Small Caps | Jul 12 2018
Michael Hill reported a soft fourth quarter with same-store sales growth deteriorating across core markets. The main positive for brokers is the fact that FY18 marks the full exit from Emma & Roe and the US business.
-Slowdown in fourth quarter sales growth may be caused by the distraction of closing businesses
-Weak consumer environment in Australia may also be having an adverse impact
-Additional investment may be required in marketing to reinvigorate momentum
By Eva Brocklehurst
Jeweller Michael Hill ((MHJ)) is fronting a cleaner outlook for FY19, having disposed of its loss-making enterprises. Nevertheless, several brokers suggests it is too early to become overly optimistic regarding growth in the core business.
The most notable aspect of the company's trading update for Credit Suisse was a sequential deceleration in the same-store sales growth in Australia, New Zealand and Canada. Admittedly, both Canada and Australia were cycling tough prior comparable periods.
The broker found management commentary light and no earnings guidance was provided. Credit Suisse continues to believe Michael Hill offers attractive value, and FY19 will not be hampered by the earnings drag from the loss-making Emma & Roe and US business. The broker expects the remaining business to deliver 6% compound earnings growth over the next three years.
Citi suspects the slowing in implied like-for-like sales growth has been caused by the distractions associated with closures in the US and Emma & Roe, as well as a new promotional strategy that focuses on reducing the amount of price discounting. While the FY19 PE multiple is undemanding, the broker needs to observe a path to improved execution before recommending the stock.
Competition in Canada and a weak consumer environment in Australia may also be having an adverse impact. The broker suggests Michael Hill may be losing share to the key Canadian brand Peoples as sales momentum for Peoples has been improving.
Morgans remains cautious regarding the performance of the core business and believes there is a requirement for investment in the near to medium term that could further curtail margins. Organic growth potential is considered subdued, given the lack of same-store sales momentum and potential for increased investment.
Morgans, too, would need to witness a sustained period of growth in same-store sales before becoming more positive on the stock, given the extent of the earnings downgrades over the past 18 months.
For FY18 the company reported total store sales of $599.7m, up 3.3%, and opened seven new stores over the year, closing two and bringing the total store count to 171. Group same-store sales growth was 0.4%. In Australia, revenue was up 1.1% for FY18 while the June quarter revealed a -3.3% decline in same-store sales growth. Management did not provide commentary regarding the sales performance only to acknowledge challenging retail conditions in Australia.
New Zealand revenue was NZ$125.1m, up 2.5%. Same-store sales growth was 2.2%. Similar to the Australian market, New Zealand recorded a sequential slowing into the fourth quarter but, Credit Suisse suggests, unlike Australia this did not reflect a challenging prior comparable but rather a continuation of the slowing momentum seen over FY18.
Sales growth in Canada was up 15.5% year-on-year, reflecting the rolling out of eight new stores. Same-store sales growth was 3.5%. Management did reiterate previous commentary that the pace of further store opening in Canada would be dictated by the availability of suitable locations and satisfactory lease terms.
Morgans makes additional downgrades to FY18 forecasts to reflect the more subdued update on the fourth quarter. The broker suspects taking share in what has become a somewhat tired category may require additional investment in marketing, loyalty and systems.
FNArena's database shows two Buy ratings and two Hold. The consensus target is $1.09, suggesting 13.2% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 6.2% and 7.2% respectively.
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