Michael Hill profits slide 22pc on falling margins

Sir Michael Hill at the opening of the revamped Whangarei store.

Michael Hill International, the jewellery chain that bears the name of its founder, posted a 22 per cent drop in annual profit as its profit margin declined and it paid a settlement to the Australian Tax Office.

The Brisbane-based retailer said profit fell to A$25 million, or 6.43 cents a share, in the 12 months ended June 30, from A$32.1 million, or 8.24 cents, a year earlier. The earnings include a A$5.993 million payment to settle a dispute with Australian tax officials over the transfer of intellectual property to an Australian unit in 2008.

Michael Hill, which operates 278 Michael Hill stores and six Emma & Roe stores, increased its annual sales 9.9 per cent to A$483.9 million. However its profit margin declined with earnings before interest and tax as a percentage of sales falling to 8.7 per cent from 9.1 per cent the year earlier. The company kept its annual dividend unchanged at 6.5 Australian cents per share as its two largest units struggled to gain traction and it plans for future expansion.

"The decision to maintain dividends at the same level as 2012-13 reflects the flat trading conditions in our two most profitable markets, Australia and New Zealand," chairman Michael Hill said in the statement. "It also factors in the company's ambitions for growth in the coming years for both Michael Hill and Emma & Roe brands."

Shares in Michael Hill were unchanged at $1.30, and have declined 6.5 per cent so far this year.

The company said its cash flow and debt were impacted by an increase in inventory from its North American bridal trial and the opening of new stores, as well as payment of the Australian tax settlement and funds paid into a tax pool in New Zealand. Net operating cash flow fell 65 per cent to A$14.7 million while net debt increased 173 per cent to $47.9 million. The equity ratio in the group's balance sheet slipped to 53.3 per cent from 59.4 per cent.

In Australia, earnings before interest and tax rose 10.6 per cent to A$46.7 million as sales increased 4.4 per cent to A$302 million. The Ebit margin rose to 15.5 per cent from 14.6 per cent. Michael Hill plans to open five new jewellery stores in Australia this year, taking the total in that country to 169, as well as opening three new Emma & Roe charm jewellery stores.

Read Michael Hill's latest financial results presentation here:

In New Zealand, Ebit fell 0.3 per cent to $22.1 million as sales slipped 1.5 per cent to $109.7 million. The Ebit margin rose to 20.1 per cent from 19.9 per cent. The company expects to keep Michael Hill store numbers at 52 in New Zealand this year and open one Emma & Roe store.

In Canada, Ebit jumped 239 per cent to C$3.8 million as sales rose 30 per cent to C$69 million. The Ebit margin increased to 5.5 per cent from 2.1 per cent. It plans to open 10 new stores in Canada this year, taking the total to 64, while maintaining strong Ebit growth.

In the US, the Ebit loss shrank 29 per cent to US$1.7 million from US$2.4 million as sales fell 2.6 per cent to US$10 million. The Ebit margin narrowed to a loss of 16.8 per cent from 23 per cent. It expects to open one store in the US this year, taking the total to nine and bring all the existing eight stores to a positive cash position.

Michael Hill remains in dispute with New Zealand tax authorities regarding its financing arrangements between New Zealand and Australia through 2009 to 2013 when it claimed tax deductions of $31 million. It took a A$2.3 million interest expense in the latest year to mitigate the impact of potential interest costs that could be claimed by the Inland Revenue Department during the period.

The company will pay a final dividend of 4 Australian cents a share on Oct. 3.