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Why this retail share was smashed on Monday

The Australian share market may have tumbled sharply lower again on Monday, but that decline is nothing compared to the one being made by the Michael Hill International Ltd (ASX: MHJ) share price.

At lunch the jewellery retailer’s shares are down a massive 24% to 69 cents.

Why are Michael Hill’s shares being smashed today?

Long after the market closed on Friday and most investors were heading home for the weekend, Michael Hill decided to release its first quarter update.

As you might have guessed by the timing and the share price reaction today, it was not a good update.

According to the release, in the September quarter Michael Hill saw its global sales fall 8.8% on the prior corresponding period to $122.9 million. Sizeable declines were seen across its Australian, New Zealand, and Canadian stores, leading to same store sales falling 11% during the period.

Management has accepted the blame for the poor performance. It admitted that it underestimated the marketing and promotional activities required to support its strategic shift away from a reliance on discount based pricing.

But it wasn’t all bad. One positive during the quarter was its online sales. Management advised that online revenues were not impacted by its marketing misstep and grew by 84.9% during the quarter.

New CEO Phil Taylor remains confident in its strategy. He stated that:

“We are confident that our strategy to improve gross margin as we reduce the level of discounting and price based events, is the right strategy and will ultimately result in a brand and product that are more valued by our customers. While the transition is proving more challenging than expected we remain committed to the strategy and have taken many learnings from the first quarter which we are confident will drive performance in the critical December quarter.”

Should you buy the dip?

Even after factoring in this disastrous start to the year, I feel its shares look to be great value at under 8x earnings.

However, my preference remains rival Lovisa Holdings Ltd (ASX: LOV) which I like for its ambitious long-term expansion plans.

In addition to Lovisa, retailers such as Adairs Ltd (ASX: ADH) and Super Retail Group Ltd (ASX: SUL) could be worth a look.

And here is a retail share with a growing dividend that I think is in the buy zone today.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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