New Zealand-based jeweler, Michael Hill (ASX:MHJ), has closed half a dozen outlets and retrenched staff and managers in response to what it calls "challenging conditions," which have adversely impacted profit margins, leading to earnings reductions of over 40%.
In fact, the company might even report a small statutory loss for the latest half-year.
"The macroeconomic environment affecting consumer sentiment has resulted in difficult trading conditions, while inflated input costs and aggressive competitor behavior have also placed significant pressure on margins," the company stated in an update to the ASX and NZX on Friday.
Michael Hill reported weak sales, especially in New Zealand, whereas in Australia, they were boosted by the acquisition of Bevilles for $45 million last April, rising 4.15% for the half.
However, sales growth for the primary Michael Hill chain was negative for the half-year.
Alongside the closure of six outlets, the company opened four new stores in an effort to maintain sales momentum.
As a result, the company anticipates earnings before interest and tax (EBIT) to be in the range of $30 to $33 million, with margins expected to fall to around 61% to 62% (which is still high). This marks a sharp decline from Michael Hill's margin of 65.2% for the December 2022 period.
Considering that the company reported "comparable EBIT" of $54.5 million for December 2022, the 2023 half-year results are not as strong as some reports suggested on Friday. At worst, the latest EBIT result will be more than 40% lower than that of the December 2022 half-year.
The store closures and job cuts, including some senior managers, will result in one-off costs deducted from the EBIT, and the company is likely to see a significant drop in statutory profit for the period. It reported a statutory profit of $37.6 million for the December 2022 half.
Given the drop in EBIT and the additional costs, including taxes and interest, Michael Hill could report a statutory loss for the latest period.
Michael Hill CEO Daniel Bracken stated on Friday, "While the first half was undoubtedly a challenging period for our business, with sales for the core Michael Hill brand down, we are encouraged by our performance within the broader jewelry sector."
"Clearly, margins were under pressure due to both input costs and promotional activity, and inflationary forces led to increased costs across various aspects of the business, which collectively impacted EBIT for the half-year. Consequently, the company has taken direct actions to reduce operating costs, including the departure of several senior management roles."
"Even though consumers continue to monitor their discretionary spending, our multi-brand strategy positions us strongly to continue gaining market share from our competitors as we expand the Bevilles network and elevate the Michael Hill brand."
