Michael Hill posts profit rise but sales slow

It was a tale of two quarters for jeweller Michael Hill International as it reported a net profit up 6 per cent to $27.8 million for the half-year to December, despite a disappointing run into Christmas.

The NZX-listed retailer grew revenue 8.3 per cent to $312.9m, while earnings before interest and tax weighed in at just under $36m - up 3.4 per cent.

In a statement to the NZX, chairman Sir Michael Hill said the half had been a tale of two quarters - with a strong first quarter followed by a slowdown over October to December.

"All countries struggled to make gains on previous years sales numbers during the key December quarter however same-store growth was achieved in all markets during the six months which is pleasing."

In New Zealand, retail revenue grew 3.6 per cent to $63.1m, while earnings before interest, tax, depreciation and amortisation (ebitda) rose 6.2 per cent to $12.9m. Same-store sales lifted 3 per cent.

Sir Michael said the additional resources poured into the key Australian market mid-last year had started to have a positive impact on sales.

Revenues there jumped 10.6 per cent to A$162.7m, with ebitda up 15 per cent to A$27.9m. Same-store sales on a local currency basis were up 3.8 per cent.

In Canada sales lifted 21.5 per cent to C$29.5m, with ebitda rising almost 32 per cent to C$1.5m.

Same-store sales in Canada were also up 3.8 per cent.

Revenue at Michael Hill's United States stores increased 4.2 per cent to US$5.5m, but the division made an operating loss of US$1.3m. Same-store sales rose 4.2 per cent. Sir Michael said the board was satisfied with the progress of the US division, but recognised there was still a long way to go before it was the business was proven in the US market.

"Focus remains on improving both the top line sales and the margins in order to grow the bottom line of the nine stores over the coming twelve months."

Sales of the retailer's professional care plan in the half-year, which offers customers ongoing maintenance and care of their jewellery, jumped 25 per cent to $18m.

Of that, about $5m was booked as actual revenue, as earnings from the plan are treated as deferred revenue and brought to account over the life of the plan.

The retailer said its tax disputes with Inland Revenue and the Australian Taxation Office were ongoing, "but it remains unclear when final resolution will be achieved in respect of either manner".

The disputes relate to the way Michael Hill valued and financed the sale of intellectual property from its New Zealand business to Australia.

In New Zealand the amount in dispute is the $24.6m tax effect of deductions claimed by the New Zealand business through to June 30 last year. The tax effect of deductions for the half-year ended December is about $3.5m.

In Australia, the amount in dispute is $41.5m - being the value of a deferred tax asset.

Michael Hill said in the event it was required to pay any tax liability to the IRD, it would also be hit by an interest expense.

If the ATO prevailed, that would reduce the amount of depreciation able to be deducted by the group.
Shares in Michael Hill last traded on the NZX at $1.23, near the high for the past 12 months of $1.25 and up from 92c this time last year.

Shareholders will receive an interim dividend of 2.5 cents per share.