MHJ - Michael Hill International.

[k1w1]

I think that the most recent increase in SP is due to significant buying by Fisher Funds who have been increasing their stake. This may or may not give other shareholders confidence. I don't regard it as a negative myself. Techies would say who cares, provided stops are in place, any change in sentiment towards MHI will be detected and appropriate action taken.

In situations like MHI I always remember Warren Buffett's comment that the stock market in the short term is a voting machine but in the longer term is a weighing machine.

[Placebo]

More news from MHI... Christmas quarter to come, then Valentines...

quote:MHI
11/10/2004
QUARTER

REL: 1259 HRS Michael Hill International Limited

QUARTER: MHI: Michael Hill International sales up 9.6% for first quarter

Michael Hill International Limited
3 months sales to 30 September 2004.

Note that these figures represent 2 months actual and September preliminary
figures excluding accounting adjustments.

Last Year This Year
% Var

NZ same stores 15,107,710
15,474,224 2.4%
Australia same stores 28,852,241
30,157,059 4.5%
Canada same stores
1,055,223 1,103,592 4.6%
Total same stores
$45,015,174 $46,734,875 3.8%

NZ all stores 15,107,710
15,474,224 2.4%
Australia all stores
29,256,672 33,102,052 13.1%
Canada all stores
1,055,223 1,204,519 14.1%
Total all stores $45,419,604
$49,780,795 9.6%

The above figures are all in NZ Dollars.

Exchange rate used for conversion to NZ dollars
Australia .88
.92
Canada
.84 .86

Comments

In the first quarter, 4 new stores were opened in Australia and 2 new
stores opened in Canada.

Same store sales in Australia were up 9.3% in Australian dollars - the first
quarter exchange rate last year being .88 versus .92 this year.

[k1w1]

Looking at the 3 month figures the total same store sales across the whole group have only increased by $1.7 million.

The increase in sales has come from new stores in Australia. Sales revenue from Canada's existing stores has increased by $50,000.00.The 2 new Canadian stores has increased sales by $100,000 or $8500 per week. With no new stores New Zealand sales have increased by $200,000.00 over the period.

This leaves 4 new stores in Australia producing about 2 million in New Sales and existing stores increasing sales by $1.5 million.

I think these figures show:

Management recognises that growth in NZ is stagnant and new investments are better made overseas.

Growth in Canada is hardly breathtaking at this stage. I don't regard sales of approx $4500 per week per new store as significant.Perhaps that will change in the future. But thats still blue sky investing at this stage.

The real growth is in Australia where the new stores are having a significant impact and the existing ones are also improving.

More profits would be made in the next year if all the MHI stores were spread across Australia rather than Canada and NZ as well.

ANC.AX is in exactly that position.With more stores in Australia than MHI it is accordingly better positioned to grow its sales and profits than MHI.

Despite this the market continues to have a growth premium priced into the MHI SP and not into the ANC SP.

Thus the Buffet saying about the market being a voting machine in the short term but in the longer term it becomes a weighing machine.

[Nevl]

I fail to see how a 9% increase in sales in a bad thing. I agree NZ slaes growth will be limited to about the same as inflation and the the rate of increase in GDP. Not much more space in the country for more stores. Aussie is getting better as Aussie will when they begin to see MHI as an Aussie company. Just don't remind them of its Kiwi origins and Aussie will do fine. It is becoming an accepted piece of the furniture over there and that will help in the long term. The case of $4500 per week in sales is ok as long as the costs are less than that. I am not a retailer but I am sure MHI have thought this one through as long as sales are higher than costs this will be fine. Remember Jewelery is a high markup business with margins of 200% not uncommon. I would say the stock cost of those $4500 in sales was less that $2000 leaving 2500 to cover Rent wages and admin costs. MHI stores are usually small with maybe 2 full time staff so rent should be ok with the wages of maybe 800pw for the staff. The thing in Canada is see how much the same store sales improve. That was 4.6% not great but ok for a new company in a competitive market. Also they had the 4 stores for 1 year before deciding that they could make a go. I think the next results will show at least breakeven in Canada and expect group profit to be up a by 10 to 15%.

Depending on your investing style that may not be enough and you may spot better opportunities elsewhere. Still as a solid performer to form the basis of a long term investment portfolio I reckon it is a winner.

[bambi]

Don't expect Canada to break even soon. In the annual report it states 12 stores are needed for them to break even.
Still I think this is a great company taking a nice slow and steady approach. I don't think they'll ever grow as fast as some other companies but you know they aren't going to stuff up and go under either.

Bambi
Disc: Hold MHI

[KJ]

I don't think that the latest 3 mth figures are a good indicator of of how MHI is performing.The time frame is too short.

If you look at the FY figures to 30/6/04:

Sales
Aussi-$1.80m per store
NZ -$1.88m per store
Can -$1.23m per store

Canadian sales increased by 166%-it does not seem too hard for sales to reach the same level as NZ and Aussi.They expect that they need 12 stores to break even with 4 more stores opening this yr.

Is NZ important?

NZ is important to MHI-NZ EBIT as a % of revenue is 12.7%-considerably better than AUSSI at 10.9%.
As a result NZ ebit $11.0m(46 stores)-Aussi ebit $18.2m(93 stores)
I see that they are considering opening another 2 stores in NZ.

IMO the strategy of spreading into CAN is sound while continuing their expansion in Aussi where another 9 new stores are planned.

[k1w1]

KJ, Bambi and Nevl,

I am not saying that MHI is a poor company. My point is a really narrow one.

In Canada there are now 6 stores, 4 more are planned. As pointed out they need 12 to break even. So in the next year at least profit growth will not come from Canada.

In New Zealand their room for expansion and growth is limited. Effectively they are in a mature market. So in the next year growth in sales and hence profits will not come from New Zealand.

It is Australia that MHI is looking for growth in sales and profits. It will grow its sales by opening new stores there. Nevl that is how you get 9% growth. If you compare same store to same store the MHI growth is only 3 %.

It seems from comparisons with ANC that MHI is right in their strategy. ANC have also identified Australia as the place where its market share and profits have grown and as a place to expand with new stores and renovations of existing stores.

MHI has growth already priced into its SP.

Now which one of the above statements am I wrong about ?

[KJ]

Kiwi-you seem to be saying that expanding into Can was not a good idea and sales are not going well.

You state that the sales from the 2 new stores in Canada were $4500 per week.This is assuming that these 2 stores were trading for the full 3 mths when in their annual report it was expected that these stores would open in October.I think that you will find that the 2 stores were only trading for a few weeks during the quarter.

I think just looking at a 3 mth period is going to mislead.It would seem that CAN sales are going well-$1.23m per store last yr compared with $1.80m in Aussi.On this basis (after a 2 yr trial)MHI are happy
that CAN will be a success and are now increasing stores.The same formula that they used successfully in Aussi.

I agree that NZ is a mature market and hence their move into Aussi some yrs ago.
MHI deserves to have a growth premium built into its shareprice-most growth coys have.

[k1w1]

[quote]Originally posted by KJ

Kiwi-you seem to be saying that expanding into Can was not a good idea and sales are not going well.

I am not saying it is not a good idea. Nor that sales are not going well. I am saying that in the next year or two MHI is not going to get any significant addition to its sales revenue or profit from Canada. This is simply because MHI quite prudently are expanding slowly and cautiously. Even if sales per store are as good as Aussie they just arent going to have enough stores to do more than break even.

We agree that NZ is not going to provide the growth and that Australia will. So my point is that in the next year every dollar spent in Australia will generate better returns than the same dollar spent in NZ or Canada. As ANC is spending more dollars in Aust to open more new stores, and has more existing stores there than MHI do , it should do better than MHI in terms of growth in sales and profit in the next year.

Yet market perception is that ANC is not a growth stock and MHI is priced as though it is. Hence my reference to Buffett that short term the market is a voting machine but long term it is a weighing machine.

[James K]

quote:Originally posted by k1w1

KJ, Bambi and Nevl,
Now which one of the above statements am I wrong about ?

Kiwi, I disagree with 3 of your statements.

1. Canada.
You said "In Canada there are now 6 stores, 4 more are planned. As pointed out they need 12 to break even. So in the next year at least profit growth will not come from Canada."

Please note that Canada lost NZ$1.4 million in FY2004, that was a $0.4m improvement on the prior year when it lost NZ$1.8m. As they approach breakeven (approx 12 stores) Canadian losses will continue to decline. Reducing the size of the Canadian losses will, by itself, produce year-on-year improvement in MHI group's profits (even if it keeps making losses).

2. "In New Zealand their room for expansion and growth is limited. Effectively they are in a mature market. So in the next year growth in sales and hence profits will not come from New Zealand."

I agree store growth opportunities are limited in NZ. But they have said they see potential to open 2 new stores p.a. in NZ. With a current 46NZ stores, that implies approx 4% sales growth.

But there is potential for NZ profit growth. At the FY 2004 announcement they said "Included in the NZ costs are provisions of $705,000 before tax relating tothe downsizing of the Whangarei support office from 30 September 2004, whichhas previously been announced." The non-recurrence of this cost, plus the assumed efficiencies from integrating the Brisbane/Whangarei back office operations should generate a substantial benefit to NZ earnings in FY2005 and thereafter.

3. "It is Australia that MHI is looking for growth in sales and profits. It will grow its sales by opening new stores there. Nevl that is how you get 9% growth. If you compare same store to same store the MHI growth is only 3 %."

Note that in constant exchange rates, Aust same stores sales increases were 9% (it's the effect of the stronger NZ$ that reduces Aust LFLs to 3%). In A$, total Aust sales grew 18.3% (13.1% in NZ$ terms). That's excellent growth IMHO. In Canada, same stores sales increased 7% in C$ terms. That's pretty good on the back of (from memory) 45% Canadian same-store-sales increase in FY2004.

If you're interested have a good read of Michael Hill's Chairman's letter also from the FY2004 report. Paraphrasing, it says he expects the MHI brand to be as big in Canada as it is in Australia in years to come. The MHI share price has run hard recently, but I still believe MHI will be as good to me over the next decade as it has over the last decade.