Michael Hill’s trading result for the six months to 31 December, which was released to the market on 11 January, had a number of interesting features. 

The company has 240 jewellery stores with 146 or 61% located in Australia where conditions are clearly tough.  Australian “same store” sales revenue in New Zealand dollar terms was basically flat at around $178m for the first half and the company stated that margins are under pressure which will “adversely impact on profits for the half year”. 

By contrast sales numbers (in NZD’s) from New Zealand stores were up about 10% to $54m, and rises of around 2% (to $25m) and 16% (to $2.6m) were recorded from same store sales in Canada and the US respectively.  Overall same store sales were $263m for the six months, up 2.3%. 

In Australia the resources sector continues to trade well but the rest of the economy is slowing and as usual the retail sector is an obvious indicator of activity.  The Michael Hill business can clearly mitigate the impact of slower economic conditions through pricing strategies and maintaining the pace of new store openings but by the company’s own admission, half year EBIT will likely be in the range of $33-35m which is only slightly up on the same period last year.  But the Michael Hill business remains well funded and free cash flow is strong, unlike many other New Zealand companies that have seen trading declines translate quickly into financial pressures.  Michael Hill has equity in excess of 60% of total assets with net debt reduced by 19% to $36m since the end of the June 2011 financial year.  Moreover the total dividend was up by 12% to 4.5cps for the year to June 2011. 

The key issue this year will be the extent to which the Australian economy continues to slow on the back of reduced momentum from China.  Recent OECD leading indicator data from China is pointing to a slowdown and aggregate GDP growth seems set to head below 9% for the year.  There is little doubt that Michael Hill has a good track record as a retailer but the possible flow-through effects as the world’s second largest economy begins to slow may be hard to counter if the Australian economy is negatively impacted by a slowdown in China.

Graeme Thomas