What is the stock?

Michael Hill International (MHJ)

How long have you held the stock?

We have held the stock for just a few months. It only listed on the ASX in early July, when it transferred its listing from the New Zealand Stock Exchange. Only once it listed on the ASX were we able to purchase the stock for our funds.

What do you like about it?

Well-managed jewelry retailers can be good businesses, and Michael Hill is a good example. It has built up a reasonable reputation in a particular price range, particularly in engagement rings. The company is not well-known to Australian investors, which gives rise to the opportunity in the stock, but we have been following it for many years as a NZX-listed company and have built up some conviction. It has a strong track record, having grown revenues by 9% per annum for 30 years, and its prospects look just as bright. Its Australian and New Zealand operations are very profitable but largely mature, but it now has the potential to speed up the roll-out of its namesake retail format in Canada and the USA. It is also trialling a new retail format called ‘Emma & Roe’, which appears to be resonating with customers and is nicely profitable. It has the potential for a roll-out of this format with a company target of 300 stores.

How is it better than its competitors?

Retail is detail, and the detail for Michael Hill is in the form of innovation, discipline and culture. The company actually manufactures a fair percentage of its own products, has brought out new product ranges such as watches along the way, and it has added ‘professional care plans’ that are a very profitable add-on. It actually achieves a higher percentage mark-up on its sales than Tiffany’s. It has also innovated in its development of new store formats, including most importantly the new Emma & Rose store. And it is very disciplined in product ranging and pricing, the leases it takes on, and in the management of costs and inventory levels, with the latter a very critical part of one’s success in jewelry retailing. In-store, there is strong customer service culture that enables high levels of in-store conversion to sales. In short, it has continuously improved over time to now be a very successful and profitable retailer.

What do you like about its management?

Actually, the CEO has just retired, having run the company for 16 years, but the Executive Chair, Emma Hill, is very impressive and aligned with shareholders given the Hill family’s majority holding in the company. There is great depth to the management team, and they are very experienced and astute retailers. They are measured, innovative, returns-focused and orientated towards the long term. In some ways, having Sir Michael and the Hill family there has allowed the company to avoid investors’ short-term pressures and to manage in a measured way for the long term.

What is your target price?

We don’t typically set fixed price targets, especially for a company like Michael Hill, whose valuation is ever-rising as it executes on its growth plans. We instead consider the starting valuation and its prospects against what the current share price implies. We believe the company remains undervalued, which is understandable given the limited investor recognition of this company in Australia.

At what point would you sell it?

We would sell if managerial quality deteriorates, once it exhausts itself on growth opportunities, which we don’t believe will be for some time yet, or if the share price starts to price in future earnings expectations ahead of what we believe the company can deliver.

How much has it added (subtracted) to your overall portfolio over the last 12 months?

The stock has performed nicely as it continues to gain recognition in Australia, rising about 40% since listing, and this has meant we have had some success with it already. We believe however that the contribution will be more meaningful over the long term.

Is it a liquid stock?

Liquid enough, especially for retail investors. We have managed to buy a 5% position in the company since it listed in July.

Where do you see the value?

The value is in the roll-out of new stores, including in particular the Emma & Roe format. As first set out in 2002 in Sir Michael’s autobiography Toughen Up, the goal is for 1,000 stores by 2022. It currently has 300. The company’s valuation will grow as the company executes on its roll-out, which value will manifest as investors come to find and appreciate this retailing success story.

Source: Bloomberg

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.