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Michael Hill first-half profit tumbles 66% on US, Emma & Roe store closures

Thursday 22nd February 2018

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Michael Hill International posted a 66 percent drop in first-half profit, mainly reflecting A$19.8 million of provisions to reposition its Emma & Roe chain and to recognise costs of exiting the US market.

The jewellery chain first flagged the provisions two weeks ago. It is exploring options for its US exit, including a sale of the business or through an agreement with landlords of its nine stores, with the process targeted to be completed by June 30. In the first half, US revenue fell 15 percent to US$6 million for a loss of US$5.6 million on an earnings-before-interest-and-tax basis, including a provision for impairment and onerous leases of US$3.5 million.

Emma & Roe achieved a 20 percent gain in sales to A$10.5 million but recognised an A$15.2 million charge for impairments and onerous leases, resulting in an A$19.6 million ebit loss. Emma & Roe is being repositioned as a "demi-fine jewellery" chain, with redesigned stores and a new online offering scheduled for the new financial year. There would be "a material reduction" in the number of stores, the company said.

For the retailer as a whole, profit dropped to A$8.7 million in the six months ended Dec. 31, from A$25.8 million a year earlier. Sales from continuing operations rose 4.5 percent to A$342 million. The company opened 14 Michael Hill stores in the first half and same-store sales edged up 0.3 percent. It now has a total 347 stores including 30 in the Emma & Roe chain.

"For the period, the group increased its overall revenues and achieved same-store sales growth despite challenging retail conditions and underperformance of the US and Emma & Roe businesses," chief executive Phil Taylor said in a statement.

"The company’s core Michael Hill businesses in Australia, New Zealand and Canada performed strongly during the first quarter before experiencing a slowdown in the second quarter, in particular, the November trading period, where sales fell short of expectations," he said. "This challenging November period, combined with a heavier investment in our marketing efforts, resulted in a flat ebit result from the combined three businesses."

Total first-half ebit dropped to A$15 million from A$40 million.

Michael Hill will pay an interim dividend of 2.5 Australian cents a share, unchanged from a year earlier.

In its biggest market of Australia, the Brisbane-based company's revenue rose 1.8 percent to A$185 million although ebit fell 3.2 percent to A$32.6 million. The company said "challenging November trading period and increased marketing costs impacted bottom line results."

It said the Michael Hill brand is well positioned to take market share in Australia, in what it called "a relatively stagnant category."

Michael Hill New Zealand recorded a 4.2 percent gain in sales to about $70 million while ebit fell 4.6 percent to $15.8 million. It said increased investment in marketing and higher than expected payment plan costs "adversely impacted the segment’s bottom line". Its focus in the second half is "on lifting gross margin and achieving cost efficiencies."

Canada was the standout segment for the retailer. Sales jumped 18 percent to C$73.7 million while ebit rose by the same amount to C$10.4 million as it opened seven stores to bring its total to 83 and "captured additional market share from increased awareness and brand credibility."

ECommerce sales surged 73 percent in the first half to A$5.6 million, accounting for just 1.7 percent of group revenue.

Michael Hill's dual-listed shares last traded on the ASX at A$1.095 and have dropped 19 percent in the past 12 months.


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