New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Michael Hill International / Equity Bottom-Up

<h2>Michael Hill Intl. (MHJ) 1H21 Result Initial Impressions</h2>
Michael Hill’s (MHJ) result had plenty to like with sales momentum, gross margin expansion, a large cash balance (A$90m), and ongoing signs of strategy execution. MHJ reported 1H21 EBIT of NZ$59m, in line with guidance (A$56m-$60m) and expectations (FB NZ$57m).
MHJ announced a AUD 1.5cps interim dividend (behind our expectations). The softer than expected dividend reflects an element of ongoing COVID-19 caution around trading disruption. With a significant cash balance and global vaccine roll outs, we see scope for higher dividends from 2H21.
Outlook — Strategy execution positive signal, with sales momentum continuing in recent weeks
MHJ’s result shows signs of strategy execution with strong loyalty programme take-up, inventory reduction/tidy up, and increased sales penetration of branded collections. This should be positive for gross margin going forward, and while 1H21 margin expansion is encouraging, discerning what is strategy specific vs. favourable trading backdrop will be key. Sales momentum has continued through the first eight weeks of 2H21, with group same store sales (SSS) up +11%.
Result take outs
<ul>
<li>Net-cash balance — MHJ reported a net-cash position of A$90m. Contributing to this was an unwind of inventory (down c.A$30m) and an increase in payables. We expect this cash balance to moderate as MHJ pays its catch up 1H20 1.5cps (A$5.8m, announced January 2021) and with the company yet to settle its holiday pay liability (c.A$20m).</li>
<li>Operational initiatives — Highlights included a step up in digital sales (6% of total sales in 1H21) and MHJ’s loyalty program members (now 480k, +237% in 1H21), which have contributed to margin accretion. 15 underperforming stores have been closed since 1H20, with one closed in the period.</li>
<li>Divisional detail — Same store sale (SSS) growth and margin expansion in all markets.</li>
</ul>
o&nbsp;&nbsp;New Zealand:&nbsp;SSS increased +3.6% to A$68.4m, while total segment revenue declined marginally due to temporary store closures in Auckland. Gross margins lifted +230bps to 61.1%.
o&nbsp;&nbsp;Australia:&nbsp;SSS increased by +12% to A$174.2m, with total segment revenue lifting +0.5% despite 2,567 lost trading days due to lockdowns. Gross margins lifted +150bps to 61.4%
o&nbsp;&nbsp;Canada:&nbsp;SSS increased by +3..6% to A$70.3m, while total segment revenue fell -5.9% due to store closures. Only 40 of 86 stores were trading at balance date. Gross margins lifted +330bps to 61.5%.
Conference call at 1pm NZT
MHJ will host a conference call at 1pm NZT. Participants must register online in advance&nbsp;<a href="https://apac.directeventreg.com/registration/event/5431938" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://apac.directeventreg.com/registration/event/5431938&amp;source=gmail&amp;ust=1614210928526000&amp;usg=AFQjCNGF_PZPjXJYpfFiAZzsYanC_7t0vQ" rel="noopener">HERE</a>. Alternatively, there is a listen only webcast available&nbsp;<a href="https://edge.xn--mediaserver-pf3f.com/mmc/p/yvzp569d" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://edge.media%E2%80%90server.com/mmc/p/yvzp569d&amp;source=gmail&amp;ust=1614210928526000&amp;usg=AFQjCNFNfiktmBHIX-TiUBWnpurs2uVAUQ" rel="noopener">HERE</a>.
1H21 result summary (A$m)
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.3&amp;permmsgid=msg-f:1692523441247803437&amp;th=177d0d1a3998d82d&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ9dlpg-7r8pBSFWgqOcjVG2WmsxuTnAAt-JJ4yWQvy1ELRAIJHOAIqImcYMqECwFf8gXKnn2KHxMfzwavxpAWNIELwpWdbsrA45p3BciSh5-0FHdL_PqWivR-U&amp;disp=emb" width="521" height="136" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: MHJ, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1692523441247803437&amp;th=177d0d1a3998d82d&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ83B-EbVSXsajTVNAL7HqUnDffgGxQvbDn29lwQfekVFPoXrDKlC5mOq7Aedg1HHwytxXJSvJzDXwQHkp3E7FWUCVq6cQTtd87Eqb4-eFUBDVGMp_gMdqIKryE&amp;disp=emb" class="editor-image img-responsive"></figure>
 P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Michael Hill Intl. (MHJ) 1H21 Result Initial Impressions
Michael Hill’s (MHJ) result had plenty to like with sales momentum, gross margin expansion, a large cash balance (A$90m), and ongoing signs of strategy execution. MHJ reported 1H21 EBIT of NZ$59m, in line with guidance (A$56m-$60m) and expectations (FB NZ$57m).
MHJ announced a AUD 1.5cps interim dividend (behind our expectations). The softer than expected dividend reflects an element of ongoing COVID-19 caution around trading disruption. With a significant cash balance and global vaccine roll outs, we see scope for higher dividends from 2H21.
Outlook — Strategy execution positive signal, with sales momentum continuing in recent weeks
MHJ’s result shows signs of strategy execution with strong loyalty programme take-up, inventory reduction/tidy up, and increased sales penetration of branded collections. This should be positive for gross margin going forward, and while 1H21 margin expansion is encouraging, discerning what is strategy specific vs. favourable trading backdrop will be key. Sales momentum has continued through the first eight weeks of 2H21, with group same store sales (SSS) up +11%.
Result take outs

Net-cash balance — MHJ reported a net-cash position of A$90m. Contributing to this was an unwind of inventory (down c.A$30m) and an increase in payables. We expect this cash balance to moderate as MHJ pays its catch up 1H20 1.5cps (A$5.8m, announced January 2021) and with the company yet to settle its holiday pay liability (c.A$20m).
Operational initiatives — Highlights included a step up in digital sales (6% of total sales in 1H21) and MHJ’s loyalty program members (now 480k, +237% in 1H21), which have contributed to margin accretion. 15 underperforming stores have been closed since 1H20, with one closed in the period.
Divisional detail — Same store sale (SSS) growth and margin expansion in all markets.

o&nbsp;&nbsp;New Zealand:&nbsp;SSS increased +3.6% to A$68.4m, while total segment revenue declined marginally due to temporary store closures in Auckland. Gross margins lifted +230bps to 61.1%.
o&nbsp;&nbsp;Australia:&nbsp;SSS increased by +12% to A$174.2m, with total segment revenue lifting +0.5% despite 2,567 lost trading days due to lockdowns. Gross margins lifted +150bps to 61.4%
o&nbsp;&nbsp;Canada:&nbsp;SSS increased by +3..6% to A$70.3m, while total segment revenue fell -5.9% due to store closures. Only 40 of 86 stores were trading at balance date. Gross margins lifted +330bps to 61.5%.
Conference call at 1pm NZT
MHJ will host a conference call at 1pm NZT. Participants must register online in advance&nbsp;HERE. Alternatively, there is a listen only webcast available&nbsp;HERE.
1H21 result summary (A$m)

Source: MHJ, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities

 P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Michael Hill Intl. (MHJ): 1H21 Result Initial Impressions