Friday, February 19, 2010

Michael Hill International: 2010 half year profit commentary

The 2010 half year profit for Micheal Hill International [MHI.NZ] out yesterday was a tale with two stories to tell - encouraging and disappointing.

Summary of Key Points

- Underlying profit up more than 65% from $12.7 million to $22.2 million.

- Operating revenue of $244.864m up 7.9% on last year

- Same store sales up 4.5% on last year

- Earnings before interest and tax (EBIT) of $30.329m up 42.3% on last year

- Net profit before tax of $27.542m up 53.9% on last year

- Net profit after tax of $22.299m

- 5 new stores opened during the six months and 2 closed

- Total of 242 stores open at 31 December 2009

- Interim dividend of 1.5 cents per share up from 1.0 cent last year

- NZ stores struggling

- North American stores biting into bottomline

First the disappointing stuff

US stores have tripled their losses to just under US$ 3 million from last year and as I said in my 2009 full year commentary the retail environment in the US isn't going to recover any time soon and it is likely the company will be in for substantial losses. I think there is more bad news to come over the 2010 year on that front.

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 but I think it is going to be alot tougher than initially thought.

Michael Hill's Canadian stores have also dropped further back into a small loss on same store sales down by 5%. After adding 3 stores over the last 6 months this division still struggles to make a net profit. Like its cousin further south it continues to drag on the overall results of the company.

New Zealand operations were improved significantly in terms of overall and same store sales but the kicker is that the all important margins were down. Not surprising in this retail environment.

The Encouranging

Underlying profit is up more than 65% from $12.7 million to $22.2 million. Something you cant find on the release but a tax gain of $53 million hides the bottomline.

Australian Michael Hill stores were largely immune from the retail downturn with both an increase in revenue and before tax profit. Margins were very slightly down but Australian stores still defy the downturn of company stores in other geographical areas of operation.

This good news could be coming to and end soon as taxpayer handouts have come to an end (for this time anyway) and much of this welfare money went on spending up large in the retail sector.

Many NZX listed companies have managed their capital well during the credit squeeze and Micheal Hill has been exceptional in this case. Overall company debt is down slightly but an indication that money is being tightly managed is that payables have moved up 36%. Many companies have moved out paying day to day company bills to better manage cashflow during the recession.

The 2009 year was one of the worst years in business for MHI over the last generation. Most of the indicators have been bad and things seem to look more promising but nonetheless a little patchy in 2010, Australia has continued to be 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!) I will make a prediction though. Life is going to be just as tough this year and their North American stores are going to continue to bleed red ink until consumers decide that this company becomes part of their shopping horizon. A longer time horizon than I at first thought. 5 years plus, rather than the 2-3 that I thought.

My extra shares picked up last year for just this long term play are therefore going to have to wait to appreciate.


MHI shares finished even at NZ$.69c on the news yesterday.

9 .5 for effort, 9 for results.

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

Michael Hill International @ Share Investor

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