Michael Hill International Limited (MHJ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Michael Hill Analyst Briefing for 1H 2021 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Daniel Bracken. Thank you. Please go ahead.

Good morning, and thank you for joining us for the Michael Hill International Limited FY '21 First Half Results Call. It is a pleasure to be speaking to you today. I'm here this morning with Chief Financial Officer, Andrew Lowe. And together, as set out on Slide 3, we will be taking you through a review of the results and providing you with an update on our key strategies and initiatives. As usual, we will end the session with a Q&A. Turning to Slide 4. We entered the new financial year with the backdrop of our global store shutdown at the end of the prior year. As we reopened, the business deployed best-in-class health and safety protocols to provide a safe retail environment for both our team members and our customers. Pleasingly, the business performance responded almost immediately to the transformation agenda with strong sales and margin results for the first quarter. Off the back of strong early results, a full restart of our international supply chain was initiated. Investments in Christmas inventory was prioritized, along with the development of a successful and relevant Christmas brand campaign. Key strategies that were paused for the COVID-19 lockdown period were reinvigorated: Our loyalty program, Brilliance by Michael Hill, which has successfully grown by over 200% to an impressive 0.5 million members; deployment of our new retail incentive scheme designed to motivate our team members to achieve desired key metrics while providing best-in-class customer experience; and a number of omnichannel initiatives to ensure the company becomes a truly channel-agnostic business, which meets the needs of our customer wherever and whenever they want to shop. I'm particularly pleased with our results given the volatile trading conditions experienced by our business: continuous store closures throughout the half, significant decline in foot traffic in all markets, not a single day of all stores open and the material impact of over 3,700 lost trading days. In spite of these obstacles, to deliver this significant performance improvement is truly outstanding. Our substantial lift in profits was due to the focus and the energy of our team and the transformational change agenda at Michael Hill. I'm very proud of our retail metrics: same-store sales up 6%; digital growth of over 100%; retail margins up by 200 basis points; costs down; inventory, way down; and an outstanding cash position at the close of the half. The digitization and elevation of our brand is clearly resonating with our customers as our key strategic initiatives across loyalty, retail fundamentals and product newness. Michael Hill is a business that has been focused on transformation. And while the global challenges have significantly impacted operations and continue to do so on a daily basis, the performance across all metrics proves we have built strong foundations for growth. Furthermore, the business has proven its brand is resilient and relevant as it continues the journey to become a modern, differentiated omnichannel jewelry brand. I will now pass to Andrew to provide more color on the first half results. After that, I will return to provide an update on key strategies for the business.

Thank you, Daniel. Turning now to Slide 5, FY '21 H1 group results. As mentioned by Daniel, given the disruptive operating trading conditions, we're particularly proud of our half year results. Today, we announced a net profit after tax of $39 million, up by 82% for the half year, with the statutory earnings before interest and tax of $58.9 million, up by 66% due to positive same-store sales, improved margin and our unwavering focus on costs. Total revenue only saw a drop of 2.9% to $319.9 million, even with the permanent closures of 15 underperforming stores compared to the prior year. And the impact of COVID-19 disrupted trading conditions, with 3,709 lost store trading days. At the end of the half, the company had 0 bank debt and a cash position of $90 million against prior year of $0.4 million, reflecting a deliberate focus on costs and strong working capital management with an inventory reduction in the order of $30 million. Since half year-end, cash has been deployed to meet Christmas inventory supply payment obligations, payment of the deferred dividend debt and recommencement of the wage remediation program. During the half, the business continued to optimize the merchandise offer, leading to a material reduction in inventory. Our strong and long-standing vendor relationships, together with our in-house Australian manufacturing facility, ensured reliable continuity of supply, delivering optimal stock levels through the peak Christmas trading period. After taking into consideration the company's comparable EBIT of $44.6 million for the half against prior year of $31.6 million, the encouraging sales performance from stores since half year-end and the strength of the balance sheet, the Board decided to declare an interim dividend of AUD 0.015 per share, which is flat against the prior year FY '20 H1 interim dividend. The declared FY '21 interim dividend is unfranked and fully imputed with conduit foreign income. The decision to hold the interim dividend flat against prior year reflects the risk of ongoing trading disruption and demonstrates the Board's intention to restore dividend payments to historic levels as the pandemic recovery becomes more certain. The company actively managed its global store network, landlord relationships and only permanently closed one underperforming store in Australia in the half, resulting in 289 stores at the end of the half. Turning to the next slide on key performance results. Despite the significant ongoing impacts of the global pandemic, the group experienced solid growth of 6.3% in same-store sales, with the Australian same-store sales up by 12%, New Zealand up by 2.8% and Canada up by 3.6%. This strong performance was achieved through an ongoing focus on strategic initiatives to modernize and transform the Michael Hill business. Group margin grew to 62.7% as the company balanced both margin and sales growth. Margin growth was underpinned by the increased penetration of online, the impact of the rapidly growing loyalty program, improved intake margin, product mix and our new retail incentive scheme. It should also be noted that this margin improvement has been delivered even with the introduction of new progressive monthly stock provisioning. Our digital sales increased by 102% for the half, and these sales now represent 5.8% of total sales. Our branded collection sales represented nearly 40% of total sales as we continue to develop this category. Moving on to our segment results on Slide 7. In Australia, same-store sales increased by 12% to $174.2 million. This performance is a credit to this segment as it also experienced 2,567 lost store trading days due to government-mandated store closures across Victoria, South Australia and New South Wales, along with 11 underperforming stores having been permanently closed when compared to the first half of the prior year. In New Zealand, same-store sales increased by 2.8% to $68.4 million, reaffirming the resilience of the brand in our core heritage market. It should be noted that during the period, 16 Auckland stores were required to temporarily close for nearly 3 weeks due to government-mandated COVID-19 restrictions. In Canada, same-store sales increased by 3.6% to $70.3 million, which is a remarkable result given the extent to which COVID-19 has impacted the country. Of the 86 stores, 21 stores gradually closed through November and December and a further 25 stores closed from Boxing Day, leaving only 40 of 86 stores trading at the end of the half, resulting in 838 lost store trading days. These temporarily closed stores have been progressively reopening this month, and we hope to have all stores trading in the next few weeks. And finally, our margin-related strategies are gaining traction in all markets as the business saw gross margin improvement in the range of 150 basis points to 330 basis points across all 3 segments. I will now hand back to Daniel to provide an update on the key initiatives.

Thank you, Andrew, for your commentary on the first half financial results. Now turning to Slide 9. During the half, the company demonstrated the benefits of the transformation agenda through the strength of its retail metrics. We continue to take a disciplined approach to maximizing growth opportunities while focusing on a true omnichannel customer experience. The company's strategies are centered around delivering both sales and margin and driving efficiencies across every aspect of the business. The elevation of the Michael Hill Brand is key to our success as we continue to evolve into a modern differentiated omnichannel jewelry brand. Implementing fully integrated brand and promotional campaigns consistent across every customer touch point is now embedded in the rhythm of the business, and this was most evident in the company's highly successful Christmas campaign. Our digital businesses delivered another strong performance, with online sales doubling for the half. Our focus has been on customer experience, content, navigation and providing a frictionless checkout. Our digital-first strategy now prioritizes traffic-driving initiatives, conversion rate optimization, new payment platforms and marketplace integration. The ongoing focus on retail fundamentals is at the center of our transformation agenda and is critical to driving increased sales, higher margins, lower costs and overall improvement in customer experience. The business will continue to focus on optimizing store productivity and efficiencies while elevating customer engagement as a key priority. Our omnichannel strategies continue to gather pace in the half and drive incremental sales with the implementation of click and reserve, the test and trial of ship from store and the launch of virtual selling. As a modern customer-led retailer, the company embraces a channel-agnostic strategy, and more digital and physical initiatives will be rolled out to meet the demands of our current and future customers. The Brilliance by Michael Hill loyalty program is fundamental to future growth aspirations, increasing to more than 480,000 members. The associated member pricing is delivering margin benefits to the business and higher customer engagement. As we now embark on the next stage of loyalty, the company will focus on initiatives to drive increased customer activation, resulting in sales and margin growth. Product evolution is at the core of a customer-led retail strategy and is critical to achieving sales and margin growth. Range and assortment rationalization has continued in the half, with a refreshed product newness calendar driving higher inventory turns. The business will maintain its focus on uniquely Michael Hill-branded collections, stronger vendor partnerships, all of which will be underpinned by a comprehensive merchandise planning platform in the coming year. The cost-conscious culture continues to deliver benefits across the organization. This embedded unwavering focus on costs is best evidenced by lower inventory levels and a very healthy cash position. Furthermore, the business has made significant progress towards optimizing the global supply chain, improving the global store network and leasing arrangements and streamlining the Canadian credit proposition. The business has entered the second half with clear strategic initiatives, proven retail execution and a robust financial position. The business continues to prioritize the health and safety of our team and customers as we continue to navigate an unpredictable retail landscape. That being said, I'm extremely encouraged by the strong start to the second half, with same-store sales for the group up 11% for the first 8 weeks. With 2 new executives joining the Michael Hill leadership team, the company is well placed to continue the transformation and drive the growth agenda. That brings us to the end of our presentation. I would like to thank you again for your continued interest in Michael Hill, and we are now happy to take any questions. Thank you. I think we're just waiting for a couple of questions to be prioritized, and we'll be with you shortly. Carina, I think we are in your hands to host the question. For those on the call, apologies, we seem to be having a slight delay with our host. We've been asked to wait a moment. [Technical Difficulty] Okay. Well, we're not getting any joy with our host. So hopefully, all of you can still hear me on the call. I think we're going to end the call at that point. For those that wanted to ask questions that didn't get a chance, if you haven't got a call lined up -- oh no, hang on. Hang on. I've just been told can we just hold. They may be resolving the technical difficulty. Okay. We don't look to have a resolution. So once again, thank you for continued interest in Michael Hill. If you want to ask a question and you don't have a call lined up with us already, please contact Anthea Noble at the details at the back of our release. So once again, thank you, and chat soon.