Is this the end of the golden run for Michael Hill?

Tuesday, 23 January 2024

Michael Hill’s “golden run” of record sales may be over, a financial analyst says.

A trading update released to the NZX revealed the jewellery retailer, which operates 302 stores in New Zealand, Australia and Canada, was cutting costs and shutting underperforming stores following muted sales.

In the six months to December 31, group sales were A$362.8 million, compared to A$348.5m in the same period a year earlier.

Sales across the group were up 4.1%, when sales from the recently acquired lower-end jewellery chain Bevilles were included, but Michael Hill brand sales were down on the same half a year earlier.

New Zealand sales decreased 10.3% to $65.4m over the period, compared to $72.9m a year earlier.

Sales in Australia were up 10.2% to A$202.4m, boosted by sales from Bevilles, but sales in Canada rose just 0.6% to C$88.3m.

Michael Hill estimated its earnings before interest and tax to be in the range of $30m and $33m.

In the update, Michael Hill managing director and chief executive Daniel Bracken said the group had made moves to reduce its operating costs.

It had closed six underperforming stores; five in Australia and one in Canada.

Bracken said retail trading conditions, particularly in the fine jewellery sector, throughout 2023 and in the first half of the financial year had been challenging for the business.

Sales for the core Michael Hill brand were down, but the company was encouraged by its performance against the broader jewellery sector, he said.

“Margin was under pressure from both input costs and promotional activity, and inflationary forces saw elevated costs across many aspects of the business, which together impacted EBIT for the half.

“As a result, the company has taken direct actions to reduce operating costs, including the exit of a number of senior management roles.

“Even though consumers continue to monitor their discretionary spend, our multi-brand strategy puts us in a strong position to continue taking market share from our competitors.”

Devon Funds head of retail Greg Smith said the sugar rush of people splurging during Covid-19 was well and truly over, as demonstrated in Michael Hill’s trading performance.

The company thrived during the Covid spending rush, he said. “Its share price had more than tripled from its 2020 low, peaking at the start of 2022.”

He believed it was “the end of the golden run” for the group, but its Bevilles acquisition would work in its favour if the trend towards consumers trading down continued.

“Consumers are feeling the pinch and that has been evident in sentiment surveys towards the end of last year.

“We’ve got inflation coming down, but the reality is cost of living pressures are still very high.”

Discretionary spending would continue to be under pressure, and put further pressure on Michael Hill’s margins, he said.

“The price of gold has recently been trading at record levels, above US$2000 an ounce, also eating into its margins.”

Milford Asset Management investment analyst Jeremy Hutton said Michael Hill had been performing well for longer than the market had anticipated.

“But it is clearly showing signs that the New Zealand and Aussie consumer is starting to crack and pulling back on more discretionary high-end spending.”

He said Michael Hill’s Australian sales were down approximately 8%, when the Bevilles acquisition was taken out of the equation.

But the company had outperformed the industry segment with the market down roughly 12% in New Zealand and 11% in Australia, he said.

“So management is doing a decent job in a very tough consumer environment.

“With the tougher environment, competition starts to heat up, especially on pricing, and Michael Hill has to spend more on promotional activity which does effect profit margins.”

Diamond and gold prices had also been strong causing higher input costs, so that was a double hit on profit margins, he said.

Michael Hill operates 272 Michael Hill branded stores, and 30 Bevilles branded stores.