Michael Hill: The Turnaround Is Real, but the Multiple Already Prices a 10% Margin

Michael Hill International (ASX: MHJ) just finished its biggest year on record: record group revenue of A$655.7 million, up 4.1% in constant currency and 1.9% in Australian dollars. The market's reply was polite but restrained. The shares, which had peaked near 46.5 cents in March, ticked up to about A$0.38 in the sessions after the results came out at the end of August.

That gap between the headline and the share price is where the real story lives. Here is the record year in full. Comparable EBIT — the company's adjusted operating profit — rose 57% to A$24 million, and statutory net profit came in at A$10 million versus A$2.1 million a year earlier. On A$655.7 million of sales, that is a net margin of roughly 1.5%. Bigger still: this "record" year earned its profit almost entirely in one shopping season. The July–December half, which carries Christmas, delivered A$22.3 million of net income; the January–June half ran an operating loss of A$6.9 million, narrower than the year before. Subtract one from the other and the second half lost roughly A$12 million after tax. A business that posts a record year while losing money in six of its twelve months is in the early pages of a turnaround, not at a happy ending.

What has genuinely improved is worth separating from the profit headline, because the improvement is the measurable kind. Same-store sales rose 5.2% in constant currency, with Canada up 7%, Australia 4.8% and New Zealand 3.6%. Gross margin held at 60.5% despite elevated gold and silver prices, while the cost of doing business fell 70 basis points to 57.1% of revenue. Inventory productivity improved 13%, net debt fell to A$5.5 million from A$41.9 million, and the board restored a final dividend of 2 cents a share after paying nothing last year. The Brilliance loyalty program has 3.3 million members whose gross profit rose 14%, and customized pieces now account for more than 15% of Michael Hill-brand sales. Online is 8.7% of revenue.

Context explains why this is year zero rather than year five. The business lost chief executive Daniel Bracken, who died suddenly in February 2025, and its founder, Sir Michael Hill, who died that July. Retail veteran Jonathan Waecker joined as CEO in August 2025; he had previously been chief customer officer at New Zealand's Warehouse Group, and he acted quickly: the portfolio went from five brands to two (Michael Hill and the value-focused Bevilles), with the younger Medley and TenSevenSeven concepts closed and written off for A$6.1 million. Growth is meant to come from the existing network of 281 stores, six fewer than a year earlier — this is a same-store productivity story, not an expansion story.

Valuation is where the stock gets decided, because at this price the market is not mainly paying for what the company earned. At around A$0.38, Michael Hill is worth roughly A$150 million — about 0.25x sales and just under book value. On the A$10 million of reported profit, that is roughly 15x earnings, which is not cheap by jewelry-retail standards. Signet Jewelers, the large U.S.-listed chain behind Kay, Zales and Jared, trades around 11x trailing earnings and 0.47x sales. The revealing split: Michael Hill looks cheaper than Signet on revenue (0.25x versus 0.47x) but more expensive on the profit it currently produces. That combination is the market pricing a bridge — management's stated medium-term target of an EBIT margin of at least 10%, against the 3.7% it managed this year. Reaching the target roughly triples operating profit at steady sales. The two forces management itself flags as the risks to that bridge — elevated precious-metal prices pressuring gross margin and heavy discounting in Australia and New Zealand — are not things it controls quarter to quarter.

The proof schedule makes the thesis testable rather than vague. Early fiscal 2027 is already on the board: same-store sales rose 4.4% in constant currency over the first eight weeks, though the mix matters — Canada grew 9.8% in local currency while Australia, the biggest market, managed 1.7%. Management guides fiscal 2027 gross margin flat to slightly higher and the cost ratio flat to slightly lower, so next year's expected improvement is the same operating discipline, not a step change. The decisive checkpoint is the first-half result around February, because that is where essentially all of the year's profit is made; that is the report to hold against gross margin of 60.5% and a cost ratio of 57.1%. Management is also stepping up spending — capex and software costs rise toward A$25 million this year, partly for AI-driven inventory planning — which only strengthens the case if it lands in margin rather than in prettier stores.

A note on the dividend, because "restored" means less than it sounds. A 2-cent payout is about 5% of the share price, but it is a first step back, not a dependable income stream: two years ago the company was paying roughly five cents a share, and this year's payment comes despite a money-losing second half.

None of this makes Michael Hill a bad business. The operating evidence — same-store growth in every market, margin and cost progress, a clean balance sheet, a leader acting decisively — is as good a turnaround card as jewelry retail offers right now. But a good business and a good stock are different questions. At A$0.38 the multiple already grants partial credit for a margin triple the company has not delivered, and U.S. investors carry the practical friction of an ASX/NZX listing priced in Australian dollars. The fair-minded reading is a turnaround worth watching with a receipt in hand — a first-half FY27 report that keeps gross margin at 60.5% or better while the second-half loss keeps narrowing — not a stock to buy on the belief that the hardest part is already done.