Tale of two retailers

By Duncan Bridgeman

Friday 13th February 2004

Jeweller Michael Hill International is set for further overseas expansion as the company continues to benefit from a buoyant Australian market.

After posting a December half-year net profit of $10.9 million, up 26.5% on the same period last year, the company said it was evaluating new stores for all three countries it operated in.

A significant factor to the strong overall performance was a 65.5% increase in earnings before interest and tax (ebit) to $13 million from its Australian unit.

The company's Canadian operation improved its revenue from $694,000 to $3.3 million. An ebit loss of $656,681 came in less than budgeted, the company said.

This is in stark contrast to fellow retailer The Warehouse, which continues to disappoint across the Tasman. New Zealand's largest retailer reported a solid 14.3% increase in second-quarter sales, largely at the expense of tighter margins.

As expected, the company's Australian "Yellow Shed" operations continued to struggle, with same-store sales increasing just 3.5 over the period.

Adding further concern, the company said it experienced an "unsatisfactory deterioration" in gross margins during the quarter.

The negative tone of the statement sent The Warehouse shares drifting downward amid growing concern the Australian unit could post a bigger loss for the 2004 year than last year.

Analysts were picking a full-year net profit for 2004 of between $84 million and $90 million, compared with last year's reported $75.4 million. Most forecasts were clustered around $90 million.

"Our reading of the company's silence is that it remains comfortable with this figure," First NZ Capital said in a research note. The brokerage noted its 12-month price target of $5.45 a share would be driven either by signs of earnings improvement at the Yellow Sheds or, alternatively, by the sale of the Australian asset.

ABN Amro said the concerns regarding margin pressures had been flagged by the company for several months.

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