Michael Hill International Limited (MHJ) Earnings Call Transcript

Welcome to the Michael Hill FY '25 Results Update. [Operator Instructions] I will now hand over to Andrew.

Good morning, and thank you for joining Michael Hill International's FY '25 Full Year Results Update. I'm Andrew Lowe, Interim CEO and Chief Financial and Supply Chain Officer. Rob Fyfe, our Chair, is here with me today and will be available to answer questions at the end of the presentation. Today, I'll be taking you through a review of our FY '25 results, a current trading update and providing you with further insights on our current core priorities before ending with a Q&A session. FY '25 saw global economic uncertainty and challenging retail trading conditions persist across all markets, with conditions in New Zealand remaining particularly challenging. However, pleasingly, our 2 largest segments still delivered growth with Canada delivering another record sales performance. The second half saw an improvement in same-store sales across all segments with FY '25 half 2 group same-store sales up 2.4%. In addition, the business saw productivity lift with sales per hour increasing by 5% for the year as the business maintained its focus on wage control. Our omnichannel offering continues to be a key strategic focus for the group with further maturity across ship from store, click and collect and virtual selling, which saw digital sales grow 6% to over $50 million for the first time. During this period of economic instability, the group's focus has been on embedding strong retail fundamentals to ensure the business is ready for economic recovery and to drive sustainable growth. This has seen a series of Michael Hill initiatives implemented across the organization. The business opened 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. We refurbished our Queenstown store in New Zealand to reflect our new brand identity. The Pendant Bar concept was successfully launched. It has a focus on both build-your-own and ready-to-wear gifting, targeting both the gifting and self-gifting customers and providing them with a reason to return to purchase more pendents. We introduced an elevated quality in our certified sustainable lab diamonds, which is a high-growth category. And lastly, the establishment of a new distribution center in Auckland, New Zealand. All 3 markets are now serviced by their own in-country state-of-the-art warehouse and fulfillment infrastructure. reducing supply chain risk and logistic costs while also improving speed to market of product for both stores and digital customers. Moving on to the FY '25 group financial results. With full year revenue, gross margin and earnings broadly inline with prior year, the group reported comparable earnings before interest and tax of $15.3 million for the year ended 29 June 2025. For the year, the group delivered revenue of $644 million, broadly flat on prior year. The impacts of continued aggressive promotional trading conditions and record high gold prices were largely offset by the introduction and mix of high-margin products. Accordingly, gross margin of 60.5% was broadly flat to last year. Inflationary cost pressures continue to impact operating expenses across the business, particularly store labor and occupancy costs. During the second half, management took decisive action to reduce operating costs, discretionary spend, corporate roles and overheads, which enabled full year earnings to close broadly flat to prior year. Even with gold reaching multiple record highs throughout the year, continued active management of inventory, including the introduction of new product offerings, saw year-end inventory holdings close at $199 million. Year-end net debt closed broadly in line with prior year at $42 million. As noted in the FY '25 half 1 results release, the existing $90 million debt facility has been increased by $20 million for the 4-month period from 15 September 2025 to support seasonal working capital requirements for Christmas trade. Given continued compressed earnings in FY '25 and in conjunction with the commitment to prudent investment in operating and capital expenditure in FY '26, the Board has decided that no final dividend will be declared for FY '25. For Michael Hill, 2 new stores were opened during the year, 2 stores were converted to Bevilles and 14 loss-making stores were closed. Pleasingly, Michael Hill sales productivity lifted as demonstrated by sales finishing flat against prior year even with the volume of store closures. For Bevilles, in addition to the 2 converted Michael Hill stores, 1 store closed, taking the network to 37. The group finished the year with 287 stores. In Australia, retail segment revenue increased by 1.4% to [ $364 ] million, and same-store sales increased by 1.2% for the year, with second half same-store sales up by 2% on the prior comparable period. Gross margin for the year was 59.7%. Within this result, the recently acquired Bevilles business, while having expanded to 37 stores, including 7 stores in the new market of Queensland, has seen challenging retail conditions suppressed sales growth and margin. Trading conditions have also been particularly difficult in Victoria, where the brand was founded and the majority of the acquired stores are located. As a consequence, we have paused further store expansion to ensure the business model is optimized before we scale the network. Given this decision, the Bevilles brand intangible asset of approximately $20 million has been the subject of a noncash impairment of $7.4 million. The Australian store network finished the year with 160 stores, including 37 Bevilles stores, with 11 store closures and 2 store conversions from Michael Hill to Bevilles. In Canada, Retail segment revenue increased by 3.4% to CAD 162 million, and same-store sales increased by 4.4%, with second half same-store sales up by 6.5% on the prior comparable period. This segment delivered another year of record sales, which is a credit to the resilience of the business and commitment of team members. Gross margin for the year was 60.1%. During the year, 1 store opened, 4 stores closed, resulting in 82 stores at year-end. In New Zealand, retail segment revenue decreased by 5% to NZD 109 million. Same-store sales decreased by 5.5% for the year, while second half same-store sales were down by 2.4% on the prior comparable period, an improvement in what remains a challenging economic environment. Gross margin for the year was 58.3%. During the year, 1 store opened, resulting in 45 stores at year-end. Moving on to our current trading update. For the first 7 weeks of FY '26, group same-store sales were up 3.2% on prior year, with same-store sales for the Australian segment up 3.4%, Canadian segment up 6.8% and New Zealand segment down 3.2%. Total sales for the group were up 3% for the first 7 weeks of FY '26. At the end of the first half, we outlined the following core priorities: one, embedding the repositioning of the Michael Hill brand across all markets; two, internal strategic review of New Zealand to improve performance; and three, reinforce retail fundamentals, brand identity and awareness of the Bevilles brand. Learnings across each of these core priorities were identified through the second half with continuing deployment of a series of targeted levers. Furthermore, there is now also an opportunity to revisit and reset the group strategy following the recent announcement of new CEO, Jonathan Waecker. During this interim period, the group's primary focus has been on building strong foundations for margin recovery to drive sustainable growth. This has seen a series of initiatives implemented to support improved intake margin to deliver uniquely Michael Hill product newness and mix at higher margins and continued disciplined retail execution, all of which is underpinned by a reset of the business' operational rhythm and promotional cadence. The group also established an AI center of excellence in the second half of the year, focused on educating and training team members on the opportunities presented by AI across all facets of the business. The group is also well advanced in an initial trial of a new consignment stock model with one of our major long-standing inventory suppliers. This will provide immediate and direct working capital benefits with the ability to subsequently further scale this opportunity with additional suppliers. Prior to concluding this presentation, I would like to take a short moment to pause and reflect. It is with great sadness that we acknowledge the passing of our inspirational founder, Sir Michael Hill, in July. His vision and ambition and now his enduring legacy will continue to drive and motivate the Michael Hill team globally for the years ahead. We would also like to acknowledge the tragic and sudden loss of our former CEO, Daniel Bracken in February. Thank you for taking the time to pause and reflect. This has brought us to the end of our presentation. Rob and I are now happy to take questions.

[Operator Instructions] Our first question comes from Kade Madigan from E&P Capital.

Maybe just starting with Australia. So this same-store sales growth momentum improved through the year and has gone from plus 2% to plus 3.4% in early FY '26. How do you feel about the overall consumer spending environment at present? Is that indicative you're starting to see a bit of an improvement in Australia?

Yes, I think it's okay. Thanks for your question. I think Australia, we are starting to see those green shoots. I think Canada for some time now has been performing exceptionally well, and it's been extremely resilient. We have, I guess, been patient and waiting for those sort of first signals of Australian -- the Australian economy to turn. I think we're finally seeing the benefit of the interest rate cuts flowing through and just that return of consumer confidence in the Australian market. And I think, therefore, really pleasingly, that second half same-store sales growth lift and then we've seen a continuation of that, albeit only 7 weeks, but into July and August, very pleased.

Okay. That's good to hear. And then maybe just on the Canada comment there. Did you see any benefits in the half from a shift away from U.S.-based competitors on the back of the tariff announcements between Canada and the U.S. at all?