New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

Michael Hill International / Equity Bottom-Up

<h2>Michael Hill Intl</h2>
1Q20 Sales — Improving Clarity
We upgrade Michael Hill (MHJ) to NEUTRAL from UNDERPERFORM, following a strong 1Q20 with evidence of execution on management’s turn-around strategy. MHJ reported a strong 1Q20, with sales growth recovering strongly following a weak prior period. We are encouraged by (1) productivity improvements in Canada, (2) market share gains across all markets, and (3) margin commentary. We recognise that MHJ is in the early stages of its turnaround and that market conditions in Australia remain challenging, however, trading at ~10x forward PE, we believe investors are compensated for this risk.
What’s changed?
<ul>
<li>Earnings: Material EBIT upgrades; FY20E/FY21E/FY22E +10%/+11%/+14%</li>
<li>Target Price: Increase to NZ$0.70 from NZ$0.50</li>
<li>Rating:&nbsp;Upgrade to NEUTRAL from UNDERPERFORM</li>
</ul>
Strong start to the year
MHJ reported strong 1Q20 same store sales (SSS, up +12% against the prior year period and ahead of our expectations. The growth rate was helped by the weak comparable period where a strategic choice to reduce discounting activity impacted sales. Canada was a key highlight given management’s focus on improving productivity, with 1Q20 SSS up +16% driven by early wins from new products and changes to its sales incentive scheme. New Zealand and Australia also achieved robust SSS growth up +10% and +7% respectively.
Margins improving but remain cautious amid competitive backdrop
Encouragingly margins across all markets saw a slight sequential improvement on 4Q19, although remain down on 1Q19. Branded collections as a portion of total sales (a key initiative to lift margins) maintained a positive trajectory, increasing to 38% (FY19 33%). However, market conditions remain challenging, particularly in Australia, where the highly competitive backdrop and store closures are driving elevated sector discounting. Given the importance of the Christmas quarter we expect more prevalent sector discounting as competitors look to capitalise on the inventory clearing opportunity, with incremental margin improvement in 2Q20 difficult.
Earnings upgrades
We expect sales growth will moderate through FY20 as MHJ cycles tougher comparatives, however, early sales momentum is encouraging and we lift our full year assumptions accordingly. We have lifted our SSS growth assumptions across all markets, with the largest revisions in Canada following signs of execution on productivity improvements stronger/faster than expected.&nbsp;
<div class="content-highlight">
Investment View
MHJ has a new strategy and a largely new senior management team. While incremental progress is being made with its strategic priorities, it could take an extended period of time to return to its prior growth trajectory. Early signs of execution are positive, with little growth priced in, providing upside to our forecasts, however, we remain cautious given the tough nature of the retail backdrop and margin risk. NEUTRAL.&nbsp;
</div>
Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Michael Hill Intl
1Q20 Sales — Improving Clarity
We upgrade Michael Hill (MHJ) to NEUTRAL from UNDERPERFORM, following a strong 1Q20 with evidence of execution on management’s turn-around strategy. MHJ reported a strong 1Q20, with sales growth recovering strongly following a weak prior period. We are encouraged by (1) productivity improvements in Canada, (2) market share gains across all markets, and (3) margin commentary. We recognise that MHJ is in the early stages of its turnaround and that market conditions in Australia remain challenging, however, trading at ~10x forward PE, we believe investors are compensated for this risk.
What’s changed?

Earnings: Material EBIT upgrades; FY20E/FY21E/FY22E +10%/+11%/+14%
Target Price: Increase to NZ$0.70 from NZ$0.50
Rating:&nbsp;Upgrade to NEUTRAL from UNDERPERFORM

Strong start to the year
MHJ reported strong 1Q20 same store sales (SSS, up +12% against the prior year period and ahead of our expectations. The growth rate was helped by the weak comparable period where a strategic choice to reduce discounting activity impacted sales. Canada was a key highlight given management’s focus on improving productivity, with 1Q20 SSS up +16% driven by early wins from new products and changes to its sales incentive scheme. New Zealand and Australia also achieved robust SSS growth up +10% and +7% respectively.
Margins improving but remain cautious amid competitive backdrop
Encouragingly margins across all markets saw a slight sequential improvement on 4Q19, although remain down on 1Q19. Branded collections as a portion of total sales (a key initiative to lift margins) maintained a positive trajectory, increasing to 38% (FY19 33%). However, market conditions remain challenging, particularly in Australia, where the highly competitive backdrop and store closures are driving elevated sector discounting. Given the importance of the Christmas quarter we expect more prevalent sector discounting as competitors look to capitalise on the inventory clearing opportunity, with incremental margin improvement in 2Q20 difficult.
Earnings upgrades
We expect sales growth will moderate through FY20 as MHJ cycles tougher comparatives, however, early sales momentum is encouraging and we lift our full year assumptions accordingly. We have lifted our SSS growth assumptions across all markets, with the largest revisions in Canada following signs of execution on productivity improvements stronger/faster than expected.&nbsp;

Investment View
MHJ has a new strategy and a largely new senior management team. While incremental progress is being made with its strategic priorities, it could take an extended period of time to return to its prior growth trajectory. Early signs of execution are positive, with little growth priced in, providing upside to our forecasts, however, we remain cautious given the tough nature of the retail backdrop and margin risk. NEUTRAL.&nbsp;

Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Michael Hill Intl: 1Q20 Sales — Improving Clarity

<h2>Michael Hill Intl (MHJ)</h2>
1Q20 Sales — Initial Impressions: Strong start to the year
Michael Hill (MHJ) reported strong 1Q20 group same store sales (SSS) growth, up +11.9%, cycling weak sales in the prior period (1Q19 SSS -11.0% on 1Q18). Unsurprisingly, gross margins remain challenged given a highly competitive backdrop, which drove elevated discounting activity, particularly in Australia; although, somewhat encouragingly showed a slight improvement on 4Q19. Branded collections represented 37.9% of sales in 1Q20 (32.5% in FY19), illustrating execution on management’s strategy to grow these sales, likely helped by the 40th Birthday campaign.
Group sales growth is tracking well ahead of our full year run rate with upside risk to our forecasts. However we remain cautious over the margin outlook and recognise that it remains early in the period with the key Christmas quarter to come.
Divisional detail
<ul>
<li>Canada: Canada was the key highlight with 1Q20 SSS growth of +16.4% following a focus on productivity improvements which included changes to its operating team and incentive scheme.</li>
<li>New Zealand: 1Q20 SSS growth of +10.1%, with MHJ gaining market share.</li>
<li>Australia: The Australian business has been facing the toughest retail environment with more intensive competitor clearance activities. 1Q20 SSS increased +6.8%, however this is cycling a -12.8% decline in 1Q19 (vs 1Q18) and is likely the key source of margin pressure.</li>
<li>E-commerce:&nbsp;1Q20 e-commerce sales increased +18.9% year-on-year (+39.4% when adjusting for Emma &amp; Roe). E-commerce sales are over double that of MHJ’s single largest bricks &amp; mortar store.</li>
</ul>
Guy Hooper
Analyst, Equities&nbsp;
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+64 4 495 5255
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0800 367 227
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+64 4 495 8193
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PO Box: 5266, Wellington 6145
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<a href="http://www.forsythbarr.co.nz/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://www.forsythbarr.co.nz&amp;source=gmail&amp;ust=1570836637514000&amp;usg=AFQjCNG5f6MRwLtX0gHPDAbjKQikNC-a-A" rel="noopener">www.forsythbarr.co.nz</a>
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Michael Hill Intl (MHJ)
1Q20 Sales — Initial Impressions: Strong start to the year
Michael Hill (MHJ) reported strong 1Q20 group same store sales (SSS) growth, up +11.9%, cycling weak sales in the prior period (1Q19 SSS -11.0% on 1Q18). Unsurprisingly, gross margins remain challenged given a highly competitive backdrop, which drove elevated discounting activity, particularly in Australia; although, somewhat encouragingly showed a slight improvement on 4Q19. Branded collections represented 37.9% of sales in 1Q20 (32.5% in FY19), illustrating execution on management’s strategy to grow these sales, likely helped by the 40th Birthday campaign.
Group sales growth is tracking well ahead of our full year run rate with upside risk to our forecasts. However we remain cautious over the margin outlook and recognise that it remains early in the period with the key Christmas quarter to come.
Divisional detail

Canada: Canada was the key highlight with 1Q20 SSS growth of +16.4% following a focus on productivity improvements which included changes to its operating team and incentive scheme.
New Zealand: 1Q20 SSS growth of +10.1%, with MHJ gaining market share.
Australia: The Australian business has been facing the toughest retail environment with more intensive competitor clearance activities. 1Q20 SSS increased +6.8%, however this is cycling a -12.8% decline in 1Q19 (vs 1Q18) and is likely the key source of margin pressure.
E-commerce:&nbsp;1Q20 e-commerce sales increased +18.9% year-on-year (+39.4% when adjusting for Emma &amp; Roe). E-commerce sales are over double that of MHJ’s single largest bricks &amp; mortar store.

Guy Hooper
Analyst, Equities&nbsp;




T:


+64 4 495 5255




TF:


0800 367 227




F:


+64 4 495 8193




P:


PO Box: 5266, Wellington 6145








W:


www.forsythbarr.co.nz



Twitter:

@forsythbarr





Michael Hill Intl (MHJ): 1Q20 Sales — Initial Impressions: Strong Start to the Year

Australia

Michael Hill International Limited manufactures, wholesales, and distributes jewelry. The Company offers rings, pendants, necklaces, bangles, earrings, bracelets, watches, and other accessories. Michael Hill operates stores in New Zealand, Australia, Canada, and the United States.

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Michael Hill International (MHJ NZ)

Michael Hill Intl: 1Q20 Sales — Improving Clarity

Michael Hill Intl 1Q20 Sales — Improving Clarity We upgrade Michael Hill (MHJ) to NEUTRAL from UNDERPERFORM, following a strong 1Q20 with evidence...

Forsyth Barr

Michael Hill Intl (MHJ): 1Q20 Sales — Initial Impressions: Strong Start to the Year

Michael Hill Intl (MHJ) 1Q20 Sales — Initial Impressions: Strong start to the year Michael Hill (MHJ) reported strong 1Q20 group same store sales...

Forsyth Barr

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