Michael Hill underlying earnings fall 14% as margins squeezed

Michael Hill experienced lower same store sales due to less agressive discounting and competition.

Michael Hill International reported a slide in underlying earnings as margins were squeezed in a competitive retail environment.

The Brisbane-based company, which also operates stores in New Zealand and Canada, said underlying earnings before interest and tax were A$34.6 million ($36.37m) versus A$40.1m in the prior year. Gross margin was 62 per cent, down from 63.7 per cent in the prior year.

"2019 was a transitional year for the company. Whilst we are disappointed with the financial result, we have finished the year with positive sales momentum and reduced inventory," chief executive Daniel Bracken said.

Its reported net profit was A$16.5m in the year to June 30 versus a restated A$1.6m profit in the prior year, which was impacted by employee wage remediation costs of A$4.5m, one-off aged inventory impairment of A$6 million and employee restructuring costs of A$2m as part of the firm's cost-cutting programme.

The prior year was restated for employee remediation after a review of the group's Australian retail employment contracts and rostering showed non-compliance with some requirements that resulted in the underpayment of some current and former employees. Other one-off costs, including the closure of the Emma & Roe business and the US operation, also impacted the prior year.

Group operating revenue was A$569.5m versus A$575.5m in the prior year and group same-store sales were A$524.7m, down 3.3 per cent on the year.

Michael Hill said lower same-store sales were due to the company's shift away from "aggressive discounting for the first four months of the year and a competitive retail environment."

The company said it would pay a dividend of 1.5 Australian cents a share, bringing the full-year payout to 4 Australian cents versus 5 Australian cents in the prior year. The final dividend would be paid on September 27.

The dual-listed shares last traded at 53 cents on the NZX and are down 18.5 per cent so far this year.

Like many retailers, Michael Hill is responding to the changing retail environment and said the continued investment and development of its e-commerce business resulted in record online revenue of A$16m for the full year, up 43.6 per cent on the prior year. Online now represents 2.8 per cent of total sales.

The company opened 10 new stores and closed 11 under-performing stores along with five Emma & Roe stores, leaving it with 306 stores at year-end.

Regarding its specific markets, Australian revenue declined by 3.7 per cent to A$313.6m, with a gross margin of 61.9 per cent versus 63.3 per cent in the prior year. Margins were compressed as the company moved to defend market share in challenging retail conditions, it said. It expects the retail environment to remain challenging in the current financial year but "we are focused on building momentum off the back of the last quarter of FY19," it said.

Eight stores closed during the period. There were 168 stores trading at 30 June, including one Emma & Roe store.

New Zealand sales fell by 4.1 per cent to NZ$120.1m and gross margin dipped to 60.8 per cent from 62 per cent. It expects the New Zealand business to benefit from operational improvement in the current financial year. There were 52 stores trading at June 30.

In Canada, revenue grew 1.8 percent to C$133.1m and gross margin declined to 60.6 per cent from 62.4 per cent. There were 86 stores trading at June 30.

Looking ahead, the firm said it will continue to focus on costs. The cost-out programme should deliver full-year benefits in FY20 of A$5m. Management has identified a further A$5m cost reduction programme that will be delivered across FY20 and FY21.

"Canada presents a significant opportunity from a productivity perspective," it noted. A plan to drive increased sales per square-metre there has been developed and will be implemented during the current financial year.

Overall, "whilst we expect market conditions to remain challenging, our focus will be on strengthening our customer proposition with new branded product and improved disciplines in buying, selling and marketing," said Bracken.