The Michaels Companies, Inc.: Not much to knit pick; maintain Overweight on 8.5s and 11s

Research evidence excerpt

The Michaels Companies, Inc.: Not much to knit pick; maintain Overweight on 8.5s and 11s

Operations

$170 million of tariff refunds are expected

Michaels has submitted $170 million of Phase 1 tariff refund claims and has begun to

receive payments. The company has noted it would use refunds to repay debt, including

open market purchases of 1st or 2nd Lien Notes.

Section 122 tariffs have partially replaced IEEPA

Michaels pays significant tariffs as it sources much of its products from Asia. These

shipments currently face a 10% tariff under Section 122.

Section 301 tariffs may be coming

On March 11, the US Trade Representative (USTR) announced the initiation of

investigations under Section 301 focused on structural excess capacity and production

in manufacturing sectors. The investigations cover 16 economies, including China, the

European Union, Indonesia, Malaysia, Cambodia, Thailand, Vietnam, Bangladesh, Mexico,

and India. The investigations are expected to be completed by the end of July 2026 and

new tariffs could be imposed.

Ocean freight rates moving modestly higher

Ocean freight rates have increased due to tight shipping capacity. Michaels typically

contracts for 80% to 90% of its shipping needs and pays spot prices for the remainder.

These contracts typically run from May 1 to April 30. Furthermore, domestic freight

costs have increased as well.

Exhibit 3: Freightos China/East Asia to North America West Coast Exhibit 4: Cass Freight Index

Index (June 2024 to June 2026) Freight costs increased 9% year-over-year in May

Ocean freight costs are 14% higher year-over-year

12%

8% 8,000

$/container

7,000 4%

6,000 0%

5,000

-4%

4,000

-8%

3,000

-12%

2,000

1,000 -16%

Source: Cass Information Systems

Source: Freightos Global BofA GLOBAL RESEARCH

BofA GLOBAL RESEARCH