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IRVING, TX-Demand for jewelry and beading products,along with paper-crafting items and yarn, helped topush Michaels Stores Inc.’s net income to $30.8million, a 15.2% increase compared to the $26.7million during the same quarter last year. Dilutedearnings per share increased 15.8% for the quarterto 22 cents versus 19 cents in the second quarter of 2004.

The strong performance encouraged the chain’s CEOMichael Rouleau to say that he expects fiscal 2005 tobe Michaels’ ninth straight year of record profit.

During the second quarter, Michaels’ same-store salesgrew by 4.2% over the same period last year, whiletotal sales increased 9.2% to $745.5 million from$682.9 million. The chain experienced a 2.4% increasein average ticket and a 1.4% increase in transactions,and the chain’s margins improved by more than 140basis points to 8.4% of sales. As a result, operatingincome increased 32.2% to a second quarter record of$62.8 million.

For the third quarter, the chain is forecastingsame-store sales growth of 2% to 4%. Diluted earningsper share of 38 cents to 40 cents is anticipated, anincrease over the 31 cents posted in the third quarterof 2004.

The chain, which operates 872 Michaels stores, 165Aaron Brothers stores, 11 Recollections stores andfour Star Wholesale operations, plans to strengthenits advertising and expand its staff during the secondhalf of the year, said Jeffrey Boyer, vice presidentand CFO, during Michaels’ earnings call.

During the second half of 2005, Michaels also plansto begin piloting its new hybrid distribution method,which it has been working on for three years, Rouleausaid during the call. The new method allowsall of Michael’s vendors to deliver products to thechain’s five distribution centers rather than shipdirectly to stores.

Hybrid distribution is expected to reduce expenses forboth Michaels and its vendors, according to Rouleau.”We’re going to approach this project carefully and methodically,” he said, adding that the chain will be fully transitioned to the new system by 2008.

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