Michael Hill's growth strong

Listed jeweller Michael Hill reported a strong finish to the 2017 financial year and Forsyth Barr broker Suzanne Kinnaird said the company delivered an acceleration in sales growth across all its core markets.

Canada was particularly impressive.

The company last week reported sales rose to $A583million ($NZ606million) in the 12 months ended June 30, up from $A549.9million a year earlier. Opening new stores provided the biggest impetus to sales growth and same-store sales rose a more modest 1.5%.

The retailer opened 13 of its Emma & Roe stores, bringing the total under that brand to 29, and opened 14 Michael Hill-branded outlets while closing seven, leaving it with 304, and a total number of outlets of 333.

The increased Emma & Roe stores meant sales jumped 62% to $A15million, although on a same-store basis sales fell 1.9%.

Michael Hill store sales rose 5% to $A568million, or 1.5% on a same-store basis.

Ms Kinnaird said Michael Hill was trading at a discount to the target share price of $1.55 and valuation multiples were attractive against its peers - even without adjusting for the start-up losses of a new brand.

``Our rating is outperform. The Australasian apparel retail sector has seen a material de-rating over the last few months, given increasing concerns about the entry of Amazon.

``Michael Hill has materially underperformed which we view as unjustified.''

The reasons for Ms Kinnaird's faith in the company included jewellery being a lower risk category from online incursions, Michael Hill had superior growth options and it owned a strong brand.

Sentiment to retailers was likely to remain negative but Michael Hill should trade at a premium to sector peers.

Key drivers for growth included the store roll-out, she said. Michael Hill had a strong market position in Australasia and was leveraging it to expand in Canada. There was also an opportunity for expansion from Emma & Roe.

Outperformance in New Zealand, a return to positive growth in Australia and positive momentum in Canada delivered ``solid'' same-store sales growth of $5 in 2016.

In the first half of 2017, there was a slow-down in Australasia but an improvement in Canada during the third quarter.

``The key near-term opportunity is Canada where Michael Hill continues to see benefits of scale.''

The company also offered personal care plans, available to add on to a purchase to cover ongoing maintenance and care, Mr Kinnaird said.

``This is a gold mine for Michael Hill as payment is received upfront and margins are likely higher than its jewellery business.''

Expansion plans had been announced for the new Emma & Roe brand with about 300 stories anticipated long-term. Given Pandora's success in the market, the Emma & Roe expansion was expected to be a lucrative growth opportunity.

There were some risks. Michael Hill's products were reliant on discretionary spending. Jewellery chains catering to the majority, such as Michael Hill, were typically less affected by economic fluctuations than luxury jewellers, she said.

Longstanding chief financial officer Phil Taylor had recently been appointed as the new chief executive. Mr Taylor had been with the company since 1987 and chief financial officer since 2003.

Ms Kinnaird was not expecting any material change in strategy. The company also had considerable layers of store and divisional management to support Mr Taylor.


 

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