First NZ cuts Michael Hill earnings forecast after weak sales

Michael Hill yesterday reported an 8.8 per cent slide in September sales. Photo / Getty Images

First NZ Capital expects to see weaker earnings at Michael Hill International but says there is still potential for the share price to rise.

Michael Hill yesterday reported an 8.8 per cent slide in September sales to A$112.2 million ($121.7m) and said its transition away from discount pricing was harder than anticipated. The shares sank 24 per cent to 74 cents on the NZX yesterday, and recovered 2 cents in early trading today at 76 cents.

FNZC expects Michael Hill to generate a net profit of A$29.3m in the year ending June 30, down from a previous forecast of A$36.3m. Analyst Andrew Steele said the first quarter is typically a trough period for the retailer, and he reduced his revenue forecast by 5.8 per cent to A$557.6m.

Steele also cut his target price for the stock to $1.01 from a previous target of $1.35 due to the lower earnings forecast. Given yesterday's slump in the share price, he retained an 'outperform' rating, although he doesn't anticipate the market will regain its confidence in the stock in the near term.

"This poor sales result was driven by the company's shift away from reliance on discount-based pricing; however, this change was made without sufficient levels of marketing and promotional activities to drive top-line sales," Steele said in a note to clients.

"We would caution against extrapolating out one weak, low-profit quarter across the full year."

Michael Hill is overhauling its business after giving up on a decade-long attempt to crack the US market and winding up its Emma & Roe sub-brand. That cost the retailer A$25.5m in one-off costs writing down the value of the assets and paying fees to exit leases. It now plans to invest additional capital in its Australian business, which accounts for more than half its sales.

Former chief executive Phil Taylor stepped down from the role after two years in the top job due to health concerns. The long-serving executive will stay on as a consultant for the next six months to help ease his replacement into the job. Retail veteran Daniel Bracken - previously the head of Specialty Fashion Group - took over the reins yesterday.

Michael Hill shareholder Kingfish today said Taylor's tenure was short and difficult, encompassing a period of change for the retailer. Kingfish is a listed investment entity managed by Fisher Funds. Its shares fell 0.7 per cent to $1.36.

"Bracken's superior expertise as a retailer will be welcome in improving performance in the slimmed-down core business, although we are wary of expecting too much too quickly," Fisher Funds senior portfolio manager Sam Dickie said in its latest monthly update.