Michael Hill first-half profit more than halves

Michael Hill International’s [NZX:MHJ] net profit after tax has dropped 66%, as its failed US experiment weighed on earnings, following its warning on February 8 that first-half earnings would more than halve.

The Brisbane-based company's net profit after tax for the six months to December 31 was $A8.7 million, down from $A40 million in the same period the year before.

Earnings before interest and tax (ebit) were down 62% to $A15.1 million from $A40 million the year before. This measure is calculated by excluding the pre-tax adjustment of $A19.8 million for onerous leases and provisions for impairment affecting the planned exit from the US market and the repositioning of the Emma & Roe brand.

Underlying earnings before interest and tax were $A34.9 million, 12.7% down on the $A40 million the year before, due to the deterioration in performance of the company’s US operations and Emma & Roe business, a challenging November trading period and increased marketing spend.

Operating revenues increased 4.5% to $A342.2 million while group same-store sales increased by 0.3% to $A316.8 million. E-commerce sales increased 73% to $A5.6 million.

The company’s net operating cash flow increased 166% to $A42.3 million while its net debt reduced 37% to $A23 million.

The board declared an interim dividend of 2.5Ac a share, in line with the first-half of 2017, unfranked and fully imputed.

Chief executive Phil Taylor says the company’s core Michael Hill businesses in Australia, New Zealand and Canada performed strongly during the first-quarter before experiencing a slowdown in the second quarter, particularly the November trading period, where sales fell short of expectations.

“This challenging November period, combined with a heavier investment in our marketing efforts, resulted in a flat ebit result from the combined three businesses.”

The company decided in January to exit the US and reposition Emma & Roe into a new market segment with a material reduction in stores.

Management is strengthening core businesses through focusing on stores productivity and significant growth opportunities presented by a repositioned Emma & Roe brand, further expansion of Michael Hill in Canada and enhancements to the group’s omnichannel strategy, Mr Taylor says.

“We are confident these strategic actions will deliver greater long-term value for shareholders and we expect the exit of the US and repositioning of Emma & Roe to be completed by the end of 2018.”

Ups and downs
The Canada business is its top performer – increasing revenues and ebit by 17.6% to $C73.3 million and $C10.4 million respectively – and the company is seeking opportunities to expand the business and capture additional market share.

This includes opening seven new stores in the first half, with current plans to expand store numbers to 105 in the next two to three years.

The Australian segment faced challenging retail conditions in the first half resulting in flat same-store sales. Total first-half revenues increased to $A185 million, up 1.6%, with the increase in gross profit margin to 63.5%.

But the challenging November trading period and increase in marketing costs meant first-half ebit of $A32.6 million, down from $A33.7 million in the previous corresponding period.

December trading in Australia was steady compared to the previous year, with trading in January and February (to date) slightly up, Mr Taylor says.

The New Zealand segment saw revenue growth of 4.2% to $NZ69.7 million for the first-half and same-store sales growth of 3.5%.

A decline in gross margin of 0.3% combined with an increase in payment plan costs resulted in ebit declining 4.6% to $NZ15.8 million for the half. A series of actions are attempting to correct the gross margin shortfall and bring payment plan costs back down to previous levels, Mr Taylor says.

US revenues declined 15.2% to $US6 million, with an ebit loss of $US5.6 million, including a $US3.5 million charge for onerous leases and impairment of assets.

The company continues to explore its options to exit, either through the successful sale of the business or through reaching agreements with the landlords of the nine stores.

While total Emma & Roe revenue grew 20% to $A10.5 million in the period due to an increase in stores, same-store sales growth declined 5.4%, with the business incurring an ebit loss of $A19.6 million, including a $A15.2 million impairment for onerous leases and impairment of assets.

Michael Hill shares have declined 21% in the past 12 months to $1.16.