Michael Hill takes on the Windy City

The move by Michael Hill International [MHI.NZ] to buy 17 stores in the United States for about US$5 million ($7 million) from the Chapter 11 bankruptcy of Whitehall Jewelers Holdings-based in the Chicago area, with 2 stores in St Louis-has me a little worried.

I'm worried because this type of expansion activity veers slightly away from the tried and tested way that the company entered Australia then Canada.

The company set up a handful of stores when they entered their two overseas markets just to test the water.

Australia was started that way and now has 136 very profitable stores and Canada started with a couple and now has 22 virtually break-even stores 3 years later.

Why didn't Michael Hill test the Chicago area with 1 or two stores like they have previously?

It does make sound financial sense, it has worked before.

Micheal Hill, CEO, says the opportunity to buy the distressed sites was a "sound launching pad" to expand the Michael Hill brand across the big US market and secure some "prime sites", very true.

The NZ$7 million purchase price Hill says was largely for the inventory that the stores carried and that was bought at 80c in the dollar.

A good buy there.

Now I'm not an expert in retailing and Jewelry, as Michael Hill clearly is, but what is wrong with "testing the market" as he calls the US move, with a couple of stores, as he has done in the past?

In my opinion you don't test a market with 17 stores, it is too much too soon.

The US Jewelry market is different from Canada, it is more fragmented in demand from state to state and city to city even, and much more competitive. Chicago also has a large black population, with a much less than average yearly income, so the going will be tough, even if Oprah Winfrey does her bling shopping there.

As a shareholder, I would have much preferred little baby steps and less money spent upfront until a few stores were trading for 12 months or so and then make a decision to expand or retreat from there.

There will be more money spent on store refits, staff training etc so the total cost of this exercise will probably exceed NZ$10 million.

This news comes on the back of a great profit announcement this week.

The company reported a record tax paid profit of $25.232m for the twelve months ended 30 June 2008 compared to $21.017m for the previous corresponding period. This was a 20.1% increase in profit on top of a 8% rise in revenue to $376.664 million.

There were 22 additional stores added in the year to bring total store numbers to 210 for the entire group.

A final dividend of 2.0 cents per share with full imputation credits

The dividend will be paid on Monday, 13th October 2008 with the record date being Friday, 3rd October 2008.



Michael Hill shares have moved up strongly this week on the profit result and by almost 4.5% today on the US acquisition news.


Disclosure I own Michael Hill International shares in the Share Investor Portfolio.


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