On Dec. 27, Michaels Companies Inc MIK named Walmart Inc WMT executive Ashley Buchanan as its CEO. The announcement thrust Michaels’ stock price up 45%, but not everyone on the Street acknowledged an immediate or automatic value-add.

The Ratings

Morgan Stanley analyst Simeon Gutman maintained an Underweight rating on Michaels with a $5 price target.

The Thesis

By Gutman’s account, the Buchanan appointment bodes well for the Michaels story long-term.

“He knows what a best-in-class retailer looks like and what investments are necessary to become one,” the analyst wrote in a note. “Buchanan's expertise in omni-channel, merchandising, and private label thus appear valuable as MIK is refining its product assortment/strategy and building out its e-comm capabilities.”

However, new leadership does not correct fundamental flaws, including struggles to grow sales. Gutman anticipates declining comps through 2021, potential store closures in the near term, and margin erosion for earnings before interest and tax (EBIT).

“Industry shifts are intensifying competition and costs have been taken out of the business in prior years,” he wrote. “These factors pose risks to comps and margins in the medium-term, which we expect to outweigh the stock's inexpensive valuation.”

Gutman expects Buchanan to increase investments to better target Michaels’ “Maker” customers. Such a strategy could drive capital expenditures, accelerate margin contraction, threaten free cash flow and depress the stock value. However, these short-term consequences may pave the way for a more favorable long-term perception.

“We see a path to becoming more constructive on the stock following a deeper investment period,” Gutman wrote. “This playbook has been successful at other retail turnaround stories” such as Target Corporation TGT and Best Buy Co Inc BBY.

Price Action

At time of publication, Michaels traded up 8.6% around $8.12 per share.