioned to win in a rapidly evolving specialty retail industry. And I can’t wait to get started. I look forward to seeing everyone in a couple of weeks at our Investor Day. Ashley?

Ashley Buchanan — Chief Executive Officer

Thanks, Mike. It’s great to have you on Board. Operator, let’s move to the Q&A portion of the call.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Christopher Horvers of JPMorgan. Please go ahead.

Christopher Horvers — JPMorgan — Analyst

Thanks, good morning everybody. Can you talk about the cadence of the quarter including kind of a [Technical Issues] monthly basis, how did store opening [Technical Issues] stores closed during the quarter, and then related to that, you mentioned strong sales quarter-to-date, given what many are reporting as moderation in August on back-to-school. Can you talk about what you’re seeing thus far relative to what you saw in [Technical Issues]?

Ashley Buchanan — Chief Executive Officer

Sure. Our comp has improved throughout the quarter as the stores reopened, we end up with a 12% overall. We began June with roughly a 1,000 stores open and we’re fully open by the beginning of July and that 12% comp was inclusive of the 353% increase in e-comm. We’re not going to provide a month-to-month analysis, just like we did last time, but for the second quarter, our open-store comp including e-comm was north of 20%.

And to your question about quarter-to-date, August demands remain very strong as we exited Q2 into Q3. In the longer-term, I believe the foundational and structure change we made are continuing to better position Michaels as we go forward to gain share. And on your back-to-school question, back-to-school for us is mainly in August and like I said, we’re really pleased with the way Argus is a shaping up so far, it has remained strong and we’ll see, but right now we’re very pleased with the way we ended Q2, in the way we’re going into Q3.

Christopher Horvers — JPMorgan — Analyst

Understood. Just a follow-up, can you share some thoughts on the gross margin rate outlook going forward, how large was the tariff headwinds in the second quarter, and [Technical Issues] some pretty significant markdowns [Technical Issues] negative mix, you will have promotions, if you post a positive comp in the back half, could you see gross margin actually expand on a rate basis year-over-year?

Jennifer Robinson — Senior Vice President Finance

And so, first I will address the questions related to Q2 gross margin. As a reminder, the gross margin in Q2 includes $45 million in costs associated with the closure of the wholesale business. So absent that, we’d be at the $388 million. From a rate perspective, we did see headwinds on rate related to the tariffs as we’ve indicated, would be the case. And that subsides significantly as we go into the back half of the year and begin to lap — compared to the first half of the year. Our focus will continue to be on maximizing gross margin dollars. So as e-commerce is a larger percentage of ourselves, we do have dilution there, but the company is definitely focused on maximizing dollars and we were profitable across all of our nodes in Q2.

Christopher Horvers — JPMorgan — Analyst

Thank you.

Operator

Our next question comes from Seth Sigman of Credit Suisse. Please go ahead.

Seth Sigman — Credit Suisse — Analyst

Hey guys, thanks for taking the question. Nice quarter. I wanted to talk a little bit more about how you’re planning the second quarter in this sort of uncertain environment. It sounds like things are healthy right now. I think there was a comment that you feel good about your inventory position as we head into the second half of the year. It does look like inventories down about 19%. So my question is, is that by design, is that an effort to clean up the inventory and optimize it or you are facing some limitations, how are you planning for that and how should we be thinking about it?

Ashley Buchanan — Chief Executive Officer

Yes, good question. We’re down 19%, but if you take out the Darice wholesale business, which we exited is down 15% and a couple of things. So we do feel really good about our inventory position as we go into the back half of the year, a couple of reasons around that. One, a lot of our sales are — is broad-based across all the categories, but a lot of it are our functional business which has a shorter lead time. The second part is the mix shifts a bit and in Q3 and Q4 and seasonal and we didn’t really buy down our seasonal business in Q3, Q4, very much. And so, and if we did use this demand period to clean up a lot of the clearance as we’ve got actually less promotional, so it mix up well for us, so it’s a combination of — and we cleaned up some clearance, Darice was a portion of it, a mix shift and shorter lead time. So we feel, we feel good about our inventory positions going into the back half.

Seth Sigman — Credit Suisse — Analyst

Okay, all right, that’s helpful. And then a follow-up question on e-commerce growth, it’s interesting that it accelerated in the second quarter, even as your stores open. I’m curious did you see that elevated growth continue in the latter part of the quarter when stores were fully opened and running again. And just any more color on the behavior that you’re seeing, the influence of rolling out curbside and ship from store and whether that’s accounting for a big portion of the growth and how does that tie into profitability as well? Thank you.

Ashley Buchanan — Chief Executive Officer

Well, we are really pleased our e-comm business, it’s over 350%, it was strong throughout the quarter. Obviously, I mean it decelerated just slightly as all the stores reopened, as you would expect as you got 1,270 stores — open, but customers engage with us in a lot of ways at this time with — buy online, pickup in store, but that was curbside which we made improvements on. We did ship from store, but then we also did same day delivery in our app, obviously had a lot more activity as we did, as we expanded our ability to — may commence through the app. So it’s clear that our customers are interacting with us in multiple ways, and we’re really pleased with that, because our goal has been the same since I started, which is I want to meet the customer, where they want to be met and we’re agnostic on which channel they go through, like I said we are profitable in all nodes, but we want to be where they [Indecipherable] and we’re very pleased with the way that business is trending.

Seth Sigman — Credit Suisse — Analyst

Okay. Great, thanks very much.

Operator

Our next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.

Simeon Gutman — Morgan Stanley — Analyst

Thanks, everyone. My first question, to follow-up on e-comm and the gross margin pressure. Are you able to isolate the impact from that pressure in the second quarter and then how to think about it for the rest of the year.

Jennifer Robinson — Senior Vice President Finance

So e-comm as a result of the fulfillment in shipping cost is dilutive to our gross margin rate. However, as we’ve indicated, it’s definitely gross margin dollar positive for us. The significant amount of sales going through curbside in [Indecipherable] definitely offset those — that dilution along with the incremental shipping nodes that we opened up with ship from store during the quarter. So those things help mitigate the dilution of our e-commerce to gross margin.

Ashley Buchanan — Chief Executive Officer

And I’ll add to that a little bit. Our mix in the way we sell a fulfill e-comm between curbside, same-day delivery and biologic of the store, obviously, is a more profitable note than the direct-to-home business, but, and even with the direct-to-home business, we are making significant progress on our cost reducing splits of the tougher product AR, the margin structure we’re selling through that channel. So we feel we’re making more progress across all the fulfillment channels and those that we’re using in our e-comm business.

Michael Diamond — Executive Vice President and Chief Financial Officer

One other item to note in Q2 was a bit of a headwind is tariff, as Jennifer mentioned earlier and that headwind will subside as we get into the back half of the year.

Simeon Gutman — Morgan Stanley — Analyst

And then, I guess, at — will — at Investor Day, will you quantify the e-comm mix and then how BOPIS or curbside mixes out with inside of that. And then my follow-up question unrelated is you went back to high-low pricing, I don’t know how prevalent to representative that could be during the last quarter to the extent consumers were more price taking than bringing coupons, but can you talk about the pricing strategy and did you see the percentage of customers, let’s say shopping on coupon decline and how that’s trending as stores reopened.

Ashley Buchanan — Chief Executive Officer

Well, I guess to address the first part, which was, we’ve always been high-low retailer, we never went to EDLP at anytime, pre-COVID or during COVID or whatever you want to call it right now in the middle of COVID, we were less promotional during the quarter by design and I talked about that last quarter, which is we wanted to go from branding perspective to provide more inspiration, more creativity with discounts versus just a discounting brand. Our customers responded to that greatly with the content we put out and the inspiration we’ve created to our marketing and so we were less promotional during that timeframe. What the future holds? We’re not giving any future forecast. There’s too much variability in it, but during Q2, we were less promotional.

Simeon Gutman — Morgan Stanley — Analyst

And the mix of e-comm, I guess that will be held until Investor Day?

Ashley Buchanan — Chief Executive Officer

Yeah. We will not be breaking out the great mix of e-comm even in the Investor Day [Indecipherable].

Simeon Gutman — Morgan Stanley — Analyst

Got it. Okay, thanks and actually a nice quarter.

Ashley Buchanan — Chief Executive Officer

Sure Thank you.

Operator

[Operator Instructions] Our next question will come from Steven Forbes of Guggenheim. Please go ahead.

Steve Kovalsky — Guggenheim — Analyst

Good morning. And this is actually Steve Kovalsky on for Steve Forbes. I’ll just start with, given your strength in e-commerce, can you speak to your fulfillment plans for the holiday, did you see any capacity issues there?

Ashley Buchanan — Chief Executive Officer

We don’t foresee any capacity issues in Q4. Like I said, we have multiple ways of filling that product, particularly that 1,270 stores is using as many fulfillment centers, along with our fulfillment – e-comm fulfillment centers and we’ve actually converted our regional distribution center to ship e-comm as well, particularly on our Michaels Pro platform. So we don’t see any capacity issues in the Q3 and Q4.

Steve Kovalsky — Guggenheim — Analyst

Great. Thank you.

Operator

Our next question will come from Cristina Fernandez of Telsey Advisory Group. Please go ahead.

Cristina Fernandez — Telsey Advisory Group — Analyst

Hi, good morning and congratulations on a good quarter. I wanted to ask about SG&A, we saw dollars down this quarter with stores — all stores we reopened, how does that look for the second half of the year, is this sustainable or should we see SG&A trend back higher year-over-year?

Jennifer Robinson — Senior Vice President Finance

Yes, further to your point, from an SG&A perspective, we did have favorability in the quarter due to the stores being closed. So, and with the significant increase in sales, so somewhat of an anomaly in Q2 that we expect to be back more normalized, if you will, in the back half of the year. In addition to that, we do have headwinds on SG&A related to performance-based comp — based compensation, which we had indicated at the beginning of the year would be a headwind for us in 2020 and we do expect to see that in the back half of the year as well.

Cristina Fernandez — Telsey Advisory Group — Analyst

Okay. And this as my follow-up, you rollout two initiatives here in August, I wanted to see if you can share any more color around the revamp Michaels rewards program, what you’re seeing there, any more color on the test market that’s been in place for a couple of months and on the Michaels Pro initiative what customer are you targeting and maybe talk about any expectations, what expectations you have for that program?

Ashley Buchanan — Chief Executive Officer

Sure. We had a loyalty rewards program in the past. So we enhanced it, it didn’t really provide, I would say, any actual rewards associated with it. So we did testing in two markets last year. We were pleased with the results. So we rolled out and enhanced that loyalty program. And we did that at the timing when we’re able to probably engage with them in a better way. So when we rolled out the loyalty program, enhanced version this time, we’re able to communicate with them more effectively with personalized emails, with our Made by You marketing campaign, with the concept that we’re rolling out for that customer and along with our digital capabilities we rolled out, we felt that was the time to roll out the loyalty program and we’re very pleased with the initial response.

And then, your second question was on Michaels Pro. It’s clear to us that there is a subset of customers that want to buy bulk product from us as they have either a side business or a side hobby business or full time for them, they wanted really competitive pricing on bulk product and we view that as a necessary extension to our offering for that customer and they told us about what they wanted, and we delivered and will probably go into much greater detail and we will go into much greater detail during our Investor Day around that initiative.

Operator

Our next question will come from Carla Casella of JPMorgan. Please go ahead.

Carla Casella — JPMorgan — Analyst

Hi, my first question is on Darice and can you give us a sense of how much that contributed to number the year-ago numbers, either revenue, gross profit or EBITDA?

Ashley Buchanan — Chief Executive Officer

So Darice, generally they didn’t contribute a whole lot to the bottom line. It was a very low margin business, which is part of the reason why we’re getting out of it. We try to make it work, just the business has gotten tougher and tougher, which is why we decided to liquidate the business, but incrementally, it didn’t generate much to the bottom line.

Carla Casella — JPMorgan — Analyst

Okay. Great. And then as you’ve been buying third and fourth quarter inventory, are there any disruptions related to COVID in terms of just getting the inventory supply, you mentioned inventories are clean, but I guess I’m wondering is it the product that you want is the margin, if there’s any cost or disruption built in?

Ashley Buchanan — Chief Executive Officer

Well, like I said, we feel really good about our inventory position. We’ve placed seasonal orders back roughly in March. We didn’t — we did not buy that seasonal business down that much. We haven’t had any disruptions today, that product is actually flowing in as scheduled. We have a large supplier base globally, that’s very diverse. So we feel — we feel good about our ability to fulfill those orders during the seasonal timeframe coming up.

Carla Casella — JPMorgan — Analyst

Okay, great. Thank you.

Operator

Our next question comes from Kate McShane of Goldman Sachs. Please go ahead.

Kate McShane — Goldman Sachs — Analyst

Hi, thanks. Good morning. Thanks for taking my question. I just had a quick real estate question in terms of how you might be thinking about possibly relocating stores, just given the likely disruption that’s coming from the pandemic and real estate. Is that an opportunity that you see going forward, especially as you think about remodeling and merchandising your stores?

Ashley Buchanan — Chief Executive Officer

Well, like I said, I think in previous calls, there is only a very small handful of our stores that are cash flow negative. And that hasn’t actually changed due to pandemic. Secondly, using our network as many fulfillment centers on our ship from store basis has just enhanced that assessment. So we have really no change in our real estate strategy going forward for the foreseeable future. The one impact the pandemic did have is we did aggressively negotiate with our landlords and through Q2, we were able to realize about $12 million in rent abatements, in cash received or cash revolver received, that gets amortized over the term of the leases, that’s not a credit in Q2, it will be spread out over a number of years, but we certainly have worked very hard to get the best terms we can in this environment.

Kate McShane — Goldman Sachs — Analyst

Thank you.

Operator

Our next question comes from Laura Champine of Loop Capital. Please go ahead.

Laura Champine — Loop Capital — Analyst

Thanks for taking my question this morning, it’s on the debt level. So obviously repaid the revolver and liquidity is in long time high. I think you called out, but where does debt pay down stand on your priority list for cash flows over the next few years?

Ashley Buchanan — Chief Executive Officer

We will address our capital allocation strategy on our Investor Day on the 24, but we recognize our leverage is not optimal just like I said in previous calls, and look forward to playing that out in later September for you all.

Laura Champine — Loop Capital — Analyst

Understood. Then second question, so we’ve got the percent of stores that were open basically at the end of May and obviously in — at the end of June. But at the end of April, what percent of Michaels stores were opened, just so we can get a sense of how rapid the bounce back was?

Ashley Buchanan — Chief Executive Officer

Well, that seems like a long time ago and I actually can’t get that number at this point, we don’t — I don’t even remember what were at the end of April. But at the end of April, we were pretty much at the trough of the pandemic, so I don’t remember, I think it was right at 900 stores that were closed at the time.

Laura Champine — Loop Capital — Analyst

Got it. Thank you.

Ashley Buchanan — Chief Executive Officer

So we had — we did have a bounce back, obviously coming at the end of April, roughly 900 and it slowly started opening up in May, then I’ve talked about June and July.

Michael Diamond — Executive Vice President and Chief Financial Officer

And remember even with the store closed and stores closed at the peak of the closures, a lot of our stores, we are working on the business through curbside pickup and BOPIS. So there was revenue being generated even from most of those closed stores.

Laura Champine — Loop Capital — Analyst

Understood. Thank you.

Operator

Our next question comes from William Reuter of Bank of America. Please go ahead.

William Reuter — Bank of America — Analyst

Good morning. So it’s obvious you guys did a lot of initiatives to drive traffic, you’ve got online classes for kids, you’ve got loyalty programs, better personalized emails, I guess when you talk to your vendors, how do you expect that industry performed as a whole and do you think you took share, I guess, I’m just wondering how your growth compared to industry growth?

Ashley Buchanan — Chief Executive Officer

Yeah, it’s a good question. I think I will address this. It’s a large industry, but it’s really hard to tell where share is. I mean, we’re the only basically publicly traded arts and crafts retailer, but what we do feel and believe based on the foundation we put in place, we believe with our digital capabilities, Mic Pro, our retail foundational work we’re doing within the stores that we’ve set the foundation for consistent growth over time and our ability to continue to gain share.How much share? It’s really difficult to tell. Like I said, it’s an industry, the large industry but share data is not that forthcoming.

William Reuter — Bank of America — Analyst

Okay and then just as a follow-up to me. Historically, your fourth quarter gross margins are higher than your third quarter ones, which I expect will probably continue. However, given that shipping costs are probably going to be elevated during the fourth quarter. Should the spread between the two of those compresses when thinking about our model?

Jennifer Robinson — Senior Vice President Finance

Yes, we are not giving any guidance for Q3 or Q4 obviously due to all of the uncertainty, it’s very difficult at this point in time to predict how the back half of the year will play out.

William Reuter — Bank of America — Analyst

Okay. Thank you very much.

Operator

Our last question will come from Elizabeth Suzuki of Bank of America. Please go ahead.

Elizabeth Suzuki — Bank of America — Analyst

Great. Thanks very much. Just from a merchandising standpoint, what are your expectations for holiday this year and do you think you need to prep the stores for an earlier start to the season and how could that impact the cadence of your sales, which is usually pretty heavily skewed to 4Q? I know you’re not giving specific guidance, but just thinking about holiday specifically and how this year could be different from previous years.

Ashley Buchanan — Chief Executive Officer

Yeah, like I said, we’re not — we’re not providing any guidance for Q3 or Q4. I would say, historically arts and crafts people tend to buy different times of the year based on whether they’re making something or decorating or gifting things. Our Q4 has already started to land excitingly. So, but we’re not providing any guidance on Q3 or Q4 of how that mix may play out or how the shopping season may change.

Elizabeth Suzuki — Bank of America — Analyst

And just as a follow-up, I mean are you seeing any — an extension of the back-to-school season or just more demand for categories like supplies and organization just given how many students are starting off their school year remote or hybrid. So parents are providing more of the back-to-school supplies, is that extending the back-to-school period for you guys from August into September?

Ashley Buchanan — Chief Executive Officer

Like I said, ending Q2 and the starting of Q3, it’s been a broad-based demand across pretty much all our categories. So it’s been — it’s been a broad-based purchasing cycle across pretty much every category at Michaels, including back-to-school or any other category we have. So we feel very good about the end of Q2 and going into Q3.

Elizabeth Suzuki — Bank of America — Analyst

Great, thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ashley Buchanan for any closing remarks.

Ashley Buchanan — Chief Executive Officer

I want to thank all of you for attending this morning. We really appreciate it and look forward to talking to you on our Investor Day. Thank you.

Operator

[Operator Closing Remarks]