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

Good morning, everyone, and welcome to Michael Hill's Full Year 2022 Results Call. [Operator Instructions] I would now like to hand over to Daniel Bracken for his presentation.

Good morning, and thank you for joining Michael Hill International's FY '22 Full Year Results Update. I'm Daniel Bracken, CEO, and I'm here today with Andrew Lowe, our CFO. Today, we will be taking you through a review of our 2022 results, an update on our first 8 weeks of trade of FY '23 and providing you with a strategy update before ending with a Q&A session. But before the presentation, I would like to share an example of our current bridal campaign taken from a short film we have recently released about history of our brand. [Presentation]

I'm absolutely delighted by our outstanding results, delivering record sales, gross margin and profit, especially considering the considerable disruptions we faced across Australia and New Zealand in the first half. For the year, our revenue was up 7%, gross profit up 10% and comparable EBIT up 11%. A key highlight was our ability to grow profit faster than sales, underpinned by continued gross margin expansion. All facets of the business came together to drive this result, but I would particularly like to highlight the evolution of our product, the outstanding performance from our stores, the continued acceleration of our digital channels and the key role that our loyalty program now plays in driving sales and margin growth. These results demonstrate that we have successfully shifted the emphasis from transformation to growth as we continue to elevate and modernize the Michael Hill brand. I'm particularly proud of our people and the culture that we continue to build at Michael Hill, a high-performance team across all levels with an energy and passion that underpins our growth agenda. This culture is best evidenced by the sensational performance from our Canadian team delivering huge lift in productivity, sales and margin. And now I will hand over to our CFO, Andrew Lowe to update you on our financial results.

Well, thank you, Daniel. Turning now to slide 5, FY '22 group results. The group reported comparable EBIT of $62.9 million for the year ended June 26, 2022 against $56.6 million, an increase of $6.3 million year-on-year, driven by a combination of strong sales growth and margin expansion. For the year, the company delivered same-store sales growth of 8% and gross margin increased by 200 basis points to 64.7% for the group. Since FY '19 Q3, the company has achieved 12 quarters of same-store sales growth. These continued strong results demonstrate the success of the company's strategic transformation and the increasing strength of the brand during more than 2 years of significant global disruption. During the year, the Michael Hill global store network suffered 10,020 lost store trading days against 10,447 days in the prior year due to a combination of government-mandated lockdowns and COVID impacting store teams. Despite these disruptions to trading conditions in the global store network, total revenue grew by 7% to $595.2 million as the company continues to elevate and modernize the brand and transform the customer journey. From a cost perspective, prior to the key Christmas trading period, the business opened its Canadian 3PL distribution center in Ontario, creating a cost efficient flow of inventory from vendors, improving speed of delivery to customers and ensuring reliable continuity of supply and optimal stock levels. Supporting the company's ongoing growth agenda, our strategic increase in ATV and elevated product offerings, the company made considered investments in core inventory, which saw year-end stock holdings of $181.5 million. The company's balance sheet has benefited from strong operating cash flows, delivering year-end cash position of $95.8 million and nil debt. During the year, the company successfully sold its in-house Canadian credit book, delivering cash proceeds of $14.2 million, while also launching a long-term partnership with Flexiti Financial, Inc. to provide a new enhanced consumer credit proposition. Taking into consideration the company's performance and strength of the balance sheet, the Board has decided to declare a final dividend of AUD 0.04 per share, unfranked, fully imputed with conduit foreign income. This takes total dividends for the year to $0.075 per share. During the year, the company opened one new store in Australia and closed 6 underperforming stores across the network, resulting in 280 stores at year-end. In terms of key performance insights, it is noted that both revenue and gross margin have lifted significantly following initial 2020 COVID disrupted trade. Even with approximately the same lost trading days in FY '21 and FY '22, comparably, it has lifted in FY '22 against FY '21 and is also well up on pre-COVID FY '19. As shown on the bottom left of the slide, pleasingly, the strong lift in both revenue and EBIT has been underpinned by increased store productivity, which is borne-out by the lifted average revenue per store. The company's digital business delivered another record year with sales of $42 million, now representing 7.1% of total sales. During the year, the company successfully launched click & collect in all 3 markets and rolled out ship from store across our global network, further enhancing the company's omnichannel ecosystem. The company's marketplace strategy has progressed in all its existing markets with activation in Australia on The Iconic and with Westfield Direct, in New Zealand also with The Iconic and in Canada with The Bay. Moving on now to our segment results on slide 7. FY '22 was another year of COVID disruption for our retail network with significant first half store closures in both Australia and New Zealand and the impacts of Omicron across all countries in the second half. Despite these disruptions, all markets delivered strong results. In Australia, same-store sales increased by 4.2%. However, significant temporary store closures and the closure of 4 underperforming stores led to a decline in retail segment revenue by 2.8% to $303.4 million for the year. This result is a testament to the resilience of the Australian team, new leadership and the company strategic initiatives. The government mandated store closures this year across Victoria, South Australia, Australian Capital Territory and New South Wales resulted in 7,551 lost store trading days versus 3,458 during the prior year. As well as the strong sales performance, the segment also delivered expanded gross margin for the year to 64.8%, the country's highest margin in the last 5 years. During the year, one store opened and 4 underperforming stores closed, resulting in 147 stores at year-end. In New Zealand, same-store sales increased by 8.9%, which was a particularly strong result. The temporary store closures through the year did see a decline in retail segment revenue of 1.6% to NZD 125.1 million for the year. This result was underpinned by strong retail metrics, omnichannel initiatives and the company's strategic agenda. The government mandated store closures, predominantly in the Auckland region, resulted in 2,241 lost store trading days versus 464 during the prior year. Gross margin for the year was 63.4%, a strong year-on-year performance and significant improvement in both FY '19 and FY '20. During the year, one store closed, resulting in 48 stores at year-end. For Canada, same-store sales increased by 11.3% and retail segment revenue increased an impressive 34.8% to CAD 159.7 million for the year. This is a record result for Canada, supported by a number of strategic initiatives, along with reinvigorated leadership, driving a significant lift in productivity and team engagement. There was minimal temporary store disruption during the year with only 228 lost store trading days compared to extensive closures of 6,525 days in FY '21. In addition to a record sales result, the segment also achieved a record gross margin for the year of 64.9%, underpinned by an absolute focus on retail fundamentals and productivity metrics. During the year, one underperforming store was closed, resulting in 85 stores at year-end. Quite clearly, the significant lost trading days, coupled with a reset of the cost base to normalized levels post-COVID across leasing, wages and marketing, impacted segment results for both Australia and New Zealand. Pleasingly, in response to the successful deployment of strategic initiatives and refresh retail leadership, Canadian productivity has lifted to Australia and New Zealand levels. I will now hand back to Daniel to provide an update on the first 8 weeks of trade in FY '23 and more importantly, an update on our strategy.

Thank you, Andrew, for your insights on the full year financial results. Moving on to slide 8, current trading update. Pleasingly, the first 8 weeks of FY '23 have delivered strong early performance with Group all store sales up 18.5% against FY '22. As this period in FY '22 was impacted by store closures in Australia, a more meaningful reflection of the FY '23 performance is that we have increased sales by 13.4% against the same period in FY '21, even with 9 less stores. In addition, gross margin has also remained strong in the first 8 weeks of trade. Given the trading conditions have now somewhat normalized, the company has decided to move to half yearly trading updates. This is consistent with market practice and is in line with the company's statutory requirements. As such, the next trading update will be at our AGM in late October. Much of the company's strong performance can be attributed to the strategic transformation and the elevation of the brand along with overarching emphasis on sales and margin growth. The strategic framework underpins the future growth of the business is customer-led and continually evolving, which is best demonstrated by the introduction of a new strategy pillar dedicated to sustainability. The strategy to elevate and modernize the Michael Hill brand underpins the overarching vision for the business, highly engaging and emotive marketing campaigns with an emphasis on product, quality and craft are leading the transition away from pricing promotion towards emotional long-term customer relationships. The success of this strategy is best evidenced by the continued expansion of average transaction value, up 15% over the last 3 years. Simultaneously, the Brilliance by Michael Hill loyalty program is proving to be a key lever for growth and customer engagement. The program has increased by more than 600,000 members in the year and provides the business with essential data to drive more frequent and more profitable customers. Pleasingly, 80% of our sales are now made by members of the Brilliance loyalty program. Both brand and loyalty are key to driving medium to long-term sustainable growth in both sales and margin for the group. Michael Hill's digital transformation continues to gather pace, delivering another record year in FY '22. Strong performances on the company's direct-to-consumer websites were driven by improved customer experience, higher traffic and increased conversion rates. Digital now represents over 7% of company sales and is our highest margin channel. The successful deployment of click and collect and ship from store now available in all stores globally, enhanced our omnichannel capabilities as the company continues its customer-led digital transformation journey. Bricks-and-mortar retail is at the core of the Michael Hill business, driving more than 90% of the company sales. Elevating the in-store experience across visual presentation and customer engagement have delivered considerable increases in gross margins, conversion rates and ATV. An unwavering focus on people and performance, operational excellence and effective labor management underpin our retail productivity, which has seen significant lifts in all markets. A new senior leadership structure is now firmly in place across all countries and delivering strong results. Additionally, the company has now ramped up its CapEx program across the store network to ensure stores are aligned to the elevated brand journey. Product evolution is at the center of our customer-led retail strategy and is critical to achieve sales and margin growth and maintaining our leading market position as the house of diamonds. Laboratory grown diamonds are gaining momentum in the business, delivering increased quality and higher margins while providing customers with a certified, sustainable and climate neutral choice. Elevated quality and craftsmanship are essential to our aspirational brand journey, and this will be delivered through the evolution of our supply chain and further investments in the artisanal capabilities of our Australian manufacturing facility. During the year, the business commenced a phased deployment of a new comprehensive merchandise planning platform to improve buying processes, margin optimization, product ranging and inventory management. And the company's ongoing focus on product mix continues to be a key enabler for sustained margin expansion and product newness is critical to achieving higher inventory turns and frequency of purchase. As the company pivots from transformation to growth, the opportunity to stretch the brand into new territories and services is a key focus. I was delighted that our new pure-play brand Medley, delivered more than $1 million of sales in its first full year and has a very bright future in the group. Through the course of the year, Michael Hill has executed its marketplace strategy across its 3 core segments, partnering with The Iconic in Australia and New Zealand, The Bay in Canada and Westfield Direct in Australia. Additionally, the company is now focused on extending its Canadian website to the currently untapped Quebec market and in the near future, launching international shipping to all countries from our websites. The business is also well underway in developing a new digital ecosystem with a number of new revenue-driving service offerings across bespoke design, sustainability and financial services. Michael Hill is elevating its strategic focus on ESG, launching our 2030 vision centered around people, product and planet. Underpinned with detailed goals and milestones, the Michael Hill 2030 ESG vision aims to transform how we source and manufacture our products, how we impact our planet and how we improve people's lives across our entire value chain. We are committed to bringing change in how we operate in order to drive forward sustainable practices that benefit our customers, our planet and future generations and aim to move our business and influence the broader jewelry industry towards a more sustainable, innovative and responsible future. A clear ESG strategy aligns perfectly to our aspirational brand journey and assists in elevating our brand and acquiring new customer segments. We see this strategy as an integral part of our future to acquire a new generation of consumer while genuinely improving how we operate our business. And finally, taking into consideration the company's performance and strength of the balance sheet, the Board has decided to declare a final dividend of $0.04 per share, delivering a record total dividend for the year of $0.075 per share. This represents 67% of adjusted annual NPAT and is at the high-end of the company's dividend policy range of 50% to 75%. Subject to the company's ongoing trading performance and growth plans, the Board's intention is for dividends to remain at the higher end of the target range. Furthermore, the company has announced the launch of an on-market share buyback of up to 5% of issued capital, funded from existing cash reserves, and this is expected to commence in the coming weeks. And in addition to the above, the company still retains sufficient balance sheet strength and cash reserves for deployment into new earnings accretive organic growth initiatives and to also pursue acquisition opportunities in the jewelry sector, which meet our strict, strategic and investment criteria. 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, Daniel. We currently have no one waiting to ask a question. So we might just give it a minute for everyone to join the question queue. [Operator Instructions]

David, I think we've got most of the people on the call lined up for one-on-ones over the coming days. So we'll give it another 30 seconds if anyone wants to pop a question in. Otherwise, I think -- well, we'll wait 30 seconds before I say I think.

Well, Daniel, we do have a couple of callers joining now. Just one moment. Daniel, we do have a question here. Daniel Sine, please go ahead after the beep. Daniel, can you hear us?

Daniel Bracken can hear you.

We have Daniel Sine online. Daniel's question is, what is the strategic target for gross margin percentage and how resilient do you think that this current gross margin profile should be in downturn in retail conditions?

Well, it's a great question, Daniel. Andrew and I have that question regularly asked to us. And I think we have shown our ability through a very challenging trading environment during COVID to continue our journey to elevate the brand and as such, elevate our margin along the way. First 8 weeks of trade in this financial year, some would argue could be more challenging environment that we're now operating certainly one or 2 of the markets. And thus far, we are able to confidently say, margin is holding up. We did a lot of work over the last 2 or 3 years to lift margin and I think the underlying message around the levers we've previously talked about, which there's 4 or 5 key ones is that those levers are sustainable levers to maintaining a healthy margin. And just as a reminder, for those that haven't heard that commentary, our digital business delivers a higher margin than our store business because of a different mix of product and we generally get a couple of hundred basis points higher margin in digital. And as that business continues to take share of the overall business, that helps the overall company margin. Our loyalty program, as demonstrated in the slide pack in the presentation today is absolutely a key enabler, driving a more profitable customer, a more frequent and more profitable customer. I should say we've done a lot of work on margin mix, which has also helped underpin the margin growth and we've done a lot of work in our store network, retail fundamentals and how we manage our incentive schemes to drive the right behaviors in our stores. All of those initiatives are not one trick ponies, they're all designed for long-term sustainable margins. And therefore, we remain broadly optimistic that the margins we've achieved are sustainable. What we're probably not saying right now is that we can get further margin expansion. We lifted margin a couple of hundred basis points over each over the last couple of years. And I think that our view would be to maintain margin in the current environment would be a good outcome, and that's certainly our goal, and we remain broadly confident on that. And thank you for that question, Daniel.

Daniel, our next question comes from Andrew Steele.

The first one from me is just on the strategy update. I just want to clarify that within this, you're not anticipating any fundamental change to approach and that this is more, I guess, an evolution of your -- or next steps in your current strategy?

Absolutely, that's the case. We do not have any deviations planned, Andrew, from the strategy we've talked about. I hope it all felt very familiar to you. 6 of the 7 pillars are the same 6 pillars of our strategy that have been in play now for probably 2.5 years. And as we continue to elevate the brand, which has been in the journey for the last 2.5 years, the results have come along with that journey. So no major deviation, absolutely laser-sharped focus on the strategy that we've previously shared and shared again today.

The next one from me is just on the buyback. Could you indicate if there's a, I guess, a constraint in terms of the total quantum in dollars that you intend to spend? And is there an upper limit as to any sort of where the share price might be before you would stop the buyback?