Michael Hill profit falls

Monday 9th March 2009

Michael Hill International posted a 37% drop in first-half pretax earnings as the Australian dollar weakened and the jewellery chain incurred costs to acquire stores in the US. The company lowered its first-half dividend.

Earnings before tax for one-time items fell to $17.9 million in the six months ended December 31, from $28.5 million a year earlier, the company said in a statement. Operating revenue rose 8.5% to $227 million. Net income soared 237% to $65.6 million, reflecting a $52.9 million deferred tax credit from the transfer of intellectual property to its Australian subsidiary.

The retailer warned of the earnings drop in January, as tough trading conditions forced it to cut prices while currency movements drove up costs. The Australian dollar weakened 30% against the US dollar in the second quarter, eroding margins in the company's biggest market.

The shares are down 14% this year. Michael Hill acquired the stores of a failed jeweler in the US and while the transaction may have allowed it to enter that market cheaply, it coincided with a slump in US consumer demand. Operating losses in the US were $2.4 million in the first half.

The company will pay a first-half dividend of one cent a share, down from 1.2 cents a year earlier.

Michael Hill is "satisfied with the results for the six months in light of deteriorating economic conditions during the period," chairman Michael Hill said. "New Zealand and Canada in particular felt the brunt of the worsening global conditions however the Australia retail segment proved more resilient," he said.

The company is "confident in the continued growth and profitability of the group," he said.

In New Zealand, EBIT fell 25% to $6.8 million. Same-store sales slipped 9.3% and the operating surplus as a percentage of sales shrank to 13.8% from 16.9%.

Trading conditions continued to be difficult as the economy contracted and the company focused on cost control. Australian EBIT edged down 1.4% to A$15.5 million, while same-store sales climbed 1%. The operating margin fell to 12.4% from 13.2%. In Canada, the operating loss was C$444,000, reflecting a worsening economic climate.

By Jonathan Underhill

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