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A great ASX small-cap share for your watchlist

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My investing strategy allows me to keep a percentage of my shares in higher risk investments. Often, this means looking for ASX small-cap or mid-cap or shares that will compound well over time.  I tend to do a lot of analysis as I do not like to lose money. But then, who does?

While the share prices of many large-cap companies have already returned to their pre-pandemic levels, there are still a number of ASX small-cap shares that remain attractively priced. Here are my thoughts on one of them.

ASX small-cap retail

Discretionary retail companies have been among the hardest hit by the lockdown. Unlike the travel sector, however, there are already green shoots of growth emerging for discretionary retail spending.

Michael Hill International Ltd (ASX: MHJ) is a business familiar to most people. It operates in the $4 billion jewellery market in Australia. The company currently has around 301 stores globally and, in addition to Australia, has operations across New Zealand and Canada. 

In January, Citi rated the company as a buy and placed a target price of 80 cents per share on the Aussie jeweller. Its shares are currently trading at less than half this. In February, the company reported increases in same store sales for all stores across Australia and New Zealand. It also showed a willingness to close underperforming stores by closing down nine during H1FY20. 

Total revenue for the half was up by 4.4% versus the previous corresponding period. However, the company’s gross margin fell due to foreign exchange rates and gold prices.

Pandemic trading

Sales for Michael Hill collapsed in March when the lockdowns began with the company reporting an 11.9% reduction in sales across the group. At the same time, the YTD revenue across the company managed to increase by 0.6% due to strong performance prior to March. 

The ASX small cap saw its online sales increase dramatically during lockdowns, largely due to new digital sales technologies the company introduced in response to the pandemic. In fact, digital sales for Michael Hill during the week of late April and early May broke a new record for the company, outperforming a prior record digital sales week from Christmas 2019. This has resulted in a more focused effort by the company to increase online sales and customer acquisition moving forward. 

Michael Hill also remains focused on reducing its costs of doing business with a very lean goal of eliminating all non-essential expenditure.

The jewellery market

There is no doubt the jewellery sector is highly competitive across all three of Michael Hill’s geographic markets. In addition, fast fashion companies like Lovisa Holdings Ltd (ASX: LOV) are often competing for similar customers. As we move into a recessionary period, consumers are likely to have less discretionary income. Furthermore, Michael Hill may see its costs rise as the pandemic impacts its supply chain.

Foolish takeaway

Like many other companies that have adapted to the changing conditions as a result of the pandemic, Michael Hill has benefitted from an increase in digital sales. I believe continued focus in this area will counter the impacts of a general move away from mall shopping. Whilst I do not think this company will provide explosive, short-term growth, I do think this ASX small-cap share will continue to compound at a reasonable rate over the next 3 – 5 years.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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