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

Welcome to the Michael Hill First Half Year '25 Results. [Operator Instructions]. And I will now hand it over to Andrew Lowe.

Good morning, and thank you for joining Michael Hill International's FY '25 First Half Year Results Update. I'm Andrew Lowe, CFO. Unfortunately, Daniel Bracken, our CEO, cannot join me today for this financial update as he is unwell. Today, I'll be taking you through a review of our FY '25 half-1 results, our current trading update, and provide you with further insights on the group strategy before ending with the Q&A session. The prevailing macroeconomic pressures continue to impact consumer sentiment and discretionary retail trading conditions throughout 2024, with conditions in New Zealand remaining particularly challenging. However, our 2 largest segments still delivered growth with Canada delivering another record sales performance. Gross margin started its recovery journey, underpinned by product and brand initiatives, which are offsetting higher input costs and aggressive retail trading conditions. The introduction of higher-margin gifting products increased transaction volumes for the key Christmas period. Pleasingly, strong digital traffic and deployment of Bevilles omnichannel initiatives have supported the increase in digital sales, resulting in sales of $30.3 million for the half and representing 8.4% of group revenue. During the half, the business made significant progress on Michael Hill's brand and product initiatives. This was best demonstrated by the opening of our second global flagship store in Bourke Street Melbourne, which showcases the new brand icons and offers an elevated in-store experience for our customers. The refurbishment of our Queenstown store in New Zealand also clearly represents this new brand identity. The successful launch of the Michael Hill Pendant Bar concept with a focus of both good and ready-to-wear gifting and the introduction of elevated quality in our certified sustainable lab diamonds in this high-growth category. Moving on to the group financial results. The group reported a decline in earnings with comparable earnings before interest and tax of $24.1 million for the half year ended 29 December 2024. This result was driven by a combination of more aggressive retail competition, higher annualized operating costs across labor and occupancy, and the ongoing challenges of raw material costs, particularly gold prices. For the half, the group delivered revenue of $360 million, down 0.7% and flat on a constant currency basis. Sales for the half reflected strong business performance in the first 3 months, which was offset by more challenging results in the second quarter as we cycled record prior-year sales in both October and November. The gross margin for the half was broadly in line with FY '24 H1 despite higher input costs, particularly the gold price. With inflationary pressures impacting our operating cost base, the business took the decision in January 2025 to initiate a $5 million cost reduction program in the second half as we align resources to our strategic priorities and trading performance. Active management of inventory saw holdings reduced by $6.6 million to $213 million at the end of the half, reflecting a reduction in the store network profile and steps taken to reduce stock holdings. During the half, the business has remained committed to a reduced capital expenditure profile across both technology and stores, resulting in a closing net debt position of $9.8 million. As a proactive capital management manager to support seasonal working capital requirements for Christmas trade, the existing $90 million debt facility has been increased for the 4-month period from 15 September 2025 by $20 million. This lower funding requirement for the upcoming year reflects disciplined balance sheet management across cash, inventory, and capital expenditure. Given compressed earnings in FY '25, H1, and in conjunction with the commitment to prudent investment in operating and capital expenditure in FY '25, the Board has decided that no interim dividend will be declared for FY '25 H1. For Michael Hill, 7 stores were permanently closed, 2 stores were converted to Bevilles and 1 new New Zealand store was opened, taking the network to 256. For the half, the Bevilles store network expanded to 38 with 2 additional conversion stores. The group network was 295 stores at the end of the half across 4 markets. In Australia, retail segment revenue increased by 1.2% to $205 million for the half with 5 fewer stores, an increase of 0.6% on a same-store basis, underpinned by positive growth in the Michael Hill brand. The gross margin for the half was 60.5%. The Australian store network finished the half with 166 stores, including 38 Bevilles stores. In Canada, retail segment revenue increased by 2.4% to CAD 91 million for the half and increased by 2.7% on a same-store basis. This result is a credit to the Canadian team, resulting in yet another record performance, especially considering the continuing challenges in the local economy, and indicates the business is taking market share. Gross margin for the half was 60.8%. During the half, 2 stores closed, resulting in 83 stores at the end of the half. In New Zealand, retail segment revenue decreased by 7.4% to NZD 61 million for the half and decreased by 7.8% on a same-store sales basis. Despite the focus and effort of the business, external economic factors continue to present challenging retail conditions in New Zealand. An internal strategic review of our New Zealand segment is underway as we navigate the cyclical downturn in the economy, leverage the brand's heritage, and reestablish the profitability of this segment. Gross margin for the half was 58.9%. During the half, 1 store opened, resulting in 45 stores at the end of the half. Moving on to our current trading update. For the first 7 weeks of FY '25 H2, group sales were up 3.2% on the prior year, with same-store sales for the Australian segment up 3.8% on the prior year, the Canada segment up 6.7% on the prior year and the New Zealand segment down 1.9% on the prior year. Total sales for the group were up 1.7% for the first 7 weeks of FY '25 H2. For the rest of the presentation, I'll provide you with an update on our 10-year group strategy and our short-term strategic priorities. With the Michael Hill Group multi-brand strategy now in place, the business is firmly focused on the third phase, reinforcing that each brand is uniquely positioned for different segments and price propositions and with its own strategic priorities. In FY '24 Q4, the complete refresh of the Michael Hill brand was revealed, delivering a new elevated aesthetic across all brand assets, color palettes, and logos. Elements of the new brand assets were gradually brought to life across digital platforms, stores, and consumer packaging. This also saw a new global flagship store come to life in Chadstone, the most premium center in the Australian market. The new store incorporated all aspects of the new brand, product, and proposition with a new high-value product offering, elevated in-store experience, and product selling spaces. To coincide with the brand refresh and our first flagship store of the future, Michael Hill partnered with its first-ever global brand ambassador, Miranda Kerr. Her tireless elegance resonates in all our markets. Simultaneously, new key product offerings such as the Signature Lock range and the exclusive cut 101 facet diamond collection launched. During FY '25 H1, the business continued to embrace the aspirational brand positioning, that being aspirational yet accessible. With the successful opening of its second global flagship store showcasing our new brand icons and offering an elevated in-store experience in Bourke Street, Melbourne. In addition, the Queenstown store in New Zealand was refurbished to incorporate this new brand identity. Prior to the all-important Christmas trading period, the business successfully launched its new Pendant Bar concept with a focus on both build-your-own and ready-to-wear gifting, which provided a unique proposition in our markets, introduced a range of higher-margin gifting products to drive transaction volumes for the key Christmas period, and elevated our certified sustainable laboratory grown diamonds in this high-growth category. These initiatives demonstrate that the business is continuing its product evolution and tactical introduction of newness with a focus on quality, innovation, and sustainability. Moving on to Bevilles. Following the acquisition, the store network expanded into the new territory of Queensland with 5 new stores and 2 conversion stores. This was accompanied by 3 new stores and 2 conversion stores in existing territories, increasing the total store network to 38 stores. In FY '24 H2, the Bevilles operations transitioned to group operational IT systems and relocated its head office and distribution center to Brisbane. During FY '25, H1, the business delivered highly engaging discount-led promotions to capture customers in the value segment and expand brand awareness. Given the current cost of living pressures in Australia, the value segment of the market was highly competitive with extensive retail promotional activity. The business sourced new products carefully engineered to deliver higher gross margins to counter the required level of promotional activity. 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. The opportunity remains for the Bevilles network to grow in the value segment as the Michael Hill brand continues to optimize its store network, embed its elevated brand proposition, and attract new target customers. Over the next 12 months, the group's primary focus is on margin recovery and building a strong foundation for sustainable growth, underpinned by the following 3 key strategic priorities. Firstly, embedding the repositioning of the Michael Hill brand across all markets. The business will continue focusing on repositioning the Michael Hill brand across all markets with our product and our people as the key enablers. Product newness and quality are the cornerstones of aspirational brand positioning. As an example, the business is introducing a new Canadian diamond range, which is ethically sourced and renowned for its exceptional quality. This will further bolster our Canadian segment. Along with our steady cadence of product newness, the business will maintain its focus on margin-enhancing product initiatives. Our people are core to our business and the continual investment in development, upskilling and training is an important lever to ensure our people align with the repositioning of the Michael Hill brand. It is particularly important that our people have in-depth product knowledge to guide our customers with their milestone moment purchases. Secondly, an internal strategic review of New Zealand to improve performance. Our New Zealand segment has suffered due to the economic downturn in New Zealand and an internal strategic review has commenced to ensure our New Zealand business is well placed to dominate the jewelry market as the economy recovers. And thirdly, reinforce retail fundamentals, brand identity, and awareness of the Bevilles brand in preparation for expansion. Since acquisition, the Bevilles business has undergone a significant transformation as it expanded into a new territory of Queensland, opened 12 stores, transitioned to new IT systems, and relocated its head office and distribution center to Brisbane alongside the Michael Hill head office. The Bevilles business is now focused on instilling core retail fundamentals with the team, articulating a clear brand identity to our customers, and continuing to create brand awareness through highly engaging marketing. Furthermore, the team is focused on reestablishing the brand's dominance in its core and everyday value product offering with a more productive and streamlined product range to increase disruption in the value jewelry segment. That has brought us to the end of our formal presentation. I would like to thank you all for your continued interest in Michael Hill, and we are now happy to take any questions.

[Operator instructions]. Our first question comes from Kieran Carling of Craigs Investment Partners.

The first question is just on sales run rates across the group. So we saw all divisions soften between Q1 and Q2 and now there appears to be some pickup in early Q3. Can you just comment on what the -- or what has driven the recent improvement in sales? And then I guess, how confident are you that sales across the group will remain positive through the second half?

Yes. Thanks, Kieran. Look, I think -- and we spoke on this as part of our January trade release. We mentioned in the presentation today around October and November being more challenging as we're comping prior year record sales in those months, but we did start to see that sales recovery in December. And I think what we've then continued into January, February is effectively a continuation of that momentum. I think helpfully, in Australia last week, we saw our first interest rate cut in decades, in a couple of years. And New Zealand with a further 50 basis points, the expectation there could be a couple of smaller cuts still to come in New Zealand. So I think we're starting to, I guess, to see those green shoots of recovery, particularly in New Zealand now, we've already seen that in Australia. Meanwhile, Canada just keeps on performing as Canada has been growing for 2, 3 record years in a row. As to the certainty of continued performance, I think we'd all like to think those green shoots do give us a sense of momentum and opportunity. But I think as the last 12 months have taught us the next 12 months, the recovery that we expect, I guess the uncertainty just remains on just when and just how quickly things come back. And I think we're just going to keep on trading the way we have been.

And then just looking at your store count, I mean, there's been another 7 stores closed in Australia, 2 in Canada through the first half, and that Bevilles rollout has obviously slowed. So 2 questions on that. What is driving the increased rate of store closures? And how confident are you that expanding Bevilles is the right move going forward given that the Michael Hill rollout was clearly overdone?

Yes. Good question, Kieran. I think from an Australian point of view, we've signaled strongly that we were over network, and you just alluded to it from a Michael Hill point of view. Just noting while there were those closures in the network, sales in Australia were still up. So supported by our website and e-commerce, brand awareness and the like, we are still seeing that sales growth without the intensity of store distribution. Will there be some more closures to come in Australia? Yes, there will be, not a significant number, but I think also just clocking that any Australian store that closes is a negative EBIT store, typically in an environment that's either concentrated or not trading as well. And you are right, the Bevilles expansion has slowed. We're being very considerate and very deliberate in our choice of sites with Bevilles. I think you alluded to it, did Michael Hill perhaps under prior management grow too quickly, too big? Yes, and we're being very careful not to repeat that. For a Bevilles store to be opened, I guess, on our watch, it needs to meet a very sort of strict investment criteria around that. And equally, the flips provide an opportunity. Fair to say with landlords, we've got deep relationships, but in the current economic environment, it's still hard to secure the sites that are right and I guess the right economics around the store in terms of contribution and the like.

And then the last one is just on your initiatives to improve margins, which has obviously been to pivot towards cheaper lab diamond [Indiscernible] and silver jewelry. Are you viewing this as a short-term strategy to boost margins while input costs are high? Or is it more of a structural pivot?

I think it's quite tactical. I think we'll always be a house of diamonds, and we have a strong representation both in mind and lab. Lab is a stronger margin and the new lab that we have coming is a stronger margin still. We see lab as the fifth C as choice, and there is a consumer whether motivated by the presentation of the diamond or by its green sustainable origins. There is a market there for lab. And we're participating in that very carefully. So I don't think that's -- it's a pivot, but it's responding to, I guess, consumer demand and interest. Not structural change. It's just a shifting of the mix within our diamond offering. I think on the Pendant Bar, we always have a lower price point offering that's targeting that newer customer, more frequent customer purchase with frequency of fashion and particularly self-gifting. I think Pendant Bar provides a really unique customer-friendly way of presenting that that isn't common across the market. So I don't think it's a short-term pivot, but more us responding with product mix and innovation to meet consumer demand.

Just one additional part of the question.

Sorry, we didn't hear your initial part of the question, Kieran. Sorry, if you could please repeat.

Sorry, it was just around do you think that the gross margin on lab-grown diamonds is unsustainably high at the moment?

I don't think unsustainably, we've had 2 iterations now of our lab offering. Our new offering that we're introducing better color, better clarity at a better margin. So the customer is winning and we're winning. There comes a point where lab diamonds while being produced more cheaply do stabilize. And I think that position will be reached. There's been a lot of consolidation in the industry. There's a lot of disruption in the mined diamond environment at the moment with De Beers, a significant impairment announced by Anglo on De Beers last week. So I think margins -- that gap, I think, between lab and mine diamond, that margin gap will maintain, but there will be movements within, I think, both markets.

Our next question comes from Guy Hooper from Jarden.

I guess, carrying on gross margin, given the COGS headwinds and the promotional activity that you've seen through the holiday period, can you give us a sense of margin direction through the trading update and maybe the run rate or momentum that you're seeing from a gross margin point of view?

Yes. Thanks, Guy. I think from a margin point of view, we've been clear previously, and I'll use round numbers here, but broadly, margins peaked about the 64% mark post-COVID. We did see that dip over the last 12, 18 months. You've touched on the 2 main drivers for that, the level of promotional activity and then just the input costs, and by that, both diamonds and gold. Gold is at an all-time high, $3,000 an ounce. Sort of plateauing at that sort of 60 point. I think going into this financial year, we've been clear that we'd be seeking to restore those prior highs of margin but we're clear that we wouldn't get there in 1 year. The intention being to try and pull that back, call it halfway to sort of to 62. So look, have we quite got there? No. But I don't think any of us anticipated gold quite reaching the heights that it did. And equally, just that level of promotional activity. So I'd like to think that certainly, the momentum has shifted back to margin growth and that we can continue with that and particularly some of the tactical introductions of product and margin that we alluded to with Kieran and in the announcement to support that journey back. I guess, on the product side. I think on the promotional side, a desire to, I guess, to the extent we can pull back on the intensity of that promotional activity.

And I guess maybe to pick up on some of Kieran's comments as well, how should we think about the impact on gross profit dollar as you're seeing those lower selling price products perform particularly well?

Yes. Look, we still have a very high ATV even with that lower-selling product. And I think we just got to be careful that the Pendant Bar is a repackaging of lower price point product that we're selling in any case. The way we've done it in its appeal, it's worked brilliantly. Our lines sell through entirely at Christmas, which is what you ask is a retailer. So I think we've repackaged up some of that lower-priced product. It is at a high margin, silver, silver and layer being the highest sort of margin products that we sell. So I think, look, there is always a constant trade-off on sales and margin, and we work very hard and the retail leaders trade very hard to, I guess, hold that balance, that fine balance appropriately. I think we've got confidence though in bringing the margin back but without, I guess, not to the detriment of sales.

And on lab, I mean historically, I've always thought about Michael being roughly 1/3 sort of engagement. I mean, can you give us a sense of how big lab is within engagement and just whether or not you're seeing consumers who are choosing lab, are they trading down in terms of sales price? Or are they spending a similar amount and just getting a much bigger diamond?

You're very proud to work, Guy. And if you need a diamond, let us know. I think you're right. So the consumer isn't trading down in terms of -- if they walked in thinking they might buy a 1-carat mine, they're not picking up a 1-carat lab at a lower price. The trend that we're seeing is a willingness to buy the 3 or the 4, typically the 3 carat which is maintaining that price point, but at a significant margin lift. I think behaviorally, that's what we're seeing. In terms of what lab represents in our business, you're right, our business very broadly is 1/3 engagement or bridal, 1/3 self-gifting or self-purchasing, sorry, and then 1/3 gifting. I think within bridal, we've been very careful just to manage the uptake and how much of lab we present. There are instances in the U.S. where some of the jewelry retailers move to 75%, 80% lab. And I think there's going to be some caution there. I guess almost a point of view before -- what things change on lab, we've got to be careful that we're not overinvested in lab. So for us, lab sort of any given week or month hovered between that, I think, 10%, 15%. So in bridal, there is still that very much that, I guess, heritage demand for mind. Lab is having a role in bridal, but it's also having a role in diamond fashion. So necklace, tennis braceling, back to your point, Guy, getting a bigger diamond for a similar price in that context as well.

Just one last question for me. You're conducting a review of the New Zealand business. I mean, what are you sort of expecting to discover there? Acknowledge it has been weaker. Is there something else we need to read into it beyond the economic impacts of driving the New Zealand softness?

No, not really. I think we, as a management team and as a Board, and we've spent time on this in the last week ahead of this result, have acknowledged that the economic situation in New Zealand hasn't been a quick cycle. We've had 2 really challenging years. And we're really actually pleased with the 7 weeks in New Zealand coming back to minus 2%. You could almost round it to flat, but that's still down 2% on 2 challenging years. So things haven't suddenly turned. One of our other analysts has referred to as a slow recovery, Brian, in New Zealand. And I think a lot of New Zealand retailers, not just in jury, just broadly I'm making the statement, would like to think they traded the trough and coming out. And I think we're just trying to make sure we're as well positioned as we can as we come out of that and the cycle turns in New Zealand that we're well positioned to capitalize on that.

Our next question is from Kade Madigan of Evans & Partners.

Given I think we've touched on gross margin pretty well this morning, maybe a bit on the cost base. On the cost reduction program you started in January, any color you can provide about different areas of the business that will be captured in that? I'm just trying to think about how it will flow through to FY '26 as well.

Yes, sure. Thanks, Kade. Look, different areas of focus, I guess, some of it around labor and structure will take time to annualize through. So where we've taken steps to streamline or restructure that will take as month by month, that will start to build. There are aspects of our business that are very fixed costs, so lease and retail labor. So there is a piece around in-store labor efficiency. That's not about roles. It's just about the, I guess, the effectiveness of our rostering, and we've got some great tools that support that. In terms of other areas of focus, it is really around, I guess, the levers around discretionary spend. So the usual core areas of discretionary spend, but also in that context, just marketing spend and ensuring that we've tailored our, I guess, our disciplined or rational marketing spend to the right channels in each market and being very, I guess, careful around how we deploy those funds.

And then maybe just as well, how are lease renewals and landlord discussions going at present? So there was a bit of growth in the occupancy costs in the half despite the reduced store base?

Yes. I don't know if there are any landlords on the call, but let me answer your question very objectively. I think we've come off a period of high CPI and high inflation. So leases just naturally have been indexing in all 3 countries at a higher rate than usual. New Zealand for us typically and structurally is the lowest rental environment. It's just a different market for us. And then the bigger landlord players in Australia and in Canada. I think you might think on the face of it, I guess, with the stress on retail and the number of closures across other retailers that we've seen that landlords would be highly supportive and encouraging, and it seems that's not necessarily always the case. And I think our market intel tells us that landlords are looking to maintain their profit margins just as much as we're trying to manage our leases. So we've very carefully made sure we have not got too many leases that are overcommitted where we do want to have the ability to revisit and reset. It does mean we've got a portion of stores and holdover. So that does let us have very constructive discussions with our landlord partners. And I guess every landlord, I think we've got about 100 landlords across the world. Every landlord conversation is different and it will depend on, I guess, the status of the particular center or the particular portfolio. But I think to properly answer your question, it is very challenging for any retailer renewing at the moment. The landlords are looking to hold margin and preserve their returns.

And then sorry, maybe one just final one on the trading update as well. In the half, you talked about the aggressive retail trading conditions that you saw. Maybe how did that sort of flow through the half? And then has it sort of continued into early 2H '25 from what you've been seeing so far, too?

Yes. Look, so Black Friday, I think I'll talk to that mainly was a week different in scheduling this year, which did distort things. The behaviors that we saw in every market where people breaking very early to go into Black Friday and then actually coming out of Black Friday very quickly. There are instances of people going into Boxing Day, we haven't even made it to the Black Friday. So I think that activity around Black Friday and what we call November, so that blended period of gifting right through November and December. Just that prevalence of promotional activity across all retail. Other notable retailers that we follow, I won't name them, but that we follow that are in apparel, fashion, what have you, that would normally be very reticent to promote certainly have and they've seen the margin decline. So I think it was, I guess, a market-wide industry-wide response and then within the jewelry category to go heavier into promotion through that December period. Into the new year, we certainly made an effort to really be really measured and disciplined in our promotional activity and do it in a very targeted and considered way. I think we probably are seeing some lightening up on promotional activity. It is a less promotional period. January is a bit of a sales sort of month. For us, Valentine's in February is a significant moment that we look to leverage, and not all retailers will be doing that in February. So I think we'd like to think that the promotional sort of peak, if you like, has come in the past and that we can manage our way through these months as we move then into, I guess, the next significant moment of Mother's Day in May then through June, typically a clearance and sales month as well.

Thank you. There are no further questions. I'll now hand back over to Andrew for some closing remarks.

Thank you, Rony, and thank you all for your continued interest in Michael Hill, and we'll close the call accordingly. Thank you.