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

Thank you all for standing by, and welcome to the Michael Hill Analyst Briefing to the end of year results webcast and conference call. [Operator Instructions] I'd now like to hand the conference over to your first speaker, Mr. Daniel Bracken, CEO. Thank you, Daniel. Please go ahead.

Good morning, and thank you for joining us for the Michael Hill International Limited FY '21 Full Year Results Call. It is a pleasure to be speaking to you today. I am here this morning with Chief Financial Officer, Andrew Lowe. Together, as set out on Slide 3, we will be taking you through a review of the results and providing you with a strategy update. And as usual, we will end with a Q&A session. Turning to Slide 4. The Board and management are delighted to deliver record financial results. FY '21 has been an outstanding year with all metrics up, a credit to both the execution of our strategic initiatives and the dedication and resilience of our team. These outcomes were delivered while successfully navigating significant disruption from the global pandemic. Half of our Canadian stores were closed for many months. Victorian stores were closed for more than 3 months, and multiple short, sharp temporary closures were experienced across our global network. Focused management of our key Indian supply chain meant that the pandemic impacts in India did not significantly disrupt inventory flow and other sourcing regions across Europe and China were relatively unimpacted. And of course, throughout the year, always at the forefront of our minds was the prioritizing of the ongoing health, safety and well-being of our team members and our customers. From a results perspective, the business has delivered both strong sales growth and margin expansion in all 3 markets, further validating the transformation agenda is on track. We continue to focus on enhancing our digital business, which pleasingly exceeded expectations in its outperformance of FY '20, increasing by 53% and delivering yet another year of record digital sales. Our reinvigorated retail leadership demonstrated their commitment to further embedding our retail fundamentals, which saw increases in all key metrics: ATV, IPS and conversion were all up. Our Brilliance by Michael Hill Loyalty program went from strength to strength now with over 800,000 members. The team also worked tirelessly to roll out additional omnichannel offerings, including ship from store, click and reserve and virtual selling. I'll elaborate further on our progress during the strategy update later in the presentation. It should be noted our transformation agenda touches every single aspect of our business, and I couldn't be happier with how the team is working together to deliver common goals as we further strengthen and elevate the Michael Hill brand. This outstanding result is the culmination of over 2 years of hard work building and executing our strategy, and this is best evidenced by 8 quarters of comp sales growth together with sustained margin expansion. I will now pass to Andrew to provide more detail on the full year results. After that, I will return to deliver an update on our key strategic initiatives, along with an outlook commentary.

Thank you, Daniel. Turning now to Slide 5, FY '21 group results. As mentioned by Daniel, given the disruptive trading conditions, we're particularly proud of our full year results. Today, we announced a record statutory net profit after tax of $45.3 million for the year. Statutory earnings before interest and tax of $72.4 million represents a significant EBIT increase of $58.3 million on prior year, largely driven by improved sales and margin, delivering a $50.7 million lift in gross profit to $34.9 million. As a result of government-mandated lockdowns, the Michael Hill global store network suffered over 10,000 lost store trading days. Please refer to the slide in the Appendix to this presentation for more information on the lost store trading days throughout the year in each market. Despite the impact of significant lost store trading days due to government-mandated lockdowns and some permanent store closures reducing the global store network, the company still saw revenue growth in all markets, with total revenue up by 13.1% to $556.5 million as the company continues to elevate and modernize the brand and transform the customer journey. The company has strengthened its balance sheet with a year-end net cash position of $72.4 million, prior year's $0.5 million and 0 debt. During the year, the company also entered into a new financing facility jointly funded by ANZ and HSBC. This new $70 million facility is currently undrawn with a term to February 2024. Furthermore, the company has strategically reviewed its in-house Canadian Credit program to de-risk the balance sheet. The sale of the credit book and partnering with a new credit provider for our Canadian business is nearing conclusion. Through focused management by our merchandise team, the company delivered inventory levels to the targeted range with a holding of $171.2 million at year-end, a reduction of $7.5 million compared to last year. We continue our unwavering focus on costs right across the business from logistics and repairs to credit arrangements, labor and leasing. This focus has assisted not just to earnings but also cash flow and working capital. The company continued to actively manage its global store network and landlord relationships. During the year, the company opened 1 new store in Canada and closed 6 underperforming stores, resulting in 285 stores at year-end. Turning to capital management. The Board has previously stated its intention to restore dividend payments to historic levels as the pandemic recovery becomes more certain. After taking into consideration sales and margin performance, the strength of the balance sheet and while also recognizing the risk of ongoing trading disruption, the Board has decided to declare a final dividend of AUD 0.03 per share, unfranked, fully imputed with conduit foreign income. This represents total dividends for the year of AUD 0.045 per share and lays the foundation for a sustainable dividend profile going forward, subject to the impacts of ongoing trading disruptions. Turning now to the next slide on key performance results. Following the FY '20 global store network shutdown, the company delivered significant same-store sales growth across all 4 quarters of FY '21. For the year, the group delivered same-store sales growth of plus 8.6%, with Australia up by 13%, New Zealand by 7.1% and Canada by 6.8%. Gross margin increased by 210 basis points to 62.7% for the group. These results demonstrate the growth initiatives underpinning the 7 strategic pillars are now firmly embedded in the company. These initiatives have created a sustainable platform for sales growth and margin expansion with the success of our Loyalty program, continued penetration of our online business, acceleration of retail fundamentals and product evolution. Setting aside the accounting impacts of the leasing standard, the one-off impact of the Canadian credit book held for sale and government grants received across all 3 markets, the group delivered a comparable EBIT result of $56.6 million for the year, well up on the prior year comparable EBIT loss of $5.2 million. The company's online business exceeded expectations and significantly outperformed FY '20, resulting in another year of record digital sales of $34.8 million. Digital sales now represent 6.3% of total sales. Website traffic increased by 35.3% against prior year, with an increased volume of customers continuing to utilize our enhanced online platform. The company continues to prioritize product evolution and create uniquely Michael Hill jewelry. Branded collections now represent 42.1% of total sales for the year against 37.3% for the prior year. Moving on now to our segment results on Slide 7. In Australia, all store revenue increased by 17.1% to $312.3 million. This result is a credit to the segment as it saw 3,458 lost store trading days due to various government mandated store closures across the country. Gross margin for the year was 62.2%, a significant improvement on both FY '19 and FY '20. At year-end, of the 150 Australian stores, 30 New South Wales and 2 Northern Territory stores were temporarily closed. Currently, 46 New South Wales, 34 Victoria and 4 ACT stores are temporarily closed due to government-mandated lockdowns. In New Zealand, all store revenue increased by 19.1% to New Zealand $127.1 million. This result represents significant outperformance against FY '17, '18 and '19. It should also be noted that during the year, 16 Auckland stores were required to temporarily close on 3 separate occasions, resulting in 464 lost store trading days. Gross margin for the year was 62.0%, resulting in the strongest margin in the last 5 years. At year-end, all 49 stores were trading. Currently, those 49 New Zealand stores are temporarily closed due to government-mandated lockdowns. In Canada, all store revenue increased by 6.9% to CAD 118.4 million. This segment was heavily impacted by temporary store closures in Eastern Canada with 6,525 lost store trading days for the year. By the start of July 2021, all 86 stores are open and have remained trading since with our focus now returning to the productivity opportunity in the market. Gross margin for the year was 61.3%, a significant improvement on both FY '19 and FY '20. Our margin-related strategies are gaining traction in all markets as the business saw gross margin improvement in the range of 180 basis points to 350 basis points across all 3 segments. I will now hand back to Daniel to provide an update on the key strategic initiatives and then outlook commentary.

Thank you, Andrew, for your insights on the full year financial results. Now turning to Slide 8. As a reminder, our 7 strategic pillars, which are underpinned by initiatives that continue to deliver a transformation agenda focused on sales growth and margin expansion, driving efficiencies within the business, elevating the Michael Hill brand and enabling a true omnichannel customer experience. Turning to Slide 9. The elevation of the Michael Hill brand is definitely gaining traction as it continues to evolve into a modern, differentiated omnichannel jewelry brand, transitioning our messaging from discount-led promotions to quality and aspirational brand-led campaigns is key to enticing a broader customer base while generating higher ATV and margin growth. Our messaging will continue to highlight our reinvigorated Australian Manufacturing division with an emphasis on craftsmanship and local artisans. Our customer-facing messaging will be further enhanced by data and insights from our customer segmentation and personalization programs. Moving on to Slide 10. Digital is at the forefront of our transformation with an emphasis on customer experience, product offering and fulfillment. Following another year of exceptional growth, investment in our highest profit margin channel continues to focus on incremental sales, higher conversion rates and increased transaction value. The digital business achieved record sales of $35 million and is now at 6.3% of total sales. Also during the year, we saw the launch of our pure-play demi-fine brand, Medley. Our early foray into third-party digital channels has provided the confidence to develop an integrated marketplace solution that will be rolled out in the first half of FY '22. And looking further afield, we have identified opportunities to explore more digital channels and markets. Our digital business is well placed with continual growth underpinned by omnichannel offerings coupled with an elevated focus on conversion rate optimization. On to Slide 11. With a portfolio of 285 stores across 3 countries, bricks-and-mortar retail is at the core of the Michael Hill business. Our retail fundamental strategy is focused on driving increased sales higher margins, lower costs and a modern differentiated customer experience, all underpinned by our new retail incentive scheme. In addition, roster optimization, visual excellence and increased training continue to be areas of focus for our retail leadership team. The key metrics of ATV, IPS and conversion all increased in all markets in FY '21 and will continue to be key areas of focus. Now turning to Slide 12. The rollouts of our new ERP platform early in FY '21 was the enabler for omnichannel at Michael Hill. Across the year, we successfully tested and trialed virtual selling, click and reserve, and ship from store. Pleasingly, ship from store has delivered many cost and customer experience benefits, while click and reserve has contributed sizable incremental sales and in-store upselling opportunities. Having already seen the benefits for ATV in trialing new customer channels, these initiatives, together with digital appointments will now be progressively rolled out across our global network. Further connecting our physical and digital businesses, we will be launching click and collect for Christmas 2021 and delivering incremental sales and enhanced customer experience. Moving to Slide 13. While the Brilliance by Michael Hill Loyalty program is only 18 months old, it has already grown to over 800,000 members. Acquisition has been our priority. And while this will continue to be a key focus, the business is now turning its attention to the opportunities of activation and retention. Our early insights already provide confidence that the program is resonating with our customers, delivering increased frequency, larger baskets and higher margins. Predictive analytics and increased personalization are being enabled by an investment in data analytics capability and artificial intelligence to deliver further growth in the business. On to Slide 14. Product evolution is the foundation of a customer-led retail strategy, and it is critical to continued sales and margin growth. The business will maintain its focus on regular product newness and uniquely Michael Hill branded product as a key differentiator in the categories and markets in which we operate. The business now delivers regular product newness to excite our customers and increase sales with significantly lower margin -- sorry, with significantly lower inventory and higher margins. Our Australian Manufacturing division has been reinvigorated, delivering new bridal collections and increased speed to market, underpinned by a focus on craftsmanship, quality and innovation while still achieving improved margins. Our entry into the laboratory-grown diamond category continues to gain momentum and deliver significant margin growth. And the recently relaunched the Michael Hill designer bridal collection, our most premium bridal range, is already showing fantastic results. As we place greater emphasis on the sustainability of our products, we look forward to providing further targeted messaging and insights in the coming months. And for our last strategic pillar, turning to Slide 15. The company's significantly improved net cash and targeted inventory position at year-end demonstrate that a cost-conscious culture exists across every aspect of the company. We continue to optimize the global supply chain, improve the global store network and enhance our credit propositions globally, including the upcoming divestment of our in-house Canadian credit book. Additionally, the new Canadian 3PL facility will be operational for peak Christmas trade, servicing both online customers and stores, optimizing inventory, reducing logistics costs and enhancing overall Canadian productivity and customer experience. And now moving to outlook on Slide 16. While the company experienced significant lost sales in the first 7 weeks of FY '22 due to lockdowns in Australia, strong early performance for us in Canada and New Zealand contributed to plus 17% same-store sales for the period and plus 20% against FY '20 against FY '20. These early results further demonstrate the progress and the traction of the brand. However, the increased disruptions in Australia and now New Zealand are significant and concerning in the short term. The company already lost over 2,700 store trading days during the first 7 weeks, resulting in minus 2% total store sales for the period with an estimated impact on earnings of approximately $5 million compared to management expectations prior to the lockdowns. Of course, we continue to prioritize the health and safety of our team members and customers during these challenging times. On a positive note, to support our strategic road map and to further advance our transformation, I'm delighted to announce the appointment of Keith Louie as our first ever Chief Digital Officer. Keith brings a wealth of retail experience, e-commerce leadership and digital strategy to the Michael Hill business. His appointment alongside the recent arrivals of Amy Sznicer, Chief Retail Officer; and Jo Feeney, Chief Marketing Officer adds significant expertise to our already high-caliber leadership team. Despite the current trading disruptions, we entered FY '22 with a strong financial position, providing a stable platform to continue our transformation journey, elevate the brand and further explore new growth opportunities across all channels and markets. That brings us to the end of our presentation. I would once again like to thank you for your continued interest in Michael Hill, and we are now happy to take any questions.

[Operator Instructions] Our first question comes from Guy Hooper at Forsyth Barr.

Congratulations on a strong result. Maybe I could just start with the outlook commentary. Can you clarify just what's included in that $5 million impact? What's stated into it at the lost days to date or kind of lost days already announced?

Guy, that is effectively actualized lost sales against what we anticipated achieving through those first 7 weeks. So effectively, it's the 2,500 lost trading days and the impact of that has on profitability.

I guess you've obviously gone through a few lockdowns out today. Has there been consistent pent-up spending when you've exited? Or has that started to weigh?

I think after doing this for 15 months, I think we've got examples, absolutely examples of that and probably more often than not, that's the case. But we definitely do. Don't we, Andrew, have examples where regions or stores reopen and there's a slow rebuild. That certainly happened in some of our earlier lockdowns in Canada last year. But I think coming out of the longer, more sustained lockdowns, so Victoria last year and then coming out of the Ontario lockdowns in early July this year, we definitely saw what you're talking to, the pent-up demand and energy from our customers to reengage with our brand.

Just on the, I guess, the digital third-party play mentioned in the release. What does the rollout look like? And I guess, what sort of ambitions be ahead for it? And there's also, I guess, to mention of new markets as well. Is that for the third-party digital offering? Or are you talking about taking Michael Hill's kind of online brand into new markets?

I think we've talked about this before, Guy. That was specifically without calling it out, but that was specifically referenced to our early wholesale trial with an Australian/New Zealand-based fashion marketplace called the Iconic. We're moving away from a wholesale relationship, and we're in trial -- test and trial with them for a fully integrated marketplace model. So effectively, we populate their website with our product from our offer. So it's a much broader offer that gets populated to their customers. And that demand then flows back through effectively our online trading platform and then for us to fulfill to the customers. So we're pretty excited about that. We had positive good early trials and insights from the wholesale relationship, and we're looking forward to rolling that as an integrated model. I think the reference to further opportunities is kind of both of what you said. So there are obviously digital marketplaces in every country around the world. But just focusing on the countries we already operate in, there are clear leaders in both of those markets outside of Australia, so Canada and New Zealand. And we're absolutely interested in exploring those. So once we've built 1 marketplace integration, it will be a lot easier for us to then roll that out to other third-party marketplaces. But equally, as we get through the first half of the year and post-Christmas, we do have aspirations for looking at our digital offer outside of the 3 markets that we currently operate in. All right. Guy, I think we'll catch up later today anyway. So we'll look forward to that. Thanks.

Our next question comes from Sam Teeger at Citi.

Of the $15 million in grants you've received in FY '21, can you talk about the mix between Canada, Australia and New Zealand? And based on what you're seeing right now, how much do you think you might be receiving in FY '22?

We have -- I don't think we break that down publicly, Sam. I think it's fair to say we got slightly more in Australia than the other 2 markets. But as the Canadian lockdowns continued, the Canadian contribution to that number definitely increased through the second half. I think we are clear that we are getting support from the New Zealand government for this current lockdown. I think that's about to kick in because we're about to kick into the seventh day of that lockdown, which was a key determiner for that. Canada, we haven't gotten any lockdowns in FY '22 thus far. So that's, I guess, at this point, a moot point. And Australia, of course, is no longer a JobKeeper program. It's the Disaster Payment Plan, which is from the government directly to our team members, which we think is a lot cleaner. We obviously are delighted when the government announced that, that was a tax-free payment and that flows directly to our team members in Australia, and we don't get involved in that, which is much simpler and more straightforward.

All right, cool. And when you talk about entering new markets via the online channel, just be interested in your thoughts in terms of how much you're prepared to invest ahead of the curve in the marketing and customer acquisition.

Well, I think the reason I said second half for that, Sam, outside of our existing markets as we need to do the legwork and decide exactly where we want to place those bets. We have certainly in all 3 markets today got a strong -- sorry, not today, historically had a strong tourist trade with our brand, particularly Asian consumers. So our brand does resonate with Asian consumers. That's not to say that's where we'll go first. But that's certainly probably one of the priority areas for us to form a view on. At this point though, probably the next foray will be how do we expand our initial integrated marketplace model into our other existing markets. And then after that, start to consider markets outside of our 3 core, again, more than likely with the digital marketplace play in advance of our own direct-to-consumer play because we think that's probably the best way to avoid significant incremental costs in building brand awareness, use of the third-party marketplace player to help drive that brand awareness.

Okay, cool. And how should we think about new stores and store closures in each of the 3 markets within FY '22?

Sam, it's Andrew here. I think looking at each of the markets separately, Canada at 86, we're comfortable with that store profile. So we'd anticipate hovering in that mid- to low 80s. Maybe there's a couple that close. New Zealand, we're very comfortable with the 49. Each of those stores is profit-making. There's some new opportunities that we're exploring, but that may be a relocation or may just be an incremental 1 or 2, but we're pretty happy that we've well and truly saturated that market there with our premium sort of brand level. In Australia, at 150, there continue to be stores that we're monitoring. Might we see 3 to 5 closures of Australian stores at a border line? Perhaps. Obviously, the disruptions at the moment are not the right time to be making those decisions, and we would ordinarily be trading through Christmas in any stores. It's the most profitable portion of the year.

I'd just build on that, Sam, that the whole business has lifted significantly across the last couple of years. Yes, online has been a key plank of that growth, but it is still a small part of our business. So our stores are lifting in all markets. So stores that maybe a year ago or 18 months ago might have been seen as marginal have effectively lifted and in most cases, pulled themselves out of that. And I think Andrew is right. We're probably at towards the end of that now in Australia. We're comfortable with 145 to 150, and as Andrew says. In fact, in both Canada and New Zealand, there are probably 3 or 4 other new store opportunities that we're considering. But now is not the time for that.

Got it. yes, that's clear. And when you talked about the $5 million impact to date in this financial year, to what extent are you starting to discount to drive sales?

Well, it's funny you should ask that. Our answer to that is the complete opposite. We are delivering higher margin in Q1 this year than we were in Q1 last year. We are sticking to our strategy, focused on elevating our brand and having successes in continuing to increase margins. So we are absolutely not driving promotions to drive those comp sales that we just talked about. Those comp sales are really the continued elevation of our brand connection with the customer, our Loyalty program and customer segmentation strategy is really kicking in. So we are not using promotions to drive those same-store sales growth. If anything, our margins are ahead of the same time last year.

That's good. And just on the margins, with this new market strategy you're pursuing, it's clear you're going to be making more money from it. But potentially, there's a margin headwind that you've got to pay the Iconic in other marketplaces. Do we see that in the gross margin or the EBIT margin level? And can you roughly talk about how much you're going to give away?

We've done some pretty lengthy modeling on this, as you'd expect, and we really don't anticipate it diluting our digital margin. That's certainly our view at this point. We're going to manage the product mix accordingly. And as you know, we've got a very, very wide variety of margins across different product categories at Michael Hill. And so by using product mix and offer, we can effectively mitigate any loss of margin by picking up that incremental channel. So we're pretty confident it won't have an impact on digital. If it does, it will be a minor, minor impact, but we're not anticipating that at this point.

Right. And will we see that at the gross or EBIT margin?

Gross.

Our next question comes from Paige Hennessy at ACC.