Earnings call transcript: Michael Hill posts record revenue in H2 2026 turnaround

Michael Hill’s FY2026 turnaround accelerated: record group revenue rose to AUD 655.7m (+4.1% constant currency) and comparable EBIT jumped 57% to AUD 24m, lifting the comparable EBIT margin to 3.7% (+130bps). Profitability improved alongside a sharp balance-sheet de-risking, with net debt falling to AUD 5.5m from AUD 41.9m and inventory down AUD 9.4m to AUD 189.7m. The board restored the dividend (final AUD 0.02/share, partially franked), and shares were up 2.04% to $0.35; management guided FY2027 gross margin flat to slightly higher and cost of doing business flat to slightly lower, while planned capex/SaaS rises to ~AUD 25m from AUD 19.7m.

Analysis

The key market mechanism is operating leverage, not top-line novelty. In a low-margin, store-based jewelry model, modest comp growth plus stable gross margin can compound quickly into EBIT acceleration, especially when inventory turns improve and net debt is essentially gone. That shifts the equity from balance-sheet risk to execution optionality; the winners are the operators that can keep promotional intensity in check and rotate stock faster, while weaker regional jewelers and any competitor leaning on discounting will feel the squeeze first.

The next 1-3 months are the real test because the business is highly seasonal and management is effectively pre-announcing that holiday trading matters more than the current print. If precious metal costs stay elevated or Australian/NZ promotions intensify, today’s margin stability could prove temporary; that would hit valuation hard because the market is already paying for a better margin path. Over 6-18 months, the structural bull case depends on store refits, AI-led forecasting, and personalized product mix converting into durable inventory productivity—not just one good half.

The contrarian miss is that the turnaround is now self-funding: a near-clean balance sheet plus lower working capital intensity means incremental cash can be recycled into growth rather than debt service. But this is still a show-me story; without sustained same-store sales above low-single digits and flat-to-up gross margin into the next trading update, the rerating likely stalls. The move is probably not overdone yet, but it is also not a blank check; the ceiling is limited until management proves the new base rate is real.

Key Decisions for Investors

• Long MHJ.AX on pullbacks over the next 1-3 months; the asymmetry is decent because balance-sheet risk is largely removed and any continuation of comp/margin improvement can rerate the stock.
• Use a tight stop on MHJ.AX: cut if the next trading update shows same-store sales slipping below low-single digits or gross margin moving below the 'flat to slightly higher' path.
• Do not short the name here; the near-zero net debt makes downside less about solvency and more about execution, which is harder to time before the holiday period.
• If you want a relative-value expression, pair long MHJ.AX against a more mature jewelry/retail proxy only if you can source a cleaner short; otherwise stay with the single-name long and avoid forcing a basket trade.
• Set an alert for the holiday trading window: if Australia weakens while Canada decelerates from current momentum, treat that as the falsifier for the turnaround thesis and de-risk quickly.