Michael Hill plunge ‘not as bad as it looks’

Retailer’s results blamed on closure of its US stores

Analysts say Michael Hill’s 86 per cent annual profit plunge is not as bad as it looks, with profit only falling 21 per cent if the costs of exiting the US market are taken out.

For the year to June 30, the Brisbane-based company posted a net profit of A$4.6 million ($5m), down from A$32.6m the year earlier after it wound up its US stores and closed down the Emma & Roe chain.

Those one-off costs, including the writedown and disposal of assets and lease settlement costs, were A$25.5m. Stripping out those costs, earnings before income and tax fell 17 per cent to A$40.1m.

Michael Hill chief executive Phil Taylor said the year was a period of repositioning for the group. “While the cost of exiting these businesses had a material one-off impact on the financial result, Michael Hill is a stronger and more resilient business today with a clear strategy for longterm growth,” he said.

As of June 30, all US stores and 24 out of 30 Emma and Roe stores were closed. The closure programme for the final six Emma & Roe stores is still in progress.

Michael Hill said operating revenue from continuing operations Net profit Revenue Dividend Herald graphic

lifted 4.4 per cent to A$575.5m while group profit from continuing operations fell 21 per cent to A$34.8m.

Craigs Investment Partners’ senior research analyst Mohandeep Singh said the 86 per cent drop in earnings was not as bad as the headline suggested: “It’s only a 21 per cent fall once you strip out the business segments they are shutting down“.

But weak Australian sales were a concern, he said, with total sales up just one per cent, despite a four per cent increase in new stores.

“Earnings were also down on the back of higher costs,” Singh said. “The Australian economy hasn’t been firing on all cylinders. Household debt levels are fairly high and if the recent weak property price trends continue over there (and to some degree in NZ), then that will hit consumer sentiment, [where] consumers generally cut back on discretionary items like jewellery.”

Revenue in the New Zealand market rose 2.7 per cent to $125.2m, with a 2.3 per cent lift in same store sales.

“[New Zealand is] a fairly mature market for Michael Hill so that’s not a bad result. Earnings were flat despite the 2.7 per cent revenue increase, reflecting higher costs which is not out of line with what we have heard from other companies which have reported results recently,” Singh said.

ShareClarity managing director Daniel Kieser said the drop in fullyear earnings was expected given the retailer’s exit from the US market.

“The large one-off associated with the two discontinued operations is what drove the headline net profit down,” Kieser said.

“It’s always difficult to know if the costs they say were attached to its two discontinued operations are fair and accurate, and that’s because it’s hard to unpick shared costs, like accounting, that are used across the business. The important thing will be next year’s result.”

Michael Hill shares last traded at $1.08 and have fallen 18 per cent in 12 months.