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This retailer could be the next Lovisa Holdings Ltd (ASX:LOV)

Photo: Lovisa Prospectus

The share price of Michael Hill International Ltd (ASX: MHJ) jumped despite a weaker market as brokers cast their verdict on the jeweller’s move to close all of its Emma & Roe stores.

The stock jumped 2.1% to 98 cents on Monday when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fell 0.2%.

The gain is particularly pleasing given that retail stocks like Harvey Norman Holdings Limited (ASX: HVN), JB Hi-Fi Limited (ASX: JBH) and Super Retail Group Ltd (ASX: SUL) have tumbled by more than 1%.

The positive sentiment towards Michael Hill has been helped by comments from Credit Suisse, which re-iterated its “outperform” recommendation on the stock.

The broker thinks it’s a good move for management to close its remaining Emma & Roe stores following a strategic review. Michael Hill initially intended to keep six of these underperforming stores.

“We welcome the closure of the remaining Emma & Roe stores. While six stores were largely immaterial to group earnings, we were concerned that this small portfolio could still act as a distraction away from the core Michael Hill business,” said Credit Suisse.

“To provide context, we were forecasting Emma & Roe to contribute less than 1% of group revenue in FY19. As such, we view the strategic prioritisation of the core business as sensible.”

However, the closure of these stores will cost the group an extra $3.1 million in one-off costs on top of the $11.8 million to $13.9 million that management had flagged to exit the US and the Emma & Roe chain.

But that’s a small incremental price to pay it if means management can rebase the business for the new financial year, and it isn’t only Credit Suisse that’s feeling upbeat about the retailer’s future.

Macquarie Group Ltd (ASX: MQG) is also reiterating its “outperform” call on the stock with a 12-month price target of $1.30 on top of the 5% plus dividend yield.

“MHJ offers compelling value at current levels. Without the distraction of the loss-making US and Emma & Roe businesses, MHJ has considerable scope to deliver on the growth potential in the core Michael Hill business if it can differentiate and excel in certain strategic competencies (e.g. omni channel, customer data and analytics, loyalty, and merchandise management),” said the broker.

However, not everyone is taken with the latest announcement from Michael Hill. Citigroup has downgraded the stock to “neutral” from “buy” as it believes the stock will struggle to outperform in the short term.

The broker is also not confident that management can generate medium-term earnings growth following the closure of all the Emma & Roe stores as it believes this brand was a key profit driver due to consumer’s preference for fashion jewellery compared to fine jewellery.

This consumer trend is one of the reasons why Lovisa Holdings Ltd (ASX: LOV) has performed to strongly with the stock surging by over 200% over the past year when the top 200 stock index is “only” 9% in the black.

Michael Hill is hoping to follow Lovisa’s share price path by following the latter’s business strategy. Shareholders will be crossing their fingers tightly.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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