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

Welcome to Michael Hill International's Financial Year 2024 First Half Results Update. Following the formal presentation, there will be a Q&A session for investors and analysts. [Operator Instructions] I will now hand over to Daniel Bracken.

Good morning. And thank you for joining Michael Hill International's FY '24 first half 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 '24 H1 results, our current trading update and providing you with further insights on the group strategy before ending with a Q&A session. There is no doubt that the first half was a challenging period for the business, cycled record performance in FY '23 and tough trading conditions driven by lower consumer confidence and macroeconomic pressures. Notwithstanding the difficult conditions, it is pleasing to see the external third-party transactional data, demonstrating that Michael Hill is performing better than the broader jewelry market. Clearly, margin was under pressure from both input costs and promotional activity with inflationary forces driving elevated costs across many aspects of the business, which together impacted EBIT for the half. Pleasingly, digital continued its return to growth, delivering $30 million in sales and representing 8.2% of total group sales for the half. These sales were supported by positive contributions from new digital channels. To support the continued evolution of the Michael Hill brand and the strategic lift in average transaction value, the company undertook an extensive review of the entire product offering. This saw a significant product refresh with innovation and newness delivered to stores in time for the all-important peak Christmas trading period with strong early results and positive customer feedback. During the half, the business also successfully embedded the newly acquired value-led jewelry brand, Bevilles. 4 new Bevilles stores were opened in the half with 2 in Queensland as the brand enters into this new territory. In addition, the business focused on transitioning to a shared IT platform with Michael Hill and will continue to expand the store network nationally. Furthermore, we soft launched our new digital start-up brand, TenSevenSeven, which is designed to deliver a completely unique and elevated proposition, capturing an entirely new high-end customer. And excitedly, Medley successfully trialed its first-ever pop-up kiosk in Chadstone. With our new and existing brands in place, the business remains committed to its group multi-brand strategy and I will speak further to this later in the presentation. And now, I will hand over to our CFO, Andrew Lowe, to update you on our financial results.

Thank you, Daniel. The group reported a decline in performance with comparable earnings before interest and tax of $31.3 million for the half year ended 31 December 2023. This result was driven by a combination of lower gross margins and inflationary cost pressures. For the half, the company delivered revenue of $363 million, up 4% on a 26-week basis, including Bevilles and flat on a statutory basis. Gross margin was under pressure at 61.5% due to higher input costs for gold and diamonds, along with the company responding to heightened competitive promotional activity across the key Christmas trading period. Inflationary pressures impacted the majority of costs across the business, most notably store labor and occupancy, the 2 largest cost categories. With this in mind, the company took action in the half, removing a number of leadership roles across the organization with annualized cost savings of $3 million to $4 million. Stock holdings closed for the half at $220 million, with the increase attributable to the Bevilles acquisition. Having deployed cash for a number of strategic initiatives, including the acquisition of Bevilles, the development of TenSevenSeven, along with digital and data investments, the company delivered a closing net debt position of $12 million. Given compressed earnings at FY '24 H1 and a commitment to a prudent investment in operating and capital expenditure, the Board has decided to declare an interim dividend of AUD 0.0175 per share, unfranked for Australian purposes with 0 New Zealand imputation credits and with conduit foreign income. The record date for the dividend will be Friday, 8th of March 2024, with payment on Friday, 22nd of March 2024. During the half, 4 new Bevilles Australian stores opened, taking the network to 30. For Michael Hill, 6 underperforming stores were permanently closed, taking the network to 272. The total group network was 302 stores at the end of the half across all markets. In Australia, Retail segment revenue increased by 10.2% to $202 million for the half on a 26-week basis, including Bevilles and up 6.1% on a statutory basis. Gross margin for the half was 60.6%. During the half, 4 new Bevilles stores opened with 5 Michael Hill stores closed, resulting in 271 stores, including 30 Bevilles stores at the end of the half. In New Zealand, Retail segment revenue decreased by 10.3% to NZD 65 million for the half on a 26-week basis and down 14.2% on a statutory basis. Gross margin for the half was 59.9%. Given the ongoing security incidents experienced in New Zealand and in order to protect our customers, our teams and our stores, significant investment in security measures continue to have an impact on earnings of circa $3 million. At half year-end, there were 46 stores. In Canada, Retail segment revenue increased by 0.5% to CAD 89 million for the half on a 26-week basis and down 3.8% on a statutory basis. This result is a credit to the segment considering last year was another record performance. Gross margin for the half was 61%. During the half 1 underperforming stores closed, resulting in 85 stores at the end of the half. Moving on to our current trading update. For the first 7 weeks of FY '24, H2 group sales, including Bevilles are up 9.5% on prior year, with the Michael Hill Australia retail business driving the improvement in performance against FY '24 H1. Australian segment sales, including Bevilles, up 19.6% on prior year. New Zealand segment sales down 9.2% on prior year and Canada segment sales down 0.9% on prior year. While the economic conditions and retail environment remain challenging in all markets, we are encouraged by our ongoing performance in Canada as a leading indicator and early green shoots in Australia. I will now hand back to Daniel to provide further insights on the group strategy.

Thank you, Andrew, for your insights on the first half financial results and our current trading update. For the rest of this presentation, I will provide you with an overview of our 10-year group strategy. We are currently 3 years into the strategic transformation of the business. The group's strategy is divided into 4 phases, starting with the repositioning of the Michael Hill brand, which has been gradually taking place since 2020. As the Michael Hill brand successfully elevates, we then moved to establish a portfolio of brands, which saw the acquisition of Bevilles and the launch of TenSevenSeven and now in the current phase, which is focused on clearly defining and articulating each brand's market proposition and leading into the final phase, network expansion and productivity and the overarching growth ambitions for the group out to 2030. Much of the company's strong performance over the last 3 years can be attributed to the strategic transformation of Michael Hill. The strategy to elevate and modernize the brand has underpinned the overarching vision for the business. The aspirational brand journey to a more premium market positioning continues with consistent customer-led business imperatives. From a brand perspective, the business moved away from promotional price-led marketing to brand-led emotive campaigns featuring a strong heritage brand based on innovation, artisanal craft and quality jewelry. In 2020, the business launched its first loyalty program, Brilliance by Michael Hill, which led to higher average transaction value and gross margin while attracting new customers and providing us with the foundation [Technical Difficulty] insights and customer segmentation capability. The loyalty program now has over 2 million members in conjunction with technology investments the business is now able to undertake targeted personalized messaging. Over the years, there has been significant progress in our omnichannel capabilities, providing a seamless omni-first channel-agnostic experience for our customers. Our digital offerings are continually enhanced to provide customers with best-in-class experience. Collaboration with key marketplaces led to customer acquisition and provided another digital platform in existing geographies, along with entering new markets. The company has demonstrated the success of the aspirational brand journey strategy firstly through an increasing average transaction value of nearly 30% over this period, validating our focus on elevated customer experience, higher-quality product and an attraction of a new modern customer. Secondly, retail productivity is lifted considerably across all markets, delivering increased revenues from an optimized store network. As the Michael Hill brand continues its aspirational brand journey to a more premium position, the acquisition of the Bevilles business provides a vehicle to take market share at the value end of the fine jewelry category. Additionally, in the first half of FY '24, the company soft launched 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 customer segments of the fine jewelry category and delivers multiple new growth pipelines. In addition to our core fine jewelry brand, Medley continues to establish itself as an emerging brand in the fashion demi-fine jewelry category with Watches Galore joining the group as part of the Bevilles acquisition and remains an untapped opportunity for the business. With the multi-brand strategy now in place, each brand is uniquely positioned for different customer segments and price propositions and its own strategic priorities. TenSevenSeven, uniquely modern, high-end bespoke; Michael Hill, premium contemporary classics, milestone moments; Bevilles, everyday essentials great value; and Medley, fashion-forward accessible style. April 2024, we'll see a complete brand refresh of Michael Hill delivering a new elevated aesthetic across the brand assets, color pallet and logos. These assets will bring both a contemporary and feminine perspective to the brand. These new brand codes will be gradually brought to life across digital platforms, packaging and new stores, and this will soon be followed by the exciting milestone of the brand's first store of the future. Product evolution continues with a focus on quality, innovation and sustainability. Simultaneously, the development of key signature ranges will embody the premium brand positioning. The Bevilles business will increase its focus on enhancing its brand's differentiated proposition to increase disruption in the value segment. It will undergo a rebalancing of the product offering and visual presentation to take advantage of clearly identified market opportunities and in turn, maximizing sales and margin. And importantly, reestablish the brand's dominance in its core and everyday value product offering with a more productive and streamlined product range. The clearly defined network expansion plan will be supported by a cost-effective marketing strategy that resonates with both existing and new customers. I'm really excited by the opportunities for this brand over the next few years. Our TenSevenSeven start-up brand will remain focused on its unique and elevated proposition, which is capturing an entirely new high-end customer. There will be continued enhancements to the digital customer experience with product extensions and an increased unique diamond offering. At the right time, staged investments will be deployed to attract both connected and new clients. Our Medley brand will continue to build on its fashion positioning across both demi-fine and fine jewelry to a younger demographic and the business will optimize its digital multichannel investments and continue to explore new channels, both physical and digital. With each brand uniquely positioned for their target customer segments and with both product and brand propositions established, the group will be well placed to grow revenue and profits through a more productive and expanded distribution network. In May 2024, a new Michael Hill global flagship, which represents the store of the future will come to life in Chadstone, the most premium center in the Australian market. The new store will incorporate all aspects of the new brand proposition with a new high-value product offering, elevated in-store experience and private selling spaces. On one of the best corners in the entire center with high footfall and on the entrance to Chadstone's new premium world-class food destination, this is a hugely exciting step for the Michael Hill brand. For Michael Hill, store productivity has proven to be a key lever of growth over the prior 3 periods and as the brand continues to elevate and attract new customer segments, it is anticipated that this will continue. As the network aligns over time to the elevated product proposition and with the continued focus on brand evolution, it is expected that average transaction values will continue to increase and support revenue growth. The brand refresh of our direct-to-consumer digital platforms will deliver improved customer experience and conversion rates, which in conjunction with investments in data and insights will increase productivity across all channels. And beyond the brand's leading position in bridal, promoting other key milestone moments present significant revenue opportunities for the business while leveraging the data in our loyalty program and growing the opportunities with self-purchasing customers. Even with the challenging trading conditions in the jewelry sector, the business has held firm on its strategic intent to grow the footprint and strengthen Bevilles position in the market. Based on already signed lease deals, the business will have grown the Bevilles network from 26 to 36 stores in the first year of ownership. Leveraging Michael Hill's experience, data insights and competitor analysis, the opportunity to grow the network to over 100 stores in Australia remains firmly in place. As the Michael Hill brand elevates to a more premium position, this presents opportunities for select stores to transition to the Bevilles brand in a cost-efficient model, as shown in these images. And a streamlined product offering will enable a step change in visual presentation and customer experience, leading to a more efficient store footprint and an increase in productivity. TenSevenSeven will drive further brand recognition through its customer acquisition strategy and leverage group customer data to drive increased website productivity. In order to realize the brand's revenue potential, it is essential to identify and deploy a small number of flagship showrooms in key capital city destinations. Insights from U.S. competitor brands demonstrate that a physical presence significantly increases both the conversion rate and the productivity in this segment. Medley will enhance its marketplace and new channel strategy to increase brand recognition, tap into new customers and increase revenue. Following the success of the Chadstone pop-up, further test and trial kiosk opportunities will be established. The multi-brand strategy is underpinned by a philosophy of leveraging group capabilities to drive both productivity across all brands. This presents an exciting opportunity for the business as well as our team members as we leverage our group technology investments and capabilities, customer data and insights, distribution and logistics synergies to optimize our cost of doing business, portfolio vendor management to support product quality and margins, digital capabilities to drive efficiency and growth, property management to both grow and optimize the real estate network and of course, our core support and specialist functions across human resources, finance and legal. I'm extremely enthused by our group multi-brand strategy that I've just taken you through, and no doubt there will be questions. But just before we get to Q&A, I would like to share some really exciting news as this week, we will be launching the Michael Hill Foundation, which represents our ongoing commitment to meaningful change and our dedication to a better world. The foundation encompasses 2 key areas of focus; Empowering Women and Nature Restoration. Through continued initiatives and key charity partnerships, we are dedicated to empowering the lives of women and conserving in and restoring nature in our localities, working towards our sustainability targets of 2030. I will now play you a video of our partnership with One Tree Planted. [Presentation]

I would 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 today comes from Sam Teeger.

How should we think about the next 6 to 12 months in New Zealand from a sales perspective given the trends you're seeing now?

Look, yes, it's been historically such a, I'd say, safe market for us. We've had -- that's the [ problem ] with everything that's going on there. But it's been such a reliable market from a performance perspective. We've had a lot go on there. Obviously, we've had this major, major security challenges over the last couple of years, which in turn, has had an impact on morale and team member retention, which in turn, does have an impact on sales. But economically, it was Andrew, wouldn't you agree the first of the 3 markets we operate into really push interest rates up to market that is the most highly supportive of our credit -- consumer credit proposition and obviously, that's become more challenging. And they've had a lot of political turmoil. So I think it's fair to say we are more positive about it for the next 6 to 12 months than we were the last 6 to 12 months, sort of politics now behind us. Government in place, government policy is starting to be put in place that are more positive for the retail landscape. We certainly got much greater confidence in control of our own security measures. We've rolled out now a significant investment in what's called armor glass into our stores. We've seen a couple of incidents recently where criminals have been unsuccessful in breaking and entry and stealing from us. And we do think that the economy there will start to improve over the coming 6 to 12 months like it will in the other markets. So I don't anticipate it continuing to run at minus 10%, which is sort of what we saw in the first half and the early parts of the second half, we certainly start -- expect to start seeing an improvement. Long-winded answer, but I thought it was important for context.

And when you say improvement, is positive too optimistic?

I think that would be optimistic in the second half, but I think come FY '25, we'd like to see that return to growth for sure and we'd anticipate that.

And then just in Australia, as things seem to be going pretty well here, particularly in the start to second half '24, is a like-for-like for the Michael Hill brand back to positive? And just how should we think about the evolution of comps in the PCP and how that impacts from here?

Well, I mean, as you know, we're not breaking out the segment, which I know is a little frustrating for those that follow us as closely as you do, but for sure, those first 7 weeks improvement in results was powered by the Michael Hill Australia store network, which I think certainly was well ahead of its trend in last year and getting pretty much back to where we would have liked to have seen it through the first half. So we do have a smaller network, as you know, 6 stores less. And we're pretty happy with the way we've come out of the blocks at the start of the second half.

And then just in terms of gross margins, is what you've done in the first half, a good guide for you might expect in the second half. Gold prices seem like they're still elevated and just any color around diamond prices.

Yes, the diamond prices sort of as a raw material have started to come off in the last 6 months. I think De Beers quite publicly said they dropped price at the last option by 10%. It does take time because that's a diamond manufacturer buying rough diamonds that then have to obviously be cut and polished and then turn into jewelry or they have to get to a jeweler and get into the store and then be bought by a customer. So there is some optimism certainly for FY '25 around some recovery in COGS. I'd like to think we'll have a slightly better second half than first half from a margin perspective. We are showing some positive behaviors in our business that are showing again some early green shoots on margin in this half. But for sure, we anticipate improvement in FY '25 with maybe a little bit in the second half of this year.

And then last one, just in terms of store numbers over the second half, what should we expect in terms of openings and any closures, which might happen?

So I think in my note, I talked about Bevilles going from 30 to -- well, going from 26 to 36 over the whole year. We're currently at 30. We've got 4 new stores opening for bevels in the second half, mostly across Andrew, March and April. We're trialing our first conversion store in about 3 weeks' time. So that's a Michael Hill store becoming a Bevilles store and the second one of those right at the end of the half. So that's the 6 incremental stores for Bevilles. Obviously, that's minus 2, those conversions for Michael Hill. And there's another 3 stores we're anticipating closing in the Michael Hill network in the second half. So net-net, pretty neutral.

When you say another 3 closures from Michael Hill, is that globally or just Australia?

In Australia, and that is in the half all that's planned to close globally, Sam.

There are currently no further callers in the queue. [Operator Instructions] So our next caller is from Guy Hooper. Apologies, Guy has hung up. The next call is from Kieran Carling.

Just to add to Sam's earlier question, can you just help us understand what's kind of driven that gross margin compression and just perhaps separate out what is due to kind of competitive discounting in the market versus the input cost pressure?

At its highest level or a simplistic way to think about it, it's about a half-half split between input costs, if you like, COGS increases and incremental promotional activity. So if you want to round it up and say it's 400 basis points sort of a couple of hundred on each is probably the best way to think that.

And then just in terms of what you've been seeing with the general health of the New Zealand consumer versus Australia. Would you attribute that almost entirely to where New Zealand is in the interest rate cycle? And on that basis, do you think it's possible that we see some weakening with Australia kind of as we move through the second half on that basis?

You were you asking about the New Zealand consumer or the Australian consumer or was that 2 different questions?

I'm just -- I guess I'm asking just around the relative health of the consumer. New Zealand is obviously under pressure. Would you attribute the relative weakness in New Zealand adjust to our stage in the interest rate cycle? And on that basis, would you expect that Australia would see some weakness as we progress through the second half?

Kieran, Andrew here. I think interest rates in our minds do to the heart of a lot of what is driving consumer sentiment. And I think if ranking the countries, we've seen certainly the green shoots in Canada turning and reflecting on that market, interest rates have been stable for the longest, a bit more of North American economic influence. I guess, the consumer if they can sustain interest rates and they've peaked, they've come out the other side. Australia, second in that regard behind Canada. And again, we've seen that with the turn in performance at the beginning of this half. But you're right. I think New Zealand putting aside the political issues, the interest rate and inflation environment. And certainly, we're seeing the consumer in terms of getting access to credit and access to cash, it is being driven by those elevated interest rates. So I think ranking through countries, Canada and Australia and New Zealand in terms of consumer sentiment, short to medium term, is probably the case as we wait and look for that sort of return to downward pressure on interest rates.

So just to clarify, you don't expect any deterioration into the second half for the Australian consumer in your segment?

Look, based on what we've seen in the first 7 weeks, Kieran, we are more buoyed by the Australian consumer behavior than we were over the prior 12 months. It's been our most consistent period. It's a tough calendar year last year. And I guess, our view is it's discontinuation of no further rate increases that's created some stability in the Australian -- in the minds of the Australian consumer. There certainly seems to still be more speculation in New Zealand of interest raises -- interest rate rises than there does there in Australia. And I think there's more restricts here about when will the first interest rate cap be. So I think those 2 things go hand in hand for the relative consumer confidence one country against the other.

And then last one from me is just on your thoughts on the current state of the lab-grown diamond sector. I guess looking across the board, we've continued to see trade or wholesale prices decline, Michael Hill appears to be selling identical lab-grown diamonds to close competitors at a much higher price point. I'm just keen to get your view on how sustainable you think that is?

Very pleased you used the word sustainable in there, Kieran, because if you are sustainable, our differentiator in the markets we operate in against all of the competitors is that our lab-grown diamonds are SCS certified, sustainable and carbon neutral. And we have the certificates to go with the diamonds to prove that, whereas none of our competitors do. We have made that a very, very clear positioning on our, I guess, investment in that category. We're also clearly the market leader in Australia and New Zealand. We were first to really launched a significant range. We are the first now to expand beyond bridal into more fashion jewelry and lab grown diamonds and we will continue to do so. You're right, we're selling at a higher price than most of our competitors, but you're buying into not only the sustainability story, but you're also buying into the trust of the brand when we do so. That being said, we did actually drop price on our bridal range in November to come a little bit closer to the market because lab-grown diamonds as a core raw material have come down in price. And so we did pass some of that on to the consumer and recognizing what is going on in the market, but we're certainly not chasing the market on price and our positioning is in a more superior place than others based on everything I just laid out for you.

And can you just quickly remind us what proportion of your overall sales of lab-grown and what you're targeting in the medium term?

Look, it's less than 10% and we don't really have an ambition to take it much above 10%, maybe 15%, but sort of that 10% to 12% is our target and we're pretty close to that. But that's -- we kind of want to contain it at that level because of this competitive nature of the category and a little bit of lack of clarity over where it ends up over the years to come.

Thank you. There are no further questions. I'll now hand back to Daniel to close off the meeting.

Well, thank you, everyone, once again, for your ongoing interest in Michael Hill and the Michael Hill Group strategy. Looking forward to catching up with many of you on this call on One-on-Ones over the next day or 2. Thanks very much.