I don't know about Michaels. I have purchased gift cards at Kmart, using both Kmart and Sears gift cards. (Got BP Amoco, Southwest Airlines, and Subway --they also have a few other restaurants).
I asked at Kohls one time, and was told you could use gift cards to buy other gift cards, but cannot use "merchandise credits" to buy gift cards.
I tried at Penneys one time, and they cannot do it.