CANADA A JEWEL IN THE ROUGH FOR MICHAEL HILL

Written on the 10 January 2017

CANADA A JEWEL IN THE ROUGH FOR MICHAEL HILL

MICHAEL HILL has reported a 5.7 per cent increase in store sales for the six months to 31 December driven by its expansion, but same-store growth was sluggish or negative in every market but Canada.

Total sales of AU$328 million were achieved across four countries: Australia, New Zealand, Canada and the United States.

Growth was led by the opening of eight new Michael Hill and Emma & Roe stores during the period, as same store sales grew at a pedestrian 1 per cent.

Canada was the driver of same-store growth, up 7.4 per cent, while operations in Australia (0.3 per cent), New Zealand (down 1.5 per cent) and United States (down 8.8 per cent) were disappointing.

Michael Hill (ASX: MHJ) has sent its champion in Canada, North American president Brett Halliday, south to the United States to improve the company's performance in that country.

"The US business will require some extra focus in the second half to correct its results from the first half, and this effort will be led by our North American president, Brett Halliday, who has been doing a great job of running our Canadian segment for many years now," says the company in a statement to the ASX.

"NZ had a tougher half this year after a strong performance last year, but the business remains in good shape with an experienced and high performing management team in place. Australia likewise had a bumpy half, but is positioned to perform solidly in the second half."

Emma & Roe, Michael Hill's new affordable jewellery store focused on a young demographic, continued its rollout in Australia and New Zealand and registered total store sales growth of 71.9 per cent, with same store sales growth of 1.1 per cent.

The company says it is "satisfied" with the performance of the brand and as its expansion continues, critical mass will allow the company to market and advertise more effectively.

The 16 Michael Hill and eight Emma & Roe stores that opened in the period pushed total store numbers to 329 stores, of which 24 are Emma & Roe.

A further 10 Michael Hill and six Emma & Roe stores will be opened in the second half.

"While same store sales were relatively flat for the half we have secured and opened some excellent new store locations in both Queensland and NSW and this will allow us to increase our marketing spend in the coming 12 months as critical mass is achieved in each advertising region," says the company.

The Canadian market was clearly the company's best performer, as the company enjoyed same store sales growth of 7.4 per cent and total store sales growth of 17.8 per cent.

"It appears we are continuing to take market share in this market as the competition continue to struggle."

Five new Michael Hill stores were opened in Canada during the period, making a total of 72.

While same store sales in the New Zealand segment finished down 1.5 per cent, December featured sales growth year on year.

The Australian segment achieved same store sales growth of 0.3 per cent for the half, below expectations. However, sales rebounded in December and the jeweller reported 1.3 per cent same-store growth.

"Many competitors went on sale earlier than normal in December to try and bolster pre-Christmas sales, however we resisted that trend and focused on maintaining good quality sales and gross margin in this critical period," says the company.

The US business had a poor December quarter and finished the half down 8.8 per cent for same store sales, but the company still sees opportunity in the US market.

"We continued to experiment with our marketing and merchandise strategies during the half and are confident that along with the recent changes to the leadership team, this will enable us to improve our results in the second half."

Michale Hill shares are trading up 2.80 per cent this morning, at $1.285 per share, a welcome upward movement after a period of decline from the 12-month high of $1.825 per share.

Following the trading update, Credit Suisse analyst Andrew Steele has upgraded Michale Hill to outperform, saying the current share price "better reflects the risks associated with its store roll-out program".


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