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Michael Hill International

Josephine (Jo) Little

4Q17 trading update – quarter on quarter improvement

Michael Hill International (MHJ) reported FY17 total sales growth of 6%, underpinned by 1.5% same-store sales (SSS) growth and 20 net store openings in the period. 

FY17 SSS growth comprised:

  • Australia +1.2% (vs +3.8% in the previous corresponding period);
  • New Zealand -0.8% (vs +7.2% in the pcp);
  • Canada +8.8% (vs +5.3% in the pcp);
  • United States -13.4% (vs +3.5% in the pcp); and
  • Emma & Roe -1.9% (vs +34.6% in the pcp).

Based on our estimates, 4Q17 (three months) SSS growth comprised:

  • Australia +3.6% (vs +0.2% in 1H17 and +0.8% in 3Q17);
  • New Zealand +1.0% (vs -1.5% in 1H17 and -1.4% in 3Q17);
  • Canada +14.2% (vs +6.8% in 1H17 and +7% in 3Q17); and
  • United States -20.6% (vs -9.3% in 1H17 and -14.4% in 3Q17).

Canada was the standout with the business clearly taking customer share following the closure of a key competitor. Emma & Roe continues to be challenged during the initial rollout phase despite SSS showing improvement quarter on quarter.

We moderate earnings further due to larger losses in Emma & Roe/US

While no margin or earnings guidance was provided, we now have a reasonable read on how FY17 played out. Management reiterated that FY17 gross margin will fall on the previous corresponding period due to:

  1. a challenging consumer environment (e.g. clearance activity); and
  2. discounting of surplus inventory to help fund MHJ's branded collections.

We have made downward revisions to our forecasts, largely relating to:

  1. incorporation of FY17 like-for-like sales growth assumptions and store count;
  2. increased forecast losses in Emma & Roe (cA$6.5m FY17F) and the US division (cA$4m FY17F) in FY17 from a lower top-line outcome (and store closure in the US); and
  3. lower Emma & Roe store rollout assumptions in FY18 and onwards.

The above changes, in addition to higher shares on issue, sees our earnings per share forecasts fall by 10% in FY17, 12% in FY18 and 14% in FY19. We note that the Emma & Roe business is currently undergoing a review due to underperformance which could see material changes to the current operating strategy. Any changes could take time to implement and we have therefore assumed a similar loss in FY18 vs FY17.

Investment view

The incorporation of the above forecast changes and lower multiplies (in line with the recent sector de-rating) sees us reduce our share price target. We believe there are some execution risks given the quantum of losses being created from the Emma & Roe and US businesses. We will need to see management announce and execute a material change of strategy within both of these businesses before becoming more positive on the stock. Key risks include consumer sentiment, margin/competitive pressure and persistent/growing losses in Emma & Roe and the United States. 

Given these risks, and with MHJ now trading largely in line with its sector peers following our EPS downgrades (13x FY18F), we move to a Hold recommendation (previously Add).

More information

Morgans clients can login to view our detailed report and revised share price target for Michael Hill International (MHJ). Alternatively, please contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.