Wednesday, August 26, 2009

Michael Hill International: 2009 full year profit commentary

The 2009 full year profit for Micheal Hill International [MHI.NZ] out yesterday was ugly, real ugly.

Summary of Key Points

- Operating revenue of $411.999m up 9.4%
- Same store sales 0.8% up on same period last year
- EBIT of $26.193m down 38% on last year
- Restructure of group in December 2008 resulting in a deferred tax credit of $52.942m
- Restructure consultancy costs of $1.226m expensed in the period
- US acquisition costs of $1.569m incurred in the period
- US segment loss of $5.292m for the period
- Net profit before tax of $20.149m down 46.3% on last year
- Net profit after tax of $69.533m (includes the deferred tax credit of $52.942m)
- Net debt reduced from $64.234m to $36.958m
- Operating cash flow of $47.643m for the period ($7.763m in 2008)
- 30 new stores opened during the twelve months, including 17 in the US, and 1 closed in Australia
- Total of 239 stores open at 30 June 2009
- Final dividend of 1.5 cents per share (no imputation credits attached)
- Total dividend for the year of 2.5 cents down from 3.2 cents in 2008


First the ugly stuff:

Ordinary profit after tax from operations was down by 46% on revenue up by over 9%.

One of the key reasons for this drop in profit was the purchase last year of a chain of bankrupt US jewelry stores that has so far cost MHI nearly NZ$7 million over the last 9 months. A small part of that cost was a one-off purchasing fee related to the acquisition, the rest an operating loss.

Management have indicated that more shareholder money will be spent refurbishing a handful of these US stores and as the retail environment in the US isn't going to recover any time soon it is likely the company will be in for substantial losses for the nest 12 months on US operations.

Michael Hill has said himself that the timing of the US purchase was a mistake (listen to Michael Hill interview - You need to register first) but as he has also said he has always wanted a foothold there, he has it now and holds a long-term view on its future success, as do I.

Pumpkin Patch Ltd [PPL.NZ] has also had recent difficulties with its US operations, incurring significant losses, so this is a very tough market, especially in the current economic conditions.

Michael Hill's Canadian stores have also dropped back into a small loss after being in the black last year.

New Zealand operations were down significantly, and all indications from the man on the street (my good self scoping foot traffic whenever I go past a MH store) are that things are not looking any better as we enter the new financial year.

The not so ugly:

Australian Michael Hill stores were immune from the retail downturn with both an increase in revenue and before tax profit. It is important to note though that Australia has yet to have an official recession, with economic indicators there still looking positive, so that is one explanation for its 2009 success.

Many NZX listed companies have managed their capital well during the credit squeeze and Micheal Hill has been exceptional in this case. They have nearly halved company debt to just over $35 million over the last year, without the use of any capital raising. A move to be admired by shareholders and other CEOs with less frugal spending habits.

The 2009 year has been one of the worst years in business for MHI over the last generation. Most of the indicators have been bad and things do not look any more promising in the coming 12 months. However, Australia has been an exceptional standout.

MHI management don't make predictions for the future but they do stress things will be tough over the 2010 financial year (well duh!) and its expansion into the USA is a long term play that will bear fruit in the future.

I picked up more MHI a few months ago for just this long term play.

9 .5 for effort, 6.5 for results.

Disclosure I own Michael Hill International shares in the Share Investor Portfolio.


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