The Michaels Companies Inc (NASDAQ: MIK) Q1 2020 Earnings Call Transcript

The Michaels Companies Inc (MIK) Q1 2020 earnings call dated Jun. 04, 2020

Corporate Participants:

Jim Mathias — Director of Investor Relations

Ashley Buchanan — Chief Executive Officer

Jennifer N. Robinson — Senior Vice President, Finance

James E. Sullivan — Chief Accounting Officer, Controller, and Interim Principal Financial officer

Analysts:

Steve Forbes — Guggenheim Securities — Analyst

Christopher Horvers — JP Morgan — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Kate McShane — Goldman Sachs — Analyst

Elizabeth Suzuki — Bank of America — Analyst

Carla Casella — JP Morgan — Analyst

Laura Champine — Loop Capital — Analyst

Cristina Fernandez — Telsey Advisory Group — Analyst

Zack Fadem — Wells Fargo — Analyst

Presentation:

Operator

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

Jim Mathias — Director of Investor Relations

I’d like to welcome you to our fiscal 2020 first quarter financial results conference call. Presenting on this morning’s call is our CEO, Ashley Buchanan. Also on the call and available for the Q&A portion is Jennifer Robinson, our SVP, Finance, 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, June 4, 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 the 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 today. I’d like to begin by saying that our thoughts are with those who have been impacted by the COVID-19 pandemic, which are those on the front line and all the essential workers, including our own store associates who have been dedicated to serving our communities, from all of us at Michaels, thank you. We believe that Michaels is an important part of the many communities we operate in across the country. We’re doing our part to help during this difficult time. We made a significant donation of fabric used to make face mask and provided instructions on mask making on our website. We also collaborated with organization to provide face masks to our front line workers.

Separately, we’re pleased that we’ve been able to continue to support our maker community providing resources and offerings that bring a sense of comfort and distraction from the stress and uncertainty created from the COVID-19 crisis. Our customers are telling us that crafting is an essential coping mechanism, sometimes ahead of exercise, reading books, or even being outside. Our research has found that three out of four makers are crafting more during this time. And with the desire to learn and experiment, makers are starting new hobbies too. And as we have listened to our customers, we have found our makers are using arts and crafts for a number of reasons, including a way to make a difference, a way to make plans for their children, for some, a way to make money. Many of the initiatives I’ll discuss on today’s call focus on improving our ability to enable our makers to purchase the classifiers that are really needed during this period.

I’m very proud of how our entire team pulled together to help our communities and customers meet the challenges presented by COVID-19. Before I get to details for the quarter, I want to highlight three key areas we’ve been focused on as we navigate through this environment. First, the safety and well-being of our employees and customers has been and remains our top priority. During the quarter, we developed and implemented health and safety protocols across our store base that included limiting store hours, increasing cleaning and sanitation, as well as social distancing measures. Additionally, we provided thermometers for associates, installed plexiglass shields at check-out, and hand sanitizer dispensers throughout our stores to protect both our customers and our associates.

Second, we focused on our financial health. From very early on, we took a proactive cost and cash management actions to provide ourselves with sufficient liquidity to comfortably weather the crisis. And as the economy begins to reopen, we are well positioned to continue leading forward and emerge as a stronger Company.

And third, our team did a great job aggressively expanding our digital and omnichannel capabilities this quarter. We rolled out capabilities to give our customers the ability to shop how and where they want while also reducing friction around transactions. This is not only an important element of our overall strategy, it was critical during this period when in-store shopping was not always possible. In just 45 days, we set the foundation for Michaels’ next chapter as an omnichannel retailer by rolling out curbside service, expanded ship from store, same-day delivery, shop my store, in-app purchasing capabilities and chatbot and many other offerings. We are working on a number of additional capabilities that we plan to roll out over the remainder of the year. Looking back on the quarter, the work done here by this team under challenging operating conditions was very impressive.

In an unprecedented environment, our teams executed well across each of these focus areas and our operational performance was solid. The impressive pace at which we’re able to advance on our initiatives positions us favorably as we move ahead. And as I look at the list of customer-facing capabilities we introduced during the first quarter and the pipeline of what is to come, I’m truly excited with the direction we’re headed and I’m confident in the future success of Michaels.

I’d like to start discuss our first quarter results. Sales of the quarter totaled $800 million, down 27%. The year-over-year decline was driven by temporary store closures in the second half of March and April due to the COVID-19 pandemic. Partially offsetting the impact of the store closure was a significant increase in digital sales, which I’ll provide some incremental detail on shortly. Where we are able to do so in compliance with state and local authorities, we kept our stores open, allowing us to preserve jobs and meet strong customer demand for our products. Within the various categories of the store, we saw solid demand within painting and art supplies and other core crafting areas as families sheltered in place and many took on the added responsibility of home schooling.

Our comparable sales for the quarter were down 27.6%. Importantly though, we have reopened stores in May. Demand has been strong with these stores reporting an average comparable store sales of 11%. We feel really good about these sales trends, but it’s early to acknowledge that crafty pantry loading as well as the benefits from stimulus checks may also be contributing to these strong results. So it’s something we’ll continue to monitor.

Now, moving to e-commerce. Our digital sales performance was a record for Michaels, growing at nearly 300% in the first quarter. As stores temporarily closed, digital sales accelerated throughout the quarter, as we aggressively ramped up our omnichannel capabilities. We don’t anticipate this rate of growth to continue, we do expect to see our e-commerce penetration to total sales continue to increase going forward. Consistent with this surge in digital activity from the end of February through the end of April, comscore ranked Michaels.com among the Top 20 of all retail domains. This is our first time appearing in the Top 20 and we are pleased to be in the company of some of the largest online retailers. We are even more pleased though that Michaels.com was the place that families turn to, they look for creative hours for themselves and their loved ones during this challenging period. Rapid launch and expansion of key capabilities I discussed earlier enabled us to meet the increased digital demand this quarter. We continue to work on a host of capabilities that will further enhance the digital shopping experience for our customers, and we believe will position Michaels to capture increased share in the future.

We are encouraged by the solid demand we’re seeing as we continue to open stores. As of today, we have roughly 1,000 stores open and fully operational, and the team is working to increase that number on a daily basis.

Costs related to the COVID-19 this quarter totaled approximately $15 million and were comprised primarily of costs associated with benefits and salaries for furloughed workers as well as hazard pay for certain team members as well as the write-off of seasonal inventory that could not be sold due to store closures. Gross margins in the quarter were 27.7% versus 38.2% last year’s first quarter. The year-over-year decline was primarily driven by the impact of deleveraging occupancy and distribution-related costs because of the temporary store closures during the period, as well as impact from tariffs and channel mix. We did see some benefit, however, from our ongoing pricing and sourcing initiatives, which provided some partial offset to the pressure experienced from our closures. SG&A as a percent of sales also deleveraged versus last year, but on the absolute dollar basis declined 12% versus the first quarter of last year. And while Michaels has a lean cost structure, this quarter we took aggressive action to further rationalize spending across the Company.

Moving to our liquidity position. We ended fiscal 2019 with a strong cash position of over $400 million. In March of this year, we proactively drew down $600 million on our revolver, adding to our cash position and further increasing our financial flexibility. As a result of our strong liquidity position at the start of the quarter and the immediate steps we took during the quarter, including drawing down on our revolver, curtailing expenses and managing cash outflows through strong working capital management, we ended the first quarter with $927 million in cash. Actually, in the first quarter, given our outlook, we paid down $300 million on our revolver draw that we did in March. We still have access to this significant borrowing capacity should the need arise. The preservation of our cash and liquidity will remain a priority for us on the quarters ahead as the uncertainty around COVID-19 remains, but we will continue to invest in capabilities that will further solidify and strengthen our competitive position. And I believe that COVID-19 has fundamentally changed the retail industry and accelerated shift in shopping behaviors with even a greater focus on e-commerce. And while we are committed to reshaping our business to our Maker strategy for COVID-19, we use this time to accelerate key elements of our strategy to quickly adapt and serve the needs of our customers during this tumultuous time.

It’s impressive what we’ve been able to accomplish over the past quarter, particularly the last 45 days. Michaels is well on its way becoming a leading omnichannel retailer with a robust suite of digital capabilities. Due to the hard work of our team and enabled by a solid technology infrastructure foundation, we rolled out several customer-facing initiatives that I mentioned earlier. For example, in mid-March, we tested and launched curbside pickup over the span of just a few days. Customer response to contactless pickup has been very positive and we expect this to remain amazing customer shopping over the coming quarters as well as the long-term. Although a number of stores are closed the foot traffic in the quarter, we utilized over 80% of our stores for ship from store, BOPIS, and curbside as well as other fulfillment options. In April, we successfully rolled out same-day delivery across 750 of our stores and have since expanded to well over 1,000. And while still early, the customer response for this offering has been extremely positive.

We expanded other e-commerce options, including ship from store and BOPIS offerings. We initially utilized 300 stores for ship from store and by the end of quarter, we had approximately 1,000 stores. This was an important capability as it enabled us to unlock store inventory to generate sales while safely meeting customer demand. We recently increased the utility of our mobile app, enabling in-app purchases and whilst still early, we’re encouraged by the 3x increase in conversion thus far. In the months ahead, we will continue to introduce new capabilities that will enhance and streamline our customer shopping experience across multiple interfaces. These will include increased personalization of our Michaels.com website, improvements to curbside pickup, contactless shopping as well as the ability to track shipments, initiate returns and more.

It is important to note that our e-commerce business is profitable across all nodes. Combined, the quarterly growth along with profitability drives our commitment to build out these enhanced capabilities. Our teams and technology infrastructure performed well and effectively met and increased online demand this quarter, which at times was beyond anything we have seen before, including Black Friday.

In addition to increasing the number of ways we help our customers shop, we also reshaped our marketing strategy this quarter to align with our enhanced digital and omnichannel focus. Our Made by You campaign is aimed at creating a dialog with our customers to education and creativity. We are fostering passion in arts and crafts and sharing inspiration with maker customer base.

We believe that the strong engagement in connection with our customers will help drive increased loyalty and in time increased transactions. And as part of this effort, we are utilizing digital communication methods to reach our customers. For example, we started a text program and after just few months, we were 2 million members with whom we have a one-on-one connection. And importantly, we’re building these relationships while continuing to provide value to the customers with the combination of great deals and coupons.

And finally, with the stores closed during the quarter, we quickly providing our customers thousands of projects and how-to videos. We also hosted virtual classrooms and store-based classrooms and the customer response was positive. All these actions underpinned the tenets of our Maker strategy. The reality of the current environment has shifted the timing of some of our priorities, but our direction of the strategy remains consistent. Our work to plan and execute category resets what we bring in fresh and curious SKUs continues and we anticipate a lot more news coming throughout the balance of the year.

And after a successful pilot, we now expect to roll out our loyalty program later this year versus our original timeline of April. And finally, we had a strong performance from our first maker prototype [Indecipherable] Texas. We expect to open a few more prototype stores later this year as well. We definitely seize the opportunity to improve execution and accelerate our digital agenda in the current environment. I am confident we’re striking a right balance between preserving cash at the same time positioning Michaels return to sustainable future growth.

Before I close, I’d like to provide some additional color on our recently-announced decision to close our wholesale operations as well as provide an update on the business trends we’re seeing today. First, following the end of the quarter, we announced our intent to close our Darice wholesale operations. Though we will retain the resourcing-related offices in China, we expect this process to be substantially completed by the end of November. As part of this closure, we anticipate primarily non-cash after-tax charges in the range of $46 million to $52 million.

While we are not in a position to provide a formal financial outlook for the second quarter or for the rest of the year, let me share a few insights to help you think about our expected performance. As in the last couple of weeks, we now have a majority of our stores open and as I mentioned earlier, cost for the stores we reopened in May on average 11%. We are working to continue to open stores and based on state and local laws and guidance, we are currently expect to have substantially all our stores open and fully operational by the end of June. Ahead of store openings, we are proactively investing and implementing health protocols and training associates, but when we are able to open stores, we are ready to go on day one. Longer term, I am confident of Michaels’ ability to gain market share in post pandemic retail environment.

From a cash and liquidity perspective, Michaels is in a strong position due to the work we have done to reduce costs, cut and deferred capital spending, and effectively manage our working capital. We expect to utilize cash in the second quarter. Based on our current view, we expect the second half of fiscal 2020 to be cash flow positive, and we believe we have sufficient liquidity for the foreseeable future to fund planned capex, working capital requirements, debt service payments, and anticipated growth. Importantly, I’m confident that the actions we have taken and continue to take will strengthen our business over the long term, allowing us to continue to be on the offense and position Michaels to achieve sustainable long-term growth.

So in summary, our teams have made great progress pivoting to digital-led model in a short period of time and under difficult circumstances. We are moving in the right direction with our strategy to better meet our customers’ where and when they want to shop and are adding talent to the strong Michaels leadership team to execute on this strategic agenda, as evidenced by the three additions to our management team. Tim Cheatham, he is joining us from Walmart as our new General Counsel; [Indecipherable] joins us from Shenzen, SM HQ Technologies and also spent time as CTO of [Indecipherable] as our new Chief Information Officer. And finally, I’m pleased to welcome Melanie Berman, who was previously at Anthem, as our Chief Human Resources Officer. We continue to make good progress on our search for our new Chief Financial Officer as well.

As we mentioned on our call last quarter, we continue to look forward to sharing more about our Maker strategy, our new leadership team, our financial algorithm, and our capital allocation model during upcoming Investor Day. Given the current environment, we have not committed to a date yet, but we’ll keep you informed as the decisions are made. With the global health process creating what was undoubtedly a challenging quarter, we were able to execute well while safeguarding our team and our customers, which remains our top priority. Our team pushed forward with speed to accelerate Michaels’ journey to operating as the leading omnichannel retailer with strong digital capabilities. Additionally, we took aggressive steps to preserve financial flexibility and maximize liquidity during this unprecedented time. As we move forward, having all of our stores open again, we are confident in our ability to navigate the current environment and emerge an even stronger competitive position. My kudos to the team for pushing forward in what was unprecedented set of operating conditions. And I thank each and every team member for their hard work and contributions.

Operator, we’ll now move to the Q&A portion of the call.

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Steve Forbes of Guggenheim Securities. Please go ahead.

Questions and Answers:

Steve Forbes — Guggenheim Securities — Analyst

Good morning. I wanted to start with the second quarter to-date comp trends, right, regarding the 11% comp noted for reopen stores. So maybe just a multipart question on that. I guess, is that an omnichannel comp or store-only comp? Can you help us understand, right, how e-commerce trends have trended, right, as we’ve entered the May time period? And then just clarify again what subset of stores that 11% comp pertains to. Is it, it’s all 1,000 stores that have been opened by early June?

Ashley Buchanan — Chief Executive Officer

It’s a good question. The total 11% comp is a total comp, including stores and e-com, including all the transactions that take place around BOPIS, curbside, delivery, also through our ship to home, but also our store base. And it’s a pretty much a broad-based comp we’re seeing across most categories within the store and our e-commerce platform. I would say both have been shown real positive signs as our stores have opened up. Our e-commerce trends continue to improve as well as the installed base. So we’re very encouraged with the signs we’re seeing with a bounce back. And that’s a rolling number as we started out in May with some stores open and it’s rolled up to roughly 1,000 now. So that’s an average of the stores as they roll-up and some of it open for multiple weeks and some have opened for a week or so, but we’re encouraged with the overall trends for sure.

Steve Forbes — Guggenheim Securities — Analyst

Thank you. And then just a quick follow-up, because I don’t believe promotional pressures were noted during the first quarter as a gross margin headwind. So maybe just discuss what you’re seeing in the competitive environment in general and then just the frequency and depth of planned promotional — yeah, your promotional plans, right, as we look out to the second quarter and beyond.

Ashley Buchanan — Chief Executive Officer

Yeah, it’s all a mix of promotional strategies across from a competitive standpoint. For us, you would have seen depth of promotion probably not being as deep as the mix and the change in the approach on how we fulfill orders and you saw changed our marketing as well. We pivoted really aggressively to being a brand you interact with, how you get content, how you learn the classrooms, how do you get — how you make masks, how you teach from — you have kids from school to home and how do you do your craft. So we changed our marketing mix and we changed our debt promotion during the quarter, and that’s what you saw. You saw a real positive response from our customer base as that was needed as they’re going through this kind of tumultuous time at their house.

Steve Forbes — Guggenheim Securities — Analyst

Thank you.

Ashley Buchanan — Chief Executive Officer

Thank you.

Operator

Our next question today comes from Christopher Horvers of JP Morgan. Please go ahead.

Christopher Horvers — JP Morgan — Analyst

Thanks, good morning. So can you talk about — your comps for the first quarter down 28%, you outcomped some other retailers not in your space like a Dick’s Sporting Goods and even Ulta. I’m trying to get a sense of like how many stores were actually open, because you were essential and were allowed to be open? So can you give us a sense of how the stores were — the cadence of stores that were open once COVID hit and shelter-in-place orders went in place? And then did they sort of — the number of stores degrade as jurisdictions tightened up? And so just the flow of how many stores were actually open throughout the quarter.

Ashley Buchanan — Chief Executive Officer

Yeah, it varied as ruling stay-at-home orders and closures came across the country through mid-March and all the way to April. I would say, April was our lowest point where we had over 900 stores closed and really only 300 stores open. With that being said, we’re able to utilize over 80% of our stores with either from ship from store capabilities or curbside, which enabled us to keep fulfilling orders and keep driving sales for the customer demand we are seeing and also help alleviate some of the inventory that was basically trapped in stores and freed up a lot of our ship to home capabilities from our FC.

So overall, we hit a low point of 900 stores closed, but we’re able to generate sales and commerce through about 80% of our fleet at the time really due to the fact that our team really aggressively rolled out ship from store same-day delivery app. So I was really pleased with the way how quickly we pivoted digital omnichannel retailer and we’re able to use some of our store base to deliver on that demand.

Christopher Horvers — JP Morgan — Analyst

Understood. So two follow-ups. So one, can you — how is your inventory position now? I mean, it sounds like strong comps in May. Do you feel like you’re clean? It also sounds like you’re less promotional. So would that suggest your sort of clean going forward? And then can you also give us an update on A.C. Moore and the inventory and liquidation and whether or not you felt like that was an additive to comp at any point, including the month of May?

Ashley Buchanan — Chief Executive Officer

We feel really good about our inventory position really. Like I said, we were able to use trapped inventory from our ship from store fulfillment strategy and on top of it the strong demand we’re seeing as stores open. So we actually feel really good about where our inventory is, our in-stock levels seem to be very strong, and we seem to be really good from a supply chain standpoint. Most and all of our DCs remain fully operational almost the whole time. So we feel really good about our inventory position and haven’t seen really any supply chain disruptions coming out of China or any other places. So we feel good about our inventory position.

As it relates to A.C. Moore, we were trending quite well on the transfer going into February as well. And as you know, most of those stores are located in the Northeast, where a lot of the store closures are and actually still remain. So — but we’re pleased with the transfer and we still remain confident in opportunity to capture significant sales transfer as they open up and as you — but on the 19 [Phonetic] we’re taking the leases on and three were Michaels relocation that we originally planned to do that in the second quarter. Most of those now are being pushed out to fiscal ’21 on the A.C. Moore piece.

Christopher Horvers — JP Morgan — Analyst

Meaning that you’re not — you won’t open those — you won’t necessarily open those stores, but A.C. Moore is still going away, so the comp opportunity in the back half is still there and for the rest of the A.C. Moore stores that you’re not assuming the lease? Are they all gone at this point?

Ashley Buchanan — Chief Executive Officer

Yeah. Those are all gone. And like I said, we were trading really well in February and above our forecast on the transfer. So we remain confident that when the stores reopen and as they have reopened, we’re seeing that fills and share transfer to us.

Christopher Horvers — JP Morgan — Analyst

Understood. Best of luck. Thank you.

Ashley Buchanan — Chief Executive Officer

Thank you.

Operator

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

Simeon Gutman — Morgan Stanley — Analyst

Hey, good morning. It’s Simeon, hope all is good. My first question, actually, I don’t know if — how much you can track market share. Your category should be or probably was a stay-at-home beneficiary and I’m sure some parts of your store were not. Curious what you think share or how share trended in the quarter and whether or not having stores closed eventually hurts you from a market share perspective maybe later in the quarter?

Ashley Buchanan — Chief Executive Officer

It’s a good question. As you know, it’s a hard category to track share and while that being said, from a pure play arts and crafts competitive set, we’re on almost equal playing field. I think [Indecipherable] to open more than us, but with that being said, I think our digital capability rollout offset a lot of that and it’s a skewed sense of category. So when you look at a mass perspective, they can’t offer the full breadth of what we’re offering. So it’s really hard to determine the share piece. But that being said, I think from what I’ve seen with the digital capabilities that we rolled out, with the newness has come in and the early results of that new product with the way the customers are interacting with the new ways of shopping, I’m very confident in our ability to maintain and grow share in this category. And you’re seeing it I think in our — and we’re seeing in May openings as we moved on. As our e-com has remained the positive growth it was throughout the quarter, plus the store base recovering and you’re seeing those people and new customers shopping the way they haven’t been able to shop at Michaels before has been very, very encouraging.

Simeon Gutman — Morgan Stanley — Analyst

Got it. My follow-up, it’s two parts, but it’s related to the same topic, it’s omnichannel platform. Curious — I’m sure you have goals of what you wanted this platform to look like from a capability perspective. Curious what percentage of the way are you there now, given some of the quick moves you made in the quarter? And then how inefficient were you, if you’re just doing ship from store now, how much more efficient can you get? In other words, I’m sure gross margin was impacted by this big shift, but I’m guessing you’re not doing it optimally yet. And so how — I guess, it’s all tied to what the margin structure could look like when you get this thing operating more optimally.

Ashley Buchanan — Chief Executive Officer

I think like I said last quarter when it talks about how big e-com can be, we don’t put a number on it, and we don’t put a number on it for really the specific reason of I want the customer to be able to interact with us and shop with us however they want to. Whether that’s buy online and pick up in store, go inside the store, to the curbside, have it deliver their house on the same day, we just want them to interact with our brand however they want to react with it. And I think what you’re going to see is subset of customers taking advantage of each one of these capabilities differently, and I think from that, it will be easier way for them to shop and have more interaction with our brand on a weekly and monthly basis.

As far as it comes to mix, we have invested over the years on getting our cost down, but we still have a long way to go I’d say. We’re constantly thinking about how to reduce costs and make all nodes profitable and e-com profitable across all nodes, which is a real positive. So that we can actually really invest and lean in. And we have a host of capabilities that we have mapped out throughout the rest of the year, this quarter and the third quarter and the fourth quarter that we intend to roll out very, very quickly. And like I said, we did a lot of these capabilities in 45 days. And the agility and nimbleness of that team to do this in a really short time frame and the map — the road map we have going forward is very encouraging on the way the customers are going to interact with us in the future.

Simeon Gutman — Morgan Stanley — Analyst

Thanks, Ashley.

Ashley Buchanan — Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question comes from Kate McShane of Goldman Sachs. Please go ahead.

Kate McShane — Goldman Sachs — Analyst

Good morning, thanks for taking my question. I just wanted to ask about marketing, if there was a pullback in that spend during the first quarter and how quickly you plan to ramp that back up and in what form.

Ashley Buchanan — Chief Executive Officer

Like I said, we have had a plan to over time change the way we interact with, I think, with our customers from a brand perspective. I think what this allowed us to do as people will shelter at home and we’re looking for ways to either be creative to create arts and crafts, to spend time with their kids or even to make money as they made things and resold them. We took that opportunity to rapidly change the way we did our marketing and that marketing was deliberate as it was a pre-planned rollout. We just — we’re able to roll out more quickly based on the customer demand and what we saw was a significant positive interaction with the customers. They saw us as a way to educate, a way to inspire, a way to create, and way to spend their time and that was a change. And I’m not saying we’re walking away from promotion to the coupons because that we were still there as well. It’s just a balance of what we’ve seen. And we still continue to bring value through everyday pricing and our promotional strategy, but we’ll be nimble on how we — how quickly go back to the level and depth of promotions we had previously based on demand, but we really encourage the way they’re interacting with our brand right now.

Kate McShane — Goldman Sachs — Analyst

Thank you.

Operator

The next question comes from Elizabeth Suzuki of Bank of America. Please go ahead.

Elizabeth Suzuki — Bank of America — Analyst

Great, thank you. I had a question on the wind down of Darice. So back when it was acquired, the management team had expressed that Michaels was already moving from branded product into more private label and that there’ll be incremental margin benefit from moving from third-party private label to direct sourcing. You eliminate some of the fees, you get greater control of the product. So what’s changed since then that — such that Darice is no longer viewed as a beneficial asset to Michaels?

Ashley Buchanan — Chief Executive Officer

I think the — if I parse that question out a little bit. Going private brand is still a strategic imperative and initiative for us. And what you’re seeing is we’ll see an increase in private brand penetration we believe over time and I don’t believe that the closure of Darice will impede that at all. We took a strategic view of it and in the long-term plans, we decided to close the wholesale business. And over the years, they had lost some large clients. And we reviewed the go forward and we saw really no viable path to profitability long-term on that. It did have some positive assets. We’re going to keep the sourcing office, it had some accounts receivable systems that we’ll be using going forward and some warehousing capabilities, but we didn’t see a long-term viability to growth or profitability, and we didn’t see how it fit in our long-term strategic approach.

Elizabeth Suzuki — Bank of America — Analyst

Okay. And then just since Darice is the last of the Lamrite West assets to be wound down after Pat Catan’s stores were closed, how are you thinking about potential for M&A or partnerships from here? And does that experience change your view on future transactions?

Ashley Buchanan — Chief Executive Officer

In our current view, we don’t expect M&A to be a major priority for us at Michaels, but we will be opportunistic should that opportunity arise for sure.

Elizabeth Suzuki — Bank of America — Analyst

Okay, great. Thank you.

Operator

Your next question comes from Carla Casella of JP Morgan. Please go ahead.

Carla Casella — JP Morgan — Analyst

Hi, I have one follow-up on Darice and then a couple of others. But on the Darice business, does this affect your — the expectation you had for tariffs this year? And also, of the costs expected to be incurred for the Darice exit, how much of those are cash versus non-cash and the timing?

Jennifer N. Robinson — Senior Vice President, Finance

Yes, there is no impact to our costs related to tariffs as a result of this wind down. So that still is expected to be approximately $45 million of incremental tariff costs in 2020 as compared to 2019. And as — and then the second part of your question was related to…

Carla Casella — JP Morgan — Analyst

It was the cost of Darice. How much of its cash versus non-cash and the timing of it.

Jennifer N. Robinson — Senior Vice President, Finance

Yes. So the majority of it is non-cash and the timing will be spread throughout the quarters but all within 2020. We will see some cash benefit in 2021 specific to taxes.

Carla Casella — JP Morgan — Analyst

Okay, great. And then one business question, can you give us a sense for the e-commerce performance by month, March, April, May?

Ashley Buchanan — Chief Executive Officer

We’re not breaking it out by month, but what you saw was a considerable increase month to month as the stores closed and as we rolled out mainly our capabilities, each capability we rolled out seem to accelerate the growth in our e-commerce business, which is maintained even into the current quarter.

Carla Casella — JP Morgan — Analyst

Okay, great, thanks.

Ashley Buchanan — Chief Executive Officer

Thank you.

Operator

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

Laura Champine — Loop Capital — Analyst

Thanks for taking my questions. So the 11% comp out of the gate is awesome. I would like you to comment on sort of what the puts and takes are or how sustainable that would be? Do you think that there is clearance of your own product driving this? I mean, do you think that we come out of this with positive comp in the back half? Or does that possibility look remote to you?

Ashley Buchanan — Chief Executive Officer

I mean, how sustainable it is, is unknown if it’s some craft pantry loading, clearly, some benefits from the stimulus checks. And so, just some basic pent-up demand I believe. We’re just — we’re monitoring it on a daily basis, but we know we’re not providing any back half guidance on how we think it’s going to continue or not continue, but we are encouraged with the reopening start for sure.

Laura Champine — Loop Capital — Analyst

Great. And when you plan inventories for the back half, what’s your philosophy in your initial orders for seasonal this fall and holiday?

Ashley Buchanan — Chief Executive Officer

Our hypothesis from the beginning as we went into this in February because we were really proactively — we saw it was coming early and so we preserved liquidity early. And then once that happened, we realized that our anticipation was what the demand might look like in the back half. So we rolled out a lot of strong capabilities in preparation for that from a digital perspective. And then from an inventory ordering perspective, we thought we had gone through the trough of it in Q1. So we remained positive on what the back half and particularly seasonal would look like. It’s a slight decrease in seasonal orders, but not to the degree that probably most would expect.

Laura Champine — Loop Capital — Analyst

Got it. Thank you.

Operator

Your next question comes from Cristina Fernandez of Telsey Advisory Group. Please go ahead.

Cristina Fernandez — Telsey Advisory Group — Analyst

Hi, good morning. Will you be able to comment on the performance of the stores that remained open during the first quarter? How did those do relative to what you’re seeing in May?

Ashley Buchanan — Chief Executive Officer

We’re not breaking out how the stores that remained — the 300 stores that remained open out the whole time versus the entire fleet. I mean, obviously, they did better than the entire fleet when you’re closed, but we’re not breaking those numbers out. We’re also seeing a similar trend across with the stores that remained open and the stores that reopened in May.

Cristina Fernandez — Telsey Advisory Group — Analyst

Okay, that’s helpful. And then could you expand the category trends that you’ve seen and have those — have evolved through the quarter and into May last quarter or when you reported last time, you commented that seasonal home decor [Phonetic] were softer and arts and crafts were weaker. I think you mentioned today that most categories were — are positive and you’re seeing broad-based strength, but any more color there by category would be helpful.

Ashley Buchanan — Chief Executive Officer

Yeah. It reinforced our Maker strategy throughout the quarter. What you saw was demand — strong demand in core maker categories; canvas, paint, kids crafts, all the things that we’ve discussed is around our core maker. And as a sort of close, we saw a demand contraction and seasonal demand and home decor. And that trend continued throughout the first quarter and then stores reopened, you saw kind of a broader-based demand where core crafting still remains strong and then uptick in our seasonal business as well.

Operator

Your next question comes from Zack Fadem of Wells Fargo. Please go ahead.

Zack Fadem — Wells Fargo — Analyst

Hey, good morning. Looks like you are able to take out about $35 million of SG&A versus last year, excluding some of the adjustments. Curious if you could walk through the details. How much was labor? Was there any that was previously categorized as a fixed cost? And how should we think about that trajectory with new — with stores reopening in Q2?

Ashley Buchanan — Chief Executive Officer

Sorry, I’ll just add on that. And then we’ve done, obviously, end-to-end assessment of our entire cost structure and we still see opportunities to run more efficient operation and a leaner cost structure going forward. And we’re looking to those assessments as well. And we anticipate to have some investments in our capabilities and those timings might not line up exactly, but we definitely see an opportunity to operate on a leaner cost structure.

James E. Sullivan — Chief Accounting Officer, Controller, and Interim Principal Financial officer

And I’ll remind you as well on SG&A. We’re going to be comping a pretty low performance-based compensation from last year. So you will see that headwind as we go forward in the year.

Zack Fadem — Wells Fargo — Analyst

Got it. That’s helpful. And then, just wanted to follow up on the $15 million of COVID costs that you called out specifically, and which you would categorize as recurring versus nonrecurring in Q2.

James E. Sullivan — Chief Accounting Officer, Controller, and Interim Principal Financial officer

Yeah, I can — a lot of that had to do with hazard pay both for a DC and our store employees. So certainly a significant chunk of that was in SG&A and a lot of that would be pulled back. There was a huge push for sanitation cost. Certain amounts of those, for example, in the stores, setting up plexiglass barriers for our cashiers and getting hand sanitizer placed throughout the store. Some of those costs will even out but they’ll probably be some small incremental costs as we go forward as we maintain it.

Ashley Buchanan — Chief Executive Officer

And the great thing about the plexiglass cost is, we made it in-house in our Artistree factory. So the cost to make that was actually probably significantly less than if we had to procure of a market and it opened up an interesting assessment of our Artistree business because the things that we can make outside of just custom framing.

Jennifer N. Robinson — Senior Vice President, Finance

The last thing I would add on the COVID-related cost is we did have the seasonal inventory write-off in Q1 related to inventory that we needed to get out of our stores and not able to due to their closure. We will experience some of that in Q2 as well because the stores just now opening up in Q2 and obviously we will have to get the stores cleared out and ready for our back half seasonal merchandise. So we do expect to experience some incremental potential seasonal inventory write-offs in Q2.

James E. Sullivan — Chief Accounting Officer, Controller, and Interim Principal Financial officer

Yeah.

Zack Fadem — Wells Fargo — Analyst

How much of the 1,000 basis points was the write-off?

James E. Sullivan — Chief Accounting Officer, Controller, and Interim Principal Financial officer

The basis points, we don’t have it right on hand, but certainly we — it was quite — the absolute dollar amounts were quite a bit higher than last year, given how many stores were closed and the seasonal product that we had in the stores that was unable to sell through as quickly as we normally would have. So, yeah and to Jennifer’s point, we did take some additional charge because of that. I mean that’s obviously included in gross margin.

Zack Fadem — Wells Fargo — Analyst

All really helpful. Appreciate the time.

Operator

[Operator Closing Remarks]