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Results: Michael Hill posts 14% decline in underlying earnings

James Mickleboro

The Michael Hill International Ltd (ASX: MHJ) share price could be on the move on Friday following the release of the jewellery retailer’s full year results this morning.

How did Michael Hill perform in FY 2019?

For the 12 months ended June 30, Michael Hill reported group operating revenues of $569.5 million. This was a decline of 1% year on year and driven largely by a 3.3% decline in same store sales due to its shift away from aggressive discounting and a competitive retail environment.

Further down the income statement, the company reported a 13.7% decline in underlying earnings before interest and tax (EBIT) to $34.6 million.

The decline in underlying EBIT was the result of compressed margins arising from the competitive retail environment and clearing of aged off range inventory. In addition to this, its results were impacted by employee remediation costs of $4.5 million, one-off aged inventory impairment of $6 million, and employee restructuring costs of $2 million as part of its cost out program.

On a statutory basis, net profit after tax came in at $16.5 million, compared to $1.6 million in FY 2018.

During the 12 months Michael Hill reduced its net debt by 11.4% to $24,8 million, leaving it with an improved equity ratio of 46.8%.

However, this appears to have come partially at the expense of dividends. The company declared a final dividend of 1.5 cents per share, bringing its full year dividend to 4 cent per share. This is down 20% on FY 2018’s dividend.

Michael Hill’s CEO, Daniel Bracken, acknowledged that FY 2019 had been a difficult and transformational year, but appeared optimistic on the future.

He said: “Whilst we are disappointed with the financial result, we have finished the year with positive sales momentum and reduced inventory.”

Adding: “I’m proud that we have been able to improve sales momentum despite challenging trading conditions in our key markets. Following our Q4 sales results, I’m confident that in the coming year we are well positioned to deliver improved performance as our new operating model gathers pace, new product is introduced and our investments in our digital and IT infrastructure start to bear fruit. The focus will continue to be on retail fundamentals and strong execution in store and online.”

Looking ahead, the chief executive expects trading conditions to be challenging in FY 2020.

He explained: “The business was facing significant challenges when I joined in November, but we pulled together and reversed the momentum. Whilst we expect market conditions to remain challenging, our focus will be on strengthening our customer proposition with new branded product and improved disciplines in buying, selling and marketing. Our focus on cost reduction and improved productivity will also continue as we look to build on early signs of positive momentum in the last quarter.”

Should you invest?

Whilst Michael Hill appears to be making decent progress with its turnaround, it remains too soon for an investment for me.

Instead, I would sooner buy the shares of rival Lovisa Holdings Ltd (ASX: LOV) due to its strong long-term growth potential thanks to its international expansion opportunity.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019