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

Welcome to the Michael Hill International FY '23 Results Update. Following the formal presentation, there will be a Q&A session for investors and analysts. [Operator Instructions] And I'll now hand over to Daniel Bracken.

Good morning and thank you for joining Michael Hill International's FY '23 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 FY '23 results and FY '24 trading update and providing you with further insights on the group strategy before ending with a Q&A session. Let me start by saying it's been a very busy year at Michael Hill. While we finished FY '23 with comparable EBIT slightly below prior year due to a more challenging second half, we still delivered the second highest profit in the company's history. These results were underpinned by our clearly articulated strategic initiatives driven by the ability to elevate average transaction value supported by Michael Hill's [ aspirational brand journey ], leveraged by loyalty program, which now has over 2 million members, the evolution of our product, during the year we introduced some fantastic new ranges, as an example, the new Stardust Collection, which features heavily throughout this investor presentation, and most importantly, a relentless focus on retail fundamentals, driving continued improvement in productivity across all markets. In August 2022, the company executed a seamless relocation of its global headquarters to a new purpose-built premises housing the global support functions with reimagined artisanal jewelry workshop and state-of-the-art Australasian distribution center. And the office provides a contemporary dynamic and productive environment strategically aligned to Michael Hill's aspirational brand journey. And then in June 2023, the company completed the Bevilles acquisition, successfully transitioning all team members, stores and inventory to the group. As the Michael Hill brand elevates the Bevilles business gives us the opportunity to capture market share at the value end of the fine jewelry category, currently a 26-store business primed for a significant real estate expansion strategy. We also continue to focus on digital to modernize customer experience and reach new markets. The creation of a dual-language Canadian website allows us to attract a new French-speaking customer base in Quebec and across Canada. We also extended our market [Audio Gap] Zalora in both Singapore and Malaysia. And most importantly, the Michael Hill business is built on the foundations of a great culture and a fantastic team as evidenced by our most recent engagement survey results with our global engagement score above 80%. I'd like to both acknowledge and thank the team for their unwavering focus and energy throughout the year. I will now hand over to our CFO, Andrew Lowe to update you on our financial results.

Thank you, Daniel. Turning now to Slide 5, FY '23 group results. The group has reported record operating revenue of $630 million for the 2023 financial year, a 53-week retail financial year ended 2nd of July 2023, and 4 weeks of Bevilles trade are also reflected in the group and Australian segment results. Comparable earnings before interest and tax, EBIT, for the group was $58.9 million for the year, a decline of 6% year-on-year due to the higher cost of goods pressure, wage inflation in all 3 markets and elevated New Zealand security costs. While the company delivered record revenue for the year, this was driven by a particularly strong first half performance, followed by a more challenging second half as macroeconomic conditions deteriorated and consumer confidence declined. Notwithstanding the impact of sustained elevated raw material input costs seen with diamonds and gold and while slightly down on prior year, the company still delivered strong gross margins. This performance was underpinned by the aspirational brand strategy and the ability to elevate average transaction value even in a challenging retail environment. Inventory year-end holdings were $203.3 million, with Michael Hill on target and broadly in line with prior year. The lift in stock holdings was largely driven by the inventory acquired in the Bevilles transaction. During the year, the company benefited from strong operating cash flows, successfully acquired Bevilles, returned capital to shareholders through a buy-back and dividends and continued investment in both the core business and growth initiatives, which resulted in a year-end net cash position of $8.4 million. Furthermore, the company refinanced with a new 3-year $90 million bank facility on favorable terms, which will support future strategic growth initiatives. Michael Hill opened 3 new stores and closed 5 under-performing stores across the network during the year. With the inclusion of 26 acquired Bevilles stores, the store network totals 304 across all markets at the end of the year. In terms of key performance insights, it is noted that both revenue and gross margin have lifted significantly on pre-pandemic levels. Even though comparable EBIT was slightly down on the record FY '22, earnings were still well above pre-pandemic levels. As shown on the bottom of the slide, pleasingly, the strong lift in revenue has been underpinned by increased store productivity. This is borne out by the lift in both average revenue per store and average gross profit per store. Moving on now to our segment results. FY '23 delivered strong results in all markets despite cycling record results in FY '22 and facing more challenging economic conditions in the second half. In Australia, retail segment revenue increased by 9.1% to a record $331 million for the year. In addition to a record sales performance, the segment also delivered a strong gross margin for the year of 64%, slightly down on prior year, yet up 210 basis points on pre-pandemic levels. During the year, 2 stores opened and 3 underperforming stores closed, resulting in 172 stores at year-end, which includes 26 Bevilles stores. In New Zealand, retail segment revenue increased by 5.8% to NZD 132 million for the year. Gross margin for the year was 61.9%, largely attributable to the higher penetration of diamond sales in this market. This result was still 110 basis points above pre-pandemic levels. New Zealand earnings were directly and adversely impacted by [ $5 million ] investment required to be made for uplifted and ongoing security measures to protect our team, our customers and our stores. Additionally, impact of stores experienced softer sales in the period immediately following an incident. During the year, 2 underperforming stores closed, resulting in 46 stores at year-end. In Canada, retail segment revenue was CAD 159 million for the year, largely flat to prior year. Gross margin declined to 63.3% for the year as the segment cycled a record gross margin in FY '22. This result was still 270 basis points ahead of pre-pandemic levels. The overall performance of this segment is a credit to the strategic focus placed on Canada in recent years. With strong and refreshed leadership, brand awareness continues to increase and productivity metrics have lifted significantly. During the year, 1 store opened resulting in 86 Canadian stores at year-end. Taking into consideration the company's performance and strength of the balance sheet, the Board has decided to declare a final dividend of AUD 0.035 per share unfranked for Australian purposes with nil New Zealand imputation credits and with conduit foreign income. This delivers a total dividend for the year of AUD 0.075 per share, representing approximately 70% of adjusted annual NPAT and at the higher end of the company's Dividend Distribution Policy target 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. The company commenced its on-market share buy back on 19th of September 2022 and paused on 21 November '22. The company bought back 8.63 million shares, representing 2.2% of issued capital and a total cash cost of $10.2 million. The Directors have decided to discontinue the on-market share buyback. With regards to our Organic+ investments, the business has entered new markets digitally via Zalora, Singapore and Malaysia. New revenue streams have been delivered with the launch of the recycle program and the introduction of third-party jewelry insurance in Australia. These initiatives are in their infancy, but we expect them to become more meaningful over time. And of course, we delivered on our acquisition strategy with the purchase of Bevilles. I will now hand back to Daniel to provide an update on current trade, more importantly, an update on our group strategy.

Thank you, Andrew, for your insights on the full year financial results. There is no doubt that retail conditions have continued to be very challenging in all markets, with sales growth moderating as the group cycles record Q1 sales in the prior year. For the first 7 weeks of FY '24 group sales are up 1.2% on prior year, with August outperforming July. For the core Michael Hill brand, sales have continued the recent trend and are down on the record start to FY '23. However, when compared to both FY '21 and '22, group sales are up 14.6% and 17.2%, respectively and for the core Michael Hill brand, sales are up mid-single digits for both years. External transactional sales data continues to demonstrate that both the group and the Michael Hill brand continue to take market share. Now turning to strategy. Much of Michael Hill's strong performance can be attributed to the strategic transformation and elevation of the brand along with an overarching emphasis on growth. The strategic framework underpins that future growth of the business is customer-led and continually evolving. The strategy to elevate and modernize the Michael Hill brand underpins the overarching vision for the business. Highly engaging and emotive marketing campaigns focusing on key life moments with an emphasis on product quality and craft are leading the transition away from price and promotion towards emotional long-term customer relationships. The success of this strategy is best evidenced by the continued expansion of average transaction value, up 27% over the last 4 years. Product evolution is at the center of a customer-led retail strategy and is critical to achieving sales growth and supporting elevated margin. The laboratory grown diamond category continues to expand with higher sales growth and margins helping to offset high input costs for both mined diamonds and gold. During the course of the year, the business invested in new talent and capability across product, buying, sourcing and procurement as well as technology investments in merchandise planning. The Brilliance by Michael Hill loyalty program underpins customer engagement and has now grown to over 2 million members. The program provides the business with essential data to drive more frequent and more profitable customers. Members are more valuable across ATV by 70% gross profit, by 250 basis points and members transact more frequently. And pleasingly, more than 80% of our sales are now made by members of the Brilliance loyalty program. Bricks and mortar retail is at the core of the Michael Hill business driving more than 90% of sales. The retail fundamental strategy has delivered a 21% uplift in productivity per store over the last 4 years. During FY '23, the business invested in refreshing a significant portion of our store network as we elevate the in-store experience to align with the brand strategy. The retail team continues to focus on productivity as the key performance metric for stores in conjunction with a deliberate emphasis on lifting average transaction value. In August 2022, Michael Hill announced its ESG manifesto for 2030, centered around 3 key pillars of people, product and planet. An integral part of this strategy has been the launch of a circular jewelry ecosystem Re:new. During the year, the first phase was launched, Re:cycle, a digitally enabled gold recycling program that encourages customers to give new life to their old loves by recycling gold jewelry pieces in exchange for a Michael Hill e-gift card. The second phase Re:store will focus on jewelry repairs and the third phase, Re:imagine, a diamond upgrade program, both of which will be launched in FY '24. As the Michael Hill brand continues its aspirational brand journey to a more premium position, the acquisition of the Bevilles business in June provides a vehicle to take market share at the value end of the fine jewelry category. Additionally, in October, the business will launch its new bespoke brand, TenSevenSeven, focused on servicing the high end of the market with its unique personalized diamond ring proposition. With these additional brands, the Michael Hill Group now services all significant segments of the fine jewelry category and delivers multiple new growth pipelines. Turning specifically to the Bevilles brand, it will deliver both sales and profit growth through a significant real estate expansion strategy, coupled with digital growth and an optimized business model. For FY '24, 3 sites have been secured and another 3 sites are close to finalization for pre-Christmas opening with a further tranche of sites already identified for the second half. Leveraging group capabilities and partnerships, Bevilles will benefit from optimization of both supply chain and vendor relationships, delivering margin and cost benefits to the business. With system integration planned for the second half of FY '24, this will drive further opportunities in both productivity and efficiencies by leveraging a common technology platform. TenSevenSeven is a new startup brand designed to deliver a completely unique and elevated proposition, capturing an entirely new high-end customer. The brand will be brought to life through an immersive digital experience where customers will be invited to select from tens of thousands of unique diamonds paired with a ring design of their choice and ultimate handcrafting in our artisanal Australian workshop. In due course, this digital offering will be supported by the gradual rollout of a limited number of showrooms in key capital cities. And to give you a sense of this incredible new brand... [Technical Difficulty] I hope you're all now as excited as I am about the new TenSevenSeven brand. 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 questions.

[Operator Instructions] Our first question today comes from Kieran Carling from Craigs Investment Partners.

First one from me is just around your sales for the first 7 weeks of FY '24. No, I appreciate there's some commercial sensitivity here. But I guess, just given what we're seeing from competitors than recent results and sort of the economic uncertainty ahead, are you able to provide us with more of a true like-for-like with Bevilles stripped out?

[ Andrew ], we are -- well, Kieran, thanks for your question, and nice to hear your voice. [ Andrew ], we are very clear on where we're going to continue to report Australia as one total segment. So it does present an issue for us trying to break out any individual components of that term. I think we've alluded to Michael Hill's trend -- the Michael Hill brand's, specifically, trend of being slightly negative to last year as it was in the second half. And I think, unfortunately, that's all we're willing to give on this call.

Okay. Can you provide us a little bit of a read on product pricing and perhaps transaction volumes just through the second half and into the start of FY '24? And I guess also just touch on the promotional environment out there and what your competitors are doing in that space currently.

So I'll do the second part first. It is highly, highly promotional out there in all 3 countries, which doesn't for us to go toe to toe with, that doesn't really fit with our overarching brand strategy. So we're weaning ourselves off of aggressive promotions while the market is probably leaning itself back on to it. But we are continuing to see, as Andrew highlighted in his presentation, average transaction value growing even in this challenging or more challenging retail environment. Our strategy has always been to move away from lower-priced products in our offering and to focus on the key life moments in our customers' lives, which is lending itself to higher average transaction value. As we elevate the quality and the product, we're lifting price. And equally, we are walking away from lower-value transactional merchandise. So, yes, our transactions are lower than they were last year, but that's actually our strategy. Our strategy is to sell less product but in a more meaningful way for truly emotional and key moments in people's lives. I guess back to your question about product costs. I think it's fair to say we do now feel we've fully cycled the lifts in -- well, gold has been high for 3 years, as you know, Kieran. And so that's totally cycled through our business and our supply chain and the price increases in diamonds, post the Ukraine -- Russia-Ukraine crisis has now fully rolled through our supply chain, which I guess is why we were particularly calling out why we're happy and I guess, proud of our continued elevated margins, considering all of those pressures. And again, it speaks to our aspirational brand journey and our ability to invest in better product at higher price points.

Just final one before I jump back in the queue. Just in terms of the new Bevilles stores that you're looking to roll out in FY '24. So you talked about 3 secured and another 3 potentially opening ahead of Christmas. What proportion of these stores will be replacing existing flagship stores to start with? And yes, can you provide a bit of a gauge of how many you're looking to open in the second half?

So none of those stores we've outlined in today's release are what we're internally referring to as flip stores. So none of them are Michael Hills stores -- when you say flagship, I assume you meant Michael Hill.

Yes, correct.

None of them are Michael Hills stores being converted at this point. Our focus, I think, as we outlined in the June announcement is on new real estate because we want to understand the opportunity in the market across each of our major landlord partners as to what real estate is available, what sort of deals might we be able to secure. We're very happy with the first 3 that we've secured. They're all new sites for Bevilles and they're not Michael Hill for current branded sites, and we have got favorable terms from the landlords on each occasion as we had anticipated. The further 3 that we're hoping to also open pre-Christmas are also new. And then in terms of the second half, we will be very much dictated to by available real estate. We always have in our back pocket, Michael Hill conversions to Bevilles, but we're not pulling that card out of the deck just yet. But we're probably -- we're looking for a minimum of, probably half a dozen in the second half, but we'd like a few more than that for sure. Depends on what becomes available.

Okay. And I guess just to squeeze a little follow-on on -- for the Michael Hill stores, particularly in Australia, have there been any change -- is there any change to your expectation around how many of those will be closing in FY '24, just those underperforming stores?

[ Andrew ], probably, as we have in previous years, we've got a list at the start of the year, Kieran, depending on individual landlord negotiations because as you know, every different site is a different deal. And if landlords can come to the table and either provide the right rental deal on a short-term basis or potential capital offerings to upgrade a store, we would consider maintaining a store that might be -- start the year on an exit list. I would anticipate we'd have somewhere between 3 and 5 stores closed in the Michael Hill Australia business this year kind of as we've said in previous years. So somewhere between 3 and 5.

There are no further questions in the queue at this time. So I'll hand back to Daniel.

So we'll give it another minute while we look at this amazing image. So those of you that heard me talk about Stardust collection, that product on the screen now is the center piece ring of the Stardust collection. It has over 500 individually handset diamonds in it, it's quite an incredible masterpiece and we're very proud of that new collection in our business. I guess I'm killing time to see if anyone else wants to jump in the queue. If there are no one -- if there are no other questions, [ Josh ], in the queue, I'm happy for us to finish the call and to wrap up. So thank you.

We do have Kieran who's coming back into the queue, if you'd like to take further questions from Kieran.

I'll just jump in with 1 or 2 more since we've got the time. Just on your new bespoke brand TenSevenSeven, are you able to provide any expectations around the revenue and EBIT contribution from that new brand? And maybe you mentioned that there might be a couple of stores actually opening up for that luxury brand. Can you sort of talk to numbers around that?

So no, I can't because we've got to get this thing live. We've got to test it in the market. It's going to be a soft launch towards the end of September, early October is the current plan. And we're not going to be pushing any marketing behind this side of Christmas. We want to get the business up and running, tested end to end. We will be talking to some of our top Michael Hill Brilliance members potentially about their interest in it. But that's about as much as we're going to do initially because we want to make sure that the experience is exactly as you saw on the screen there, completely seamless and elevated. So we don't have any specific anticipated results for it in the first year. I think when we get to the half, Kieran we may well start to be able to share a view of the potential performance of that business. And yes, we've studied this sector of the market kind of [ thoughtfully ] known as a ring builder proposition in the industry, and we are very deep in the knowledge of all the global players in this category. And what we've certainly seen is they are much more productive and much higher volume when you supplement the digital proposition with a physical showroom. And we're certainly looking to get one of those up in the second half of this financial year. And then at the moment, it's only an Australia launch and thereafter, we will look at the other 2 or 3 capital cities in Australia. And then as we go to New Zealand and Canada in time with it, we would look to pick up a couple of sort of capital city locations with the showroom.

And just in terms of price point, you put in the luxury category. How much higher are we talking in terms of, I guess, average transaction value versus the Michael Hill stores? And do you see yourselves competing with the likes of Tiffany & Co. and some of those more luxury players? Or are you still sort of a little bit below that level?

So just to be clear, if I think of the product pyramid that we presented or the brand pyramid, should I say, Bevilles very much is playing at a price point that's about 1/3 of the Michael Hill price point on an average price per product basis, 1/3 to 1/2 of Michael Hill. TenSevenSeven will be significantly higher. We're anticipating the average transaction value being north of $5,000, somewhere between $5,000 and $8,000. So absolutely playing into the luxury category. We'll have product on there for over $100,000. It will all be driven by the price of the -- and the selection of the diamond, obviously, that the consumer chooses to make and very much going toe to toe with some of those luxury brands in this space that you outlined.

Our next question today comes from [ Andrew Ott ], who's a private investor.

I was just wondering whether you're able to provide any more details about the security arrangements in New Zealand and how the staffs are coping. And you probably can't comment on this, but I do wonder myself when people steal jewelry, I can only imagine that what they can actually receive in cash for that must be just a token amount compared to the actual retail value.

Thank you, Andrew, to your question, and it's one that's top of mind with our Board and our executive team on a daily basis as we've been weathering this period of challenges in our New Zealand market, our core heritage market as well on that. It has been very challenging for our team. [indiscernible] our first thoughts are always for our team and our customers. We have made significant investments in providing security guards, full-time security guarding to almost every store in New Zealand now, which is a significant, obviously, investment for us. But it's absolutely something we're committed to continuing to do to provide that safety and security. We've seriously upgraded our stores in terms of security measures and equipment. I'll let Andrew talk to that in a bit more detail. And we are continuing to work incredibly closely with the New Zealand police force and our landlords. And there's a very, very strong growing concerted effort between retail, police now and landlords led by [ intergroup ] who have been fantastic in taking a leading position in that space and we are making significant progress. The majority of the criminals this calendar year that have broken into our stores have been arrested. Unfortunately, they're often below the age of 16, which still staggers me. And as a result, they get pretty soft treatment when they do finally get in front of the court. So it's a real challenge for our business. Our team just have been magnificent in managing through this. Our customers have been too. The loyalty of our team and our brand -- and our customers towards our brand blows me away every time we have one of these incidents. The team are rushing to get back in the next day to sweep the floors, to contact customers. It's quite incredible. It's something so much highlights an increased level of how proud I am around the culture and the Michael Hill team, particularly in New Zealand. Andrew, do you want to add a little bit more color?

Yes, definitely, Daniel. You are right, Andrew. This is absolutely a first instance to all of our team, and we've been very sure and very clear around the support that we provide to our team in terms of counseling, support and return to work support. And I must commend our leadership in New Zealand, as Daniel has on their leadership and response to in managing each of these events and the support that they do provide for the team. From an investment perspective, Daniel mentioned the security guards that we are providing but there has also been quite the infrastructure investment as well. So the screamer alarms, fog cannons, DNA spray and toughened glass now. So we're reaching a point where we believe we're doing everything we can to support our team. And I can only reemphasize, as Daniel did, the importance of the relationships and networks that we've built with the landlords and with other retailers because we're all in this together, but in particular, the police and their support and guidance and responsiveness. It's almost guaranteed you get arrested now if you break into a jewelry store. Our goal is to protect our team as best we can to work with the police and collectively, we get the best possible outcome here that we can in what are -- or what has been an ongoing situation that we've been navigating.

There are no further questions in the queue at this time. I'll hand back to you, Daniel.

I think at that point, we're comfortable closing the call. So thank you for the Lumi team for hosting us today. Thank you for everyone who dialed in and continues to show interest in our business. Looking forward to doing this all again in about 6 months' time with our first half results. Thanks, everyone. Good morning.

That concludes today's call. Thank you for joining us. You may now log out.