Michael Hill International Limited (MHJ) Earnings Call Transcript

Good morning, and welcome to the Annual General Meeting of Michael Hill International Limited. I begin today by acknowledging the traditional custodians of country and First Nations people throughout Australia, New Zealand and Canada and recognize their continuing connection to land, waters and community. I pay my respects to their cultures and to elders past and present. I'm Rob Fyfe, and it is my pleasure to chair today's meeting, my last as Chair of the Board of Directors. Our company secretary has confirmed that a quorum is present, and I therefore, formally declare the meeting properly constituted and open for business. Before I move to housekeeping matters, I'd like to welcome my fellow Board Directors. Firstly, our incoming Chair, Claudia Batten; Gary Smith, who chairs our Audit and Risk Management Committee; Emma Hill, Chair of the People Development and Remuneration Committee; David Whittle, Andrea Slingsby, Karen Bozic and Mark Bayliss. We're very pleased to welcome Karen and Mark, who joined the Board on the 29th of August this year. Karen brings deep retail consumer transformation and operational experience, whilst Mark brings extensive audit, risk, governance and turnaround experience. Together, their appointments bring further intellectual diversity to the Board and further strengthen our leadership and governance capabilities. We are also joined today by Jonathan Waecker, our Chief Executive Officer; Elodie Guillaumond, our Chief Financial Officer; and Rebecca Burrows, the lead external audit partner from Ernst & Young. Elodie and Rebecca are available to address any questions concerning the financial reports. I'll now cover the housekeeping arrangements. Today's meeting is being held virtually through the Lumi platform. This allows shareholders, proxies and guests to attend online, watch the live webcast, ask questions and where eligible, submit votes. The company's secretary, Cathy Hoyle and a representative from our share registry, Computershare, will be assisting with the conduct of the meeting. Thank you to those shareholders who submitted questions prior to the meeting. We will address those during our prepared speeches. Shareholders and proxies may ask questions in writing at any time during the meeting via the chat function or verbally during the dedicated question time following Jonathan and my presentations. [Operator Instructions] Please note that questions can be submitted from now. We will address questions and comments after Jonathan and I have presented. If for any reason, we do not reach your question during the meeting, the company will follow up directly with you where appropriate. Shortly, I will declare the meeting open for voting on all items of business. At that time, the resolutions and voting options will appear on screen. Voting on all resolutions today will be conducted by the way of a poll. For the purposes of the poll, I appoint Lewis Brimelow of Computershare, the company's share registry, who has examined and prepared summaries of the proxy forms received to act as returning officer and to conduct the poll. To cast your vote, select your voting preferences for each resolution. Your vote is automatically recorded. There is no need to press a further Submit or Enter button. You may change your vote at any time until I declare voting is closed. I now declare voting open on all items of business. If you are eligible to vote at this meeting, the resolutions will shortly appear on screen. Please submit your votes at any time. I will give you a warning before voting closes. If a technical difficulty arises and affects online participants, we will take reasonable steps to facilitate your participation. As set out in the Notice of Meeting, I may continue to hold the meeting and transact its business, including conducting a poll and voting in accordance with valid proxy instructions. Today, I'll briefly reflect on the year just completed. Jonathan will then provide further detail on FY '26 performance, the strategic priorities that will guide FY '27 and will also give a current trading update. FY '26 marked an important turning point for Michael Hill. Following a difficult period for the business and the broader retail sector, the group has regained sales momentum across its markets, improved profitability and cash generation and materially strengthened the balance sheet. Notwithstanding the gains the business has made, the operating environment remains uncertain. Cost of living pressures continue to shape discretionary spending, while commodity prices, currency movements, interest rates and geopolitical developments continue to be difficult to predict. For a global jewelry retailer, elevated gold prices, the rapid evolution of laboratory grown diamonds and the accelerating impact of technology reinforce the need to stay close to customers and to remain agile. Against this backdrop, the work undertaken during FY '26 to simplify the business and sharpen execution is beginning to be reflected in our results. We've focused the group on the 2 brands where we see the greatest opportunity to create value, Michael Hill and Bevilles. This has brought greater clarity, stronger accountability and more disciplined deployment of resources. For Michael Hill, our ambition is to make modern luxury accessible. The brand's nearly 5 decades of heritage in quality, creativity, service and trust provide a strong foundation. Our opportunity is to build on those strengths by growing the customer base, deepening relationships and ensuring each interaction is relevant, distinctive and personal. Across the group, technology, data and artificial intelligence will help our people make better decisions in areas such as planning, inventory allocation, customer engagement and frontline support. These capabilities support our people, enabling them to spend more time serving customers and creating outstanding experiences. The Board's decision to restore the dividend reflects both our confidence in the trajectory of the business and our commitment to delivering sustainable returns to shareholders over time. The Board declared and paid a final dividend of AUD 0.02 per share. The dividend has been enabled by a materially improved operating performance and a stronger balance sheet. It does not change the discipline with which we manage capital. We'll continue to balance shareholder returns with investment in the business and flexibility to respond to changing market conditions. This is my final AGM as Chair. It's been an absolute privilege to represent Michael Hill shareholders and to work alongside the Hill family, my fellow directors, the management team and the thousands of people who have shaped this remarkable business. The passing of our founder, Sir Michael Hill, last year was a profound loss to the Michael Hill community. Michael's entrepreneurial courage, creativity and instinctive understanding of customers created the business that we are privileged to serve today. His legacy endures in our culture, our commitment to quality and design and in the belief that jewelry helps people celebrate the moments that matter. My intention had been to conclude my tenure in mid-2025. However, given the significant changes facing the group at that time, I agreed to remain longer to support continuity, oversee the appointment of our new Chief Executive Officer and help prepare the company for its next chapter. I'm delighted that Jonathan joined the business and have great confidence in the clarity, pace and retail discipline that he and his leadership team are bringing to the group. I'm equally confident in Claudia Batten who will succeed me as Chair on the 28th of November this year. Claudia brings strategic insight, international and digital experience, energy, vision and strong governance capability. We've worked closely together over the last 18 months in preparation for this handover, and I'm genuinely excited with the leadership partnership that Claudia and Jonathan have formed. Michael Hill is in great hands. I'd also like to acknowledge and thank all shareholders for your support of me and continued support and confidence in the company. I now invite Jonathan, our CEO, to address the meeting and discuss FY '26 performance, the strategic priorities for FY '27 and our current trading update. Jonathan?

Thank you, Rob. Good morning, and thank you for joining us. Today, I'll cover the progress we've made resetting the business, our FY '26 results, our strategic priorities and how we've started FY '27. But first, let me start with the headlines for FY '26, when we delivered record group revenue, grew comparable EBIT by 57% and restored the dividend. These results tell us that turnaround is working, and I'll speak a bit to how we got there. When I joined the business in August of last year, I spent my first few weeks with our people, our customers and out in our stores. I wanted to understand what makes Michael Hill special and where we lost some of our focus. What I heard took us back to the belief that Michael Hill was founded on, that everyone deserves to wear quality jewelry to feel special wearing it and to feel welcome when they walk into one of our stores. Our team has never lost that belief. They've carried it through every store, every day, some of them for decades. And as a business, we needed to get back to that. So that became our single focus. For us, it means everyday modern luxury, beautiful quality jewelry that people feel confident wearing, giving and celebrating with. It's a high bar on quality from the piece itself to the box it comes in and the warm genuine hospitality that comes from our New Zealand heritage. We then focused on execution. We sharpened our ranges, ensuring customers can more easily find the products they were looking for. We tailored how we go to market in each of our countries, recognizing that the customer needs and preferences are not the same across our markets. We clarified our pricing, we tightened our promotions, and we created greater consistency and trust in our value proposition. We also brought a renewed focus on operational excellence and accountability, ensuring we've executed the fundamentals of retail every day. And importantly, we gave our store teams a much stronger voice in how we run the business, listening more closely to those closest to our customers. Together, these changes helped bring customer obsession back to the center of our decision-making and have resonated strongly with customers and team. We also strengthened the team leading this work. Tonia Zehrer joined us as Chief Product Officer in January after senior merchandising roles at Signet, the world's largest jewelry retailer. Elodie Guillaumond joined us as Chief Financial Officer in February and she was most recently the CFO of retail at Ampol. At Bevilles, we took the same approach. We listened to customers and teams, and we brought in new leadership under Tanya Atkinson. We simplified the offer and we focused clearly on winning in value. And after a difficult first half last year, Bevilles returned to sales and profit growth in the second half of FY '26. Across the group, sales grew in every market, and our balance sheet is stronger. We're now 14 months into this reset. There's more to do, and I see real opportunity ahead. Turning now to the results. For FY '26, we delivered record group revenue of $655.7 million, up 4.1% in constant currency and up 1.9% in Australian dollars. Same-store sales grew 5.2% in constant currency and 3% in Australian dollars, and we grew in every market segment we operate at. And we did that while protecting margins. Our gross margin held at 60.5% even as precious metal costs rose and our customers felt real cost of living pressure. At the same time, we brought our cost of doing business down by 70 basis points to 57.1% of revenue despite continued inflation. Put together, that lifted our comparable EBIT by 57% to $24 million. Our statutory net profit after tax was $10 million. Most of the gap comes from $6.1 million in noncash write-offs, largely from closing Medley and TenSevenSeven, which we announced at our Investor Day back in April. It was the right call as focusing on Michael Hill and Bevilles makes us a simpler business and puts our energy where it works. And as Rob outlined, the Board declared a final dividend of $0.02 per share after no final dividend last year. It's important to note that while customers bought more of our professional care plans this year with sales up 1.2%, the accounting rules spread that revenue over the life of each plan. And when we updated our assumptions on repairs and costs, we recognized $4.6 million less this year. Even with that statutory loss, we narrowed our seasonal second half loss by $1.8 million versus the prior year. Importantly, we've also strengthened the balance sheet. Our net debt fell by $36.3 million to $5.5 million at the end of the year. We're carrying less stock with our inventory down $9.4 million to $189.7 million and that inventory is working harder for us with our inventory productivity up 13%. Finally, we continued reshaping our store network. We closed stores that weren't making money. We opened in strong locations like Bondi Junction, Pacific Center in Vancouver and refitted key stores, including Rundle Mall and Yorkdale. We finished the year with 281 stores, 6 fewer than last year and a stronger network as a result. Our refitted stores are already showing us what's possible with higher average sales, margin and conversion than the rest of the network. At our Investor Day in April, we set out 4 levers to drive profitable growth. I'd like to speak to where we are, where each one stands and what comes next. The first is productivity. Our stores are making more money with gross profit per store up 4%. Our refitted stores are leading the way with higher average sales, margin and conversion than the rest of the network. The second is sales growth. We're growing both in our stores and online. Same-store sales grew 5.2% in constant currency, with growth in every market. And Michael Hill online sales grew 10%. Our professional care plans and services business that keep customers coming back long after their first purchase. The third is gross profit, and you've already seen that we've held margin through record precious metal prices. And the fourth is operating leverage. We lowered our cost of doing business while still investing in our store teams and our customers. As we grow, that discipline means more of every extra dollar of sales reaches the bottom line. To bring this ambition to life, we know we're better off focusing on doing fewer things very well, and that's exactly what we're doing. The positioning for our Michael Hill brand is best captured by a simple idea, making modern luxury accessible. We believe the best way to deliver on this is by focusing on 3 priorities: growing customers, growing profit and growing engagement. All 3 are underpinned by a strong foundation of people, culture and operating discipline. Growing customers means expanding our reach across channels and across markets. Growing profit means growing in a disciplined way, strengthening our margins while keeping a clear focus on cost, and growing engagement means deepening our relationships with customers through expanding our investments into services, loyalty and better customer experiences, both in-store and online. Together, these 3 priorities form the core of how we measure success across the business. Delivering them means raising performance standards across the organization and using our data and emerging AI capabilities to make stronger decisions faster. And it's important our incentives do reinforce this. Our group executive incentives are all aligned to our EBIT ambition and to the strategic outcomes we are driving. Similarly, our purpose for Bevilles is clear: to deliver the look for less. Following the reset, our strategy to do that is intentionally simple: to win on value, move fast and run lean. Winning on value means making the value unmistakable for our customers, great product, incredible prices, strong promotions and making sure when somebody walks past Bevilles store, there is a reason for them to come in. Moving fast means behaving like a great value retailer, spotting what customers are responding to, chasing the winners, turning inventory quickly, reacting to trends and opportunities and not allowing complexity or process to slow us down. And running lean means being incredibly disciplined behind the scenes, buying brilliantly, sourcing brilliantly, controlling costs, improving inventory productivity and making every dollar we invest in the business work harder. But underneath all of that is something just as important. It's how we operate, higher standards, faster decisions, clear accountability, less complexity [indiscernible] because our strategy only comes alive through the decisions that each of us make every single day. Building on the progress we made in FY '26, our priorities for FY '27 remain sharp. In Canada, we are increasing investment in marketing and productive inventory to build awareness and capitalize on our productivity gains. We plan to refit 5 of our top 6 stores while actively exploring new sites. In Australia and New Zealand, we are refreshing stores through lower cost fit-outs, including the Auckland flagship and a new New Zealand store planned for the first half. We are also resetting marketing and go-to-market activities, supported by increased investment in productive inventory. In digital, we will continue to invest in the online channel and customer experience, including expanded buy online, pick up in store capability and enhanced clienteling tools for our frontline teams. In product, we are focused on capturing the full diamond opportunity. Laboratory grown diamonds will support our growth, while natural diamonds reinforce our premium positioning. We will strengthen design leadership, introduce newness and improve availability in value-driven categories as well as with limited releases. In services, we're expanding personalization, custom and bespoke experiences while improving aftercare experiences and product care plans. The Bevilles reset will continue under new leadership and with an updated go-to-market approach for the value segment. And finally, we will continue our journey to becoming an AI-powered retailer through a people-first approach, mindset first, skill set second and tool set third. Our AI-driven demand forecasting and planning capability, for example, will support further gains in inventory productivity and agility. Turning now to current trading and how we've started FY '27. In the first 16 weeks of the year, up through Sunday, the 18th of October, group same-store sales are up 6.6% in constant currency and up 2.3% in Australian dollars. Pleasingly, we grew in every market. In local currency, our same-store sales in Canada were up 11.3%. In Australia, they were up 4%. And in New Zealand, they were up 7.1%, and we are holding gross margins in line with last year. We also know that the first 16 weeks have been much tougher from a trading environment perspective than they were a year ago, particularly in Australia, our largest market. Interest rates here have risen 4x this year, and we know where our Australian customers are feeling it in their household budgets. Our performance tells us that our go-to-market is on the right track and that our strategy is starting to work. And you can see it in our product, our new color, bridal and tennis bracelet ranges, backed by new campaigns and in-store events, are bringing in new customers and bringing back existing ones. So our focus from here stays firmly on profitable growth, growing our gross profit dollars, managing our inventory carefully and keeping an eye on CODB. And with Christmas ahead of us, that brings me to the part of the year I'm most looking forward to. We're heading into our biggest trading period with momentum. Same-store sales growth has picked up in all 3 markets since the first 8 weeks of the year, which means we are entering the all-important Christmas trading period stronger than we started the year. And we built a Christmas range I'm genuinely so proud of. This quarter, we're bringing customers 68% more new pieces than last year across our most important categories, earrings and studs, tennis bracelets, engagement and bridal and with even more in men's, colored stones, Michael Hill watches and silver. We've listened to our customers and our story is about value. So alongside all of that newness, we've more than doubled our core everyday lines, including pieces designed specifically for Christmas and introduced sharp entry pieces and prices that welcome new customers into Michael Hill. It's everyday modern luxury that we've made easier to give. And this Saturday, we launched our first Michael Hill Advent Calendar. When our team revealed it to our store managers, you could feel the excitement in the room. It's different. It's fun. It gives customers a reason to discover us, and it's exactly the kind of new idea I want us to keep testing. We're also continuing to invest in our stores, our new Auckland flagship on Queen Street opened in July. Our Rouse Hill store in Sydney reopens next week, and we have a new store in Richmond on the South Island of New Zealand, alongside with our reopening at Galleria in Perth, both of which will open next month in November. Christmas is our biggest trading period and there's plenty still ahead of us, but we've done the work and our teams are ready. Moving over to Bevilles. They are heading into Christmas with momentum as well. Same-store sales are ahead of last year, and Bevilles continues to win market share in a declining jewelry market here in Australia. Just as importantly, gross profit is growing faster than sales, so this is profitable growth. The team has built a much stronger Christmas range with more than 500 new products, including new waterproof jewelry and refreshed men's ranges and religious ranges and gifts at every price. We've also partnered with Jules Robinson with exclusive collections launching before Christmas. She introduces Bevilles to a large and highly engaged new audience. Every store has been reset with a layout tailored to its own customers, adding a new Black Friday offer, our proven events, Diamond Rush, VIP Day and Super Saturday and Bevilles is ready for the most important weeks of the year. I will now hand back to the Chair to conduct the formal business of the meeting.

Thanks, Jonathan. Before we move to the formal business of the meeting, we will now take questions or comments. If you have a question for the Board, management or our external auditor, or wish to make a comment on an item of business, please submit it in writing or use the audio function now if you have not already done so. Our moderator for the question-and-answer session is Cathy Hoyle. Cathy, have any written questions or comments been received or are any shareholders waiting to speak through the online platform?

Chair, we have received a number of questions through the online platform. I'll address the written questions first and then move to the audio questions. The first question is from [ CE Chong ]. Given that the share price is so depressed and undervalued, would the Board consider doing share buybacks instead of paying dividends? Doing it at current levels, no higher than NZD 0.45 per share would improve the total shareholder return, reduce the share base, increase return on equity and earnings per share. The key is buying back shares at a low price. To put in perspective, the last share buyback carried out in 2023 was actually shareholder value destructive as it was [ funded ] around NZD 1.30, close to the peak at the time. And incidentally, some insider was selling around that time, too.

Thanks for the question. And to answer it precisely, yes, we would consider share buybacks, and that is in our midst. I mean we do have to be conscious of liquidity. At the same time, we do struggle with a lack of trading velocity in the stock and that, also we believe impacts the share price. But certainly, that is in our option set for considering how we return value to shareholders.

The next question is also from [ CE Chong ]. The Australian CODB is the highest among the 3 markets and glaringly out of line. Why? And are you doing anything to bring it down to a more comfortable 48%, which would release $60 million in profit?

I think I'll pass to Elodie, sorry, to respond to that question.

Thank you, Rob. So it's true that in a way, the Australian cost profile is a bit different, mainly driven by labor cost and leasing cost. However, I think as we said, strategically, we clearly have a focus on leveraging the business. And as you would have seen in FY '26 results, we were able to reduce our cost of doing business as a percentage of revenue across all our segments and Australia had actually the best reduction. So it's a continued focus in one of our key drivers of profit growth as part of the strategy.

Thanks, Elodie. Cathy?

The next question is also from [ CE Chong ]. Can you please compare Bevilles to Michael Hill with respect to; a, profitability, specifically gross margin, CODB margin and return on capital employed; b, growth prospects; c, your future capital allocation decisions between the 2 brands?

Look, I'll pass to Jonathan to respond to that question, but just by way of context, we don't break out the detail of the underlying performance of our individual business units. But Jonathan can give you some more general perspectives on Bevilles and Michael Hill.

Yes, absolutely. And as Rob mentioned, we've started to break out where appropriate the performance in Bevilles business. And you would have seen in FY '26 that we really did see a clear inflection point between the halves. We saw same-store sales improved from a decline of 4.6% in H1 to growth year-on-year of 5.8% in H2 and that growth was coupled with a massive improvement in gross margins, which were up 660 basis points versus -- the second half versus the first. Those 2 data points really did show us that we're on to a business that can grow profitably and successfully in that value segment. Also at the Investor Day back in April, we kind of laid out what we believe our road map is with various milestones on how we're thinking about the value creation that the Bevilles business can provide. Stage 1 is the reset. That's very much the stage we're in today, and that's all about returning Bevilles to performance in line with its identity discount jeweler. And that really does show up as having clear value positioning, product clarity and really restoring the commercial discipline. That's effectively the phase that we're in now. And we're looking at Phase 2, which we describe as proving the model, really demonstrating that, that strategy delivers sustained same-store sales growth over time, GP percent improvement and consistent store level profitability. We would like to see Bevilles really demonstrate that consistency through, of course, of Christmas and really into a second half before we evaluate what we might do next with that business. One of those stages, the third stage we outlined was evaluating expansion. So in great success, if all the metrics hold, we would then start thinking about, okay, how might we expand this business and how might we unlock further shareholder growth. That's really the road map we're thinking about. And as we think about the capital allocation between the Michael Hill brand and the Bevilles brand, the Bevilles brand is very much in that Stage 1, Stage 2 phase where they're resetting and proving the model. Therefore, their capital allocation is very tight. We need them to prove that they can be a profitable business that customers will choose them again and again, and that they have earned the right for investment and for that investment to pay back for shareholders. As a result, the majority of our capital investments in FY '27 are very much focused on the Michael Hill brand, where the payback curves and metrics are far clearer and far more accretive to overall value. So we hope to come back from a growth prospect point of view next year.