Deutsche Bank High Yield Conference

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Deutsche Bank High Yield Conference

• October 3, 2007

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Jeffrey BoyerPresident Chief Financial Officer
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Agenda

• Transaction Summary J. Boyer
• Company Overview J. Boyer
• Background B. Cornell
• Strategic Overview B. Cornell
• Financial Review J. Boyer
• QA All

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Forward Looking Statements

• Some of the statements herein constitute
  "forward-looking statements" that do not directly
  or exclusively relate to historical facts. These
  forward-looking statements reflect our
  intentions, plans, expectations, assumptions and
  beliefs about future events and are subject to
  risks, uncertainties and other factors, many of
  which are outside of our control. Important
  factors that could cause actual results to differ
  materially from the expectations expressed or
  implied in the forward-looking statements include
  known and unknown risks. Because actual results
  could differ materially from our intentions,
  plans, expectations, assumptions and beliefs
  about the future, you are urged to view all
  forward-looking statements contained herein with
  caution. Michaels does not undertake any
  obligation to update or revise any
  forward-looking statements, whether as a result
  of new information, future events or otherwise.

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Non-GAAP Measures

• This presentation also contains various non-GAAP
  measures, such as Adjusted EBITDA, Adjusted
  EBITDA margin, EBITDA and free cash flow. These
  non-GAAP measures are being presented in order to
  provide investors with additional information to
  evaluate our operating performance and our
  ability to service our debt. These measures of
  performance and/or liquidity are not calculated
  in accordance with US GAAP and should not be
  considered in isolation of, or as a substitute
  for, the most directly comparable GAAP financial
  measure. Our computations of these non-GAAP
  measures may differ from those of other
  companies. Reconciliations for these measures
  are available on our Corporate website at
  www.michaels.com under Investor Relations.

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Transaction Summary
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Transaction Overview

• On October 31, 2006 Michaels Stores, Inc. was
  acquired by Bain Capital and The Blackstone Group
• 6.0 billion purchase price
• 9.7x(1) 2006E Adj. EBITDA
• Sponsors invested approximately 1,780 million
• Nearly 30 of total capitalization
• One of the largest single equity investments by
  each sponsor

(1) Fiscal 2006 Adjusted EBITDA of 616.7 million.
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Capitalization Transaction Date
( in millions)

• (1) Total facility size 1,000 million.
• Based on fiscal 2006 Adjusted EBITDA (as defined
  in our Term Loan Credit Agreement) of 616.7
  million

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Company Overview
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Two Significant Retail Formats
Michaels Stores
Aaron Brothers

• Large selection of arts, crafts, framing, floral,
  wall décor and seasonal merchandise
• Number of stores 947 (1)
• Fiscal 2006 average size (selling sq. ft.)
  18,400
• Fiscal 2006 average sales per square foot
  224(2)
• Locations U.S. and Canada
• Fiscal 2006 net sales 3.7 billion

• Extensive assortment of ready-made frames and
  mats, quality art supplies and premier custom
  framing services
• Number of stores 167(1)
• Fiscal 2006 Average size ( selling sq. ft.)
  5,500
• Fiscal 2006 average sales per square foot
  202(2)
• Locations CA, OR, WA, NV, AZ, ID, CO, TX, GA,
  VA, MD
• Fiscal 2006 net sales 182 million

• Store data as of September 28, 2007
• For stores open greater than 36 months

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Vertically Integrated Manufacturing Operations
Artistree Art Frame and Design
In-sourcing of manufacturers profits
millions

• Artistree supplies our stores (both Michaels and
  Aaron Brothers) with custom and specialty framing
  merchandise
• Provides competitive advantage to our Retail
  formats
• Regional processing centers in CA, TX and NC
  currently occupying 476,000 of square footage
• Recently expanded space to allow for further
  growth

ARTISTREEART FRAME and DESIGN
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Highly Diversified North American Footprint
Store Count(1)
Michaels 947
Aaron Brothers 167
With stores in 48 states and 7 provinces, MIK a
broad industry footprint

• As of September 28, 2007

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Diverse Product Offering
of total revenue /merchandise margin
3.9 billion
2.0 billion(1)
Total
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Consistent Performance Through Business Cycles
Michaels Comp Store Sales Growth
Positive Comparable Store Sales During Recession
Periods (89-91 And 01-03 Downturns)
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Significant Infrastructure Investment
Key initiatives
Historical capital expenditure

• Significant infrastructure investment
• Perpetual inventory and auto replenishment
  systems, POS, finance, etc.
• Distribution network systems
• Built and strengthened organization
• Centralized / improved processes

total sales 5.1 3.8
3.3 2.8 3.2 3.7
Significantly ahead of competitors in terms of
infrastructure investment
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Superior Business Model

• Customers value broad and deep product selection
• This requires A sku-intensive business model
• 50,000 skus nearly 50 million SKU / store
  combinations
• Complexity creates high barriers to entry
• Significant capital investment compared to
  competitors
• 696 million since 2000

Michaels has developed a sustainable competitive
advantage
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Category Killer Performance Metrics
FY 2006
( in millions)
(1) Adjusted for certain charges/gains,
stock-based compensation expenses and pre-opening
costs (where applicable) (2) ROIC
Tax-effected adjusted operating income over
average book capital net of cash and cash
equivalents Source Company filings and
estimates
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Brian CornellChief Executive Officer
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Professional Background

• 22 Years in Consumer Packaged Goods
• PepsiCo
• Tropicana
• 3 years in food retailing
• Safeway/Vons/Tom Thumb
• Operating experience in
• U.S./Canada
• Europe
• Asia
• Latin America

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Sponsors Investment Thesis

• Stable industry with attractive dynamics
• Clear market leader with highly defensible
  competitive positioning
• Less vulnerable to traditional retail risks
• Proven paths to growth
• Clearly identified margin enhancement
  opportunities
• Strong management team with excellent track
  record

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Personal Investment Thesis

• Loyal engaged consumer franchise
• Solid business fundamentals
• Strong vendor base
• Talented management team
• Significant growth potential

Michaels is positioned to emerge as the long-term
industry leader
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First 100 Day Focus

• Understand Business
• Understand Organization
• Understand Vendor Base
• Understand Our Customer

Confirmed Business Potential!
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Strategic Overview
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Michaels Strategic Objectives

• Profitable growth of our comp sales, market share
  and brand loyalty by
• Enhancing merchandise offerings
• Improving in-store shopping experience
• Building stronger customer relationship
• Driving operational excellence
• Developing management team

Investing In Our Future
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Overarching Themes

• Build on solid operational and financial
  foundation
• Enhance our consumer facing activities
• Aggressively test new initiatives and invest in
  significant opportunities 
• Overall goal Consistently drive balanced growth

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Michaels Balanced Scorecard
Market Share Consistent Unit Sales Increases
Profits Continued Margin and Quarterly Improvement
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Solid Operational Foundation
Our Focus Must Move To More Consumer Facing
Activities
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Favorable customer demographics
General demographics

• Our customer base is overwhelmingly female (90)
• Tends to have children in household (48)
• Above average household income (65,000 mean)
• Younger (70 are 18 54)
• Married (61)

Typical customer profile

• Our customer spends an average of 738 annually
  on arts craft
• Shops more than twice per month (34 times per
  year)
• Approximately half of their visits (48) are to
  Michaels

Source Quantitative Research Study Lieberman
Research Worldwide dated April 2006
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The Retailer That Knows The Most About Their
Customer Wins
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Michaels Commitment

• Know Our Consumers and Customers Better Than
  Anyone

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We Have Invested Significantly To Learn More..

• We Have Several Distinct Customer Segments
• No Retailer Is Adequately Addressing Opportunities

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Overview Of Consumer Insight Work

• The Michaels Stores franchise has a solid
  consumer foundation. Strengths include
• Breadth of product categories
• Depth of assortment
• In-stock positions
• Convenient locations

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Overview Of Consumer Insight Work

• Opportunity exists to build on strong Michaels
  franchise foundation
• Improve merchandising of our key categories
• Enhance store experience
• Physical layout
• Customer service
• Elevate the role of visual merchandising

Better Meet The Needs Of Our Consumer
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Meet Our Consumers
Craft Enthusiast
Kids Project Provisioner
DIY Home Décor
She has been crafting for a very long time, has a
few favorite categories and loves inspiration and
browsing.
Moms and teachers who shop for school projects
and kids-related activities.
Woman who is regularly arranging or adding
accents to her home to reflect the season.
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Consumer Facing View Drives Strategic and
Operational Priorities
Consumer Needs and Segments
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Consumer Facing View Drives Strategic and
Operational Priorities
Consumer Needs and Segments
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Brand Positioning/Consumer Communication

• Re-define the Essence of Our Brand
• Brand Vision
• Brand Positioning
• Brand Personality
• Brand Affiliation

Align Our Branding With Consumer Insights
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Brand Positioning/Consumer Communication

• Re-assess our communication programs
• Circulars
• Print
• TV/Radio
• On-line
• Targeted marketing/CRM
• Community/grass roots

Building A Stronger Relationship With Our Target
Consumers
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Consumer Facing View Drives Strategic and
Operational Priorities
Consumer Needs and Segments
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Merchandising Principles

• Determine specific roles of each merchandise
  category
• Manage by key consumer segments
• Leverage our core assortment
• .but be more consumer focused
• Improve relevancy to our consumer segments
• Become the category Trend Leader, known for
  newness
• Elevate overall level of quality

Our Focus Must Move To More Consumer Facing
Activities
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Consumer Facing View Drives Strategic and
Operational Priorities
Consumer Needs and Segments
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In-Store Experience

• Gain understanding of what matters
• In-store environment
• Ambiance
• Colors
• Way finding signage
• Easier to shop
• Service
• Defined by the consumer
• Role of the technology

Create A Consumer Driven Environment
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In-Store Experience

• Three Levels Of In-Store Improvement
• Level One Immediate Quick Hits.
• Reduce Clutter. Improve Shopability
• Level Two Minor Investment
• Sign Changes, Re-align Fixtures
• Level Three Modest Remodel Investment
• Utilize Design Firm. Test 20 Stores In 2008

Create A Consumer Driven Environment
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Consumer Facing View Drives Strategic and
Operational Priorities
Consumer Needs and Segments
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Strategic Sourcing

• Goals
• Drive margin improvement
• Leverage our scale in commodity categories
• Re-deploy savings to drive future growth
• Strategic sourcing organization in place
• Hired SVP of strategic sourcing
• Aligned with external sourcing agents
• Hired/hiring internal and external support

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Strategic Sourcing Opportunity
Foreign Sourcing Opportunity
( in millions)
of total2006 Cost of Merchandise
1,850
Foreign Sourced
1,377
Manufactured in US
844
Domestically Sourced
High Complexity
Manufactured in Asia
Low Complexity
Approximately 694 million of current purchases
are low complexityproducts manufactured in Asia,
but sourced locally
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Margin Opportunity From Sourcing
Illustrative example
Up to 40 of additional products can be sourced
in Asia, leading to up to 600 bps of overall
margin improvement
(1) Merchandising margin is defined as gross
profit plus occupancy costs (2) Typically 30
margin on product COGS (3) Typically 14 mark-up
on factory selling price
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Testing and Investing
Supply Chain
Consumer Insights
Marketing
Systems
New Stores
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Michaels Strategic Objectives

• Profitable Growth Of Our Comp Sales, Market Share
  and Brand Loyalty By
• Enhancing Our Merchandise Offerings
• Improving The In-store Shopping Experience
• Building a Stronger Customer Relationship
• Driving Operational Excellence
• Developing Our Management Team

Investing In Our Future
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Jeffrey BoyerPresident Chief Financial Officer
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Financial Performance
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Fiscal 2006 Company Results

• Michaels performed well since the
  recapitalization in October 2006
• Exceeding EBITDA guidance
• Decreasing total leverage by 1.3 turns
• Adjusted Financing EBITDA Results
• Q4 actual of 301 million versus guidance of 276
  million
• FY actual of 617 million versus guidance of 590
  million
• 76 million higher than LTM 7/29/06 of 541
  million
• Merchandise margin improvements of
• Q4 320 basis points
• Full year expansion 160 basis points
• Continued positive sales growth despite stronger
  focus on profitability

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YE F2006 Capitalization
( in millions)

• (1) Total facility size 1.0 billion.
• Based on fiscal 2006 Adjusted EBITDA (as defined
  in our Term Loan Credit Agreement) of 616.7
  million

Significant reduction in debt leverage since
transaction close
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Fiscal 2007 Company Results

• First Half
• Total sales 1.637 billion, 2.3
• Same store sales
• Reported 0.1
• Michaels US/Canada 0.4
• Gross margin rate increased approximately 70
  basis points
• Promotional programs and ongoing product sourcing
  initiatives
• Adjusted EBITDA 200.2 million, 12.2 of sales
• down 5.8 million from 1H 2006

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Michaels Comp Sales Improved in 1H
US Canada Comp Sales
2007 Comp Store Sales Growth
Includes SAB-101 Frame Adjustment
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Solid Comp Merchandise Margin Growth
US Canada Comp Sales
2007 Comp Merchandise Margin Growth
Includes SAB-101 Frame Adjustment
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First Half Capitalization Update
( in millions)

• (1) Total facility size 1,000 million.
• Based on LTM Adjusted EBITDA (as defined in our
  Term Loan Credit Agreement) of 617.5 million

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Fiscal 2007 Outlook

• Second Half
• Same - Store Sales 1 - 3
• Total Sales 2 - 4
• Operating income 320 - 325 million.
• Adjusted EBITDA 415 - 420 million
• Full Year
• Same - Store Sales 0 - 2
• Total Sales 2 - 4.
• Gross margin 30 - 40 basis points
• Adjusted EBITDA 615 and 620 million

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Sales Expected to Further Strengthen
2007 Comp Store Sales Growth
1 3
Includes SAB-101 Frame Adjustment
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Michaels Comp Margins Growth Solid
US Canada Comp Sales
2007 Comp Merchandise Margin Growth
4.0
Includes SAB-101 Frame Adjustment
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Long Term EBITDA Goals
100 150 bps
50 100 bps
100 150 bps
300 600 bps
50 100 bps
Near-term target margin 17-19
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Summary

• Build on solid operational and financial
  foundation
• Enhance our consumer facing activities
• Aggressively test new initiatives and invest in
  significant opportunities 
• Overall goal Drive balanced growth

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Q A