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Michael Hill Revamps Emma & Roe

Small Caps | Mar 08 2018

Jeweller Michael Hill has identified a major opportunity in the demi-fine jewellery segment for its troubled Emma & Roe brand.

-Smaller, concentrated store footprint will be retained
-Concerns linger regarding consumer attitudes
-Improving trend and diminished losses expected from FY19


By Eva Brocklehurst

Jeweller Michael Hill International ((MHJ)) plans to add some sparkle to its underperforming Emma & Roe division, identifying a brand positioning opportunity, and will proceed with a small trial footprint for the next 15 months or so.

The company has identified an opportunity in the "demi-fine" jewellery segment, which is a segment combining fine jewellery with a fashion statement, supplying customers with both style and affordability. Michael Hill will create a smaller, concentrated store footprint during an initial trial period for the remainder of FY18 and FY19.

Of the current 30 Emma & Roe stores, 24 will be closed. The remaining six stores will be in a single market area. Emma & Roe employees will be redeployed to Michael Hill stores where circumstances allow. Total one-off cash costs for lease terminations and employee severance are currently estimated at $5.8-7.9m. The company is also negotiating the exit of the nine operating US stores, and has signalled a sale, or partial sale, is now less likely.

Citi expects the jeweller to benefit from a greater focus on its core business and the Emma & Roe turnaround. The stock has been trading at an undemanding PE on FY19 estimates of 9.8x and a -30% discount to listed retail peers, which the broker considers excessive. This is based on the business being relatively less exposed to a housing slowdown and the impact of Amazon.

The broker supports the decision to reposition Emma & Roe and target the demi-fine segment, envisaging material upside if the brand is successful going forward. Nevertheless, Citi is conscious the company remains in the planning phase and will have to ensure the brand does not get caught between fine and fashion jewellery without a clear market position.

The strategy to reduce discounting and improve the brand through increased marketing also makes sense but the broker remains concerned about consumers being conditioned to buy on promotions and losing share to competitors that continue to discount. Regardless, the repositioning will take time and the broker believes the short-term risks to margins are skewed to the downside.

Messy Turnaround

The outcome of the turnaround strategy for FY18 earnings will be "messy", Macquarie believes. The exit from the US should be completed by the end of FY18 and all trading losses eliminated by FY19.

Henceforth, the broker expects an improving trend from core geographies that sets a solid basis for trading in FY19. Macquarie envisages value in the restructured business and maintains an Outperform rating.

Morgans prefers a Hold rating during what continues to be a period of significant restructuring and underlying business weakness. The broker concurs that the removal of losses after the exit from the US and diminished losses from a materially lower store base at Emma & Roe should mean a better FY19/20.

In the wake of the first half results and on the back of the significant decline in the share price, Credit Suisse upgraded to Outperform from Neutral. The broker welcomes the exit of the US business and the repositioning of Emma & Roe but remains cautious about the near-term earnings profile and the potential for greater-than-forecast losses during the repositioning.

FNArena's database shows three Buy ratings and one Hold. The consensus target is $1.32, signalling 16.5% upside to the last share price.

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