Earlier today, Michael Hill International Ltd (ASX: MHJ) announced that the company has suspended the operations of its stores in Australia and New Zealand. In afternoon trade, Michael Hill shares are down 20% to trade at 22 cents.
Here's why the company has shut its stores and what it could mean for other ASX retail shares.
What did Michael Hill announce?
The jeweller has decided to shut its stores immediately as a public health measure to reduce the spread of COVID-19. In the company's update to the market, Michael Hill elaborated that social distancing measures imposed in Australia are not compatible with the daily operations of its stores.
Michael Hill also noted that the company will be looking to reduce its costs whilst also ensuring there are enough roles to support the business. The company assured that employees being stood down will have access to either leave entitlements or government support.
The announcement follows Michael Hill's Canadian operations which ceased operations on the 20 March 2020 for an indefinite period.
How has Michael Hill performed?
Earlier this year, Michael Hill released a strong half-year report which saw the jeweller deliver a 4.4% increase in operating group revenue of NZ$329.5 million. Despite the competitive retail environment, Michael Hill was able to produce 6.9% growth in underlying earnings before interest and tax of NZ$31.6 million. Michael Hill also reported a 19.6% increase in net profit after tax of NZ$21.4 million.
The half-year report also saw Michael Hill declare an unfranked dividend of 1.5 cents per share, with the ex-dividend date on March 12, 2020. However, following today's announcement, dividend payments will be delayed by 6 months.
What is the outlook for retailers?
The social measures promoted by governments to combat the COVID-19 pandemic will see a sharp decline in retail trade, forcing many discretionary retailers to follow Michael Hill and shut their stores. Despite physical stores closing operations, Michael Hill will continue its online and e-commerce operations.
The renewed focus on online sales has been seen recently, with many retailers reporting a surge in e-commerce sales. Retailers like Nick Scali Limited (ASX: NCK) and Baby Bunting Group Ltd (ASX: BBN) have had to withdraw their full-year guidance, however, both companies cited stronger online sales momentum.
Foolish takeaway
Michael Hill will shut up to 300 stores indefinitely, which will put pressure on the company's 2,500 employees. In my opinion, more discretionary retailers will follow the likes of Michael Hill and close their doors in the near future.
Although the outlook for the discretionary retail sector may look dreary, investors can still find value if they look for certain characteristics. Such opportunities will include companies that cater to consumer staples and those with a strong and established online presence.
