Michael Hill's first-half profit plunge is a one-off blow, research analyst says

Michael Hill posted a 66 per cent drop in first-half profit to A$8.7 million. Picture / Brett Phibbs

Michael Hill International's 66 per cent profit plunge in its first-half earnings is a one-off blow on the back of plans to exit the US, says a research analyst.

"The reported number looks pretty ugly, but when you back out the A$19 million of one-off costs, the profit was probably down about 17 per cent," said Mohandeep Singh, senior research analyst for Craigs Investment Partners.

Michael Hill posted a 66 per cent drop in first-half profit, mainly reflecting A$19.8m ($21.1m) of provisions to reposition its Emma & Roe chain and to recognise costs of exiting the US market.

Total profit for the retailer dropped to A$8.7m in the six months ended December 31, from A$25.8m a year earlier.

US revenue fell 15 per cent to US$6m ($8.2m) for a loss of US$5.6m on an earnings before interest and tax (ebit) basis, including a provision for impairment and leases of US$3.5m.

Singh said the first-half result would not have come as "much of a surprise" to the market as the retailer two weeks ago announced plans to exit the US market and reposition the Emma & Roe brand.

Earnings for Michael Hill New Zealand were down close to 5 per cent for the first-half, put down to higher marketing costs, he said. It recorded a 4.2 per cent gain in sales to about $70m while ebit fell 4.6 per cent to $15.8m.

In its biggest market of Australia, the Brisbane-based company's revenue rose 1.8 per cent to A$185m although ebit fell 3.2 per cent to A$32.6m.

The company said in Australia "challenging November trading period and increased marketing costs impacted bottom line results".

"The disappointing thing for the Australian business is that you can understand that they are investing more into the marketing side but that didn't really translate into top line growth so first-half growth was flat in Australia," Singh said.

"The New Zealand performance is a little bit disappointing, too."

Despite a mixed first-half result, Singh said there were positives, including the strong performance of the Michael Hill brand in Canada.

"The positives that came from it were, at group level, that the margins improved a little bit, and especially in Australia.

"The other positives are the Canada business which is building some pretty good earnings growth, up 18 per cent in the first-half."

In an NZX statement, Michael Hill chief executive Phil Taylor said Canada continued to deliver exceptional growth for the company.

Challenging November trading period and increased marketing costs impacted bottom line results.

"The company is actively seeking further opportunities to expand the business [in Canada] and capture additional market share. This includes the opening of seven new stores in the first-half, with current plans to expand store numbers to 105 in the next two to three years," Taylor said.

He said he was pleased with the progress of its "omnichannel" strategy, which seeks to develop online sales alongside bricks and mortar, with 73 per cent growth achieved in e-commerce sales during the first half.

"This gives us confidence that we are taking the right steps towards delivering a fully integrated omnichannel experience for our customers."

US revenue fell 15 per cent to US$6m for a loss of US$5.6m on an ebit basis, including a provision for impairment and onerous leases of US$3.5m.

Emma & Roe achieved a 20 per cent gain in sales to A$10.5m but recognised an A$15.2m charge for impairments and onerous leases, resulting in an A$19.6m ebit loss.

The company opened 14 Michael Hill stores in the first half and same-store sales edged up 0.3 per cent. It has a total 347 stores, including 30 in the Emma & Roe chain.

Michael Hill's share price has declined 11 per cent this year.

- additional reporting by BusinessDesk.