Jewellery retailer Michael Hill International Ltd (ASX: MHJ) is trying to put on a brave face in a tough environment with management reporting a big jump in statutory net profit as it steps up its cost cutting program.
Shareholders will be hoping that will be enough to help stem the 50% crash in the MHJ share price over the past year which saw the stock touch a record low of 52 cents last week.
In contrast, its peer the Lovisa Holdings Ltd (ASX: LOV) share price is up 10% over the same period and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is 2% stronger.
No so sparkly results
Michael Hill posted a big 125% jump in statutory net profit to $19.5 million for the six months ended December 2018, but before you get too excited, this was due to one-off write-downs in the year before.
Underlying earnings before interest and tax (EBIT) fell 16% to $29.6 million as group revenue dipped a more modest 2.7% to $315.5 million.
The group is in the process of a "strategic repositioning" under new chief executive Daniel Bracken and no one would be expecting this result to hit the ball out of the park. As the saying goes: no pain, no gain.
Silver lining yet to turn gold
The question is whether the next six months will be better than the last. Before I get into that, Michael Hill went to some pains to point out the silver lining in the results. This includes:
- Flat gross margin of 62.6% despite the unfavourable exchange rate. Anything that isn't going backwards is commendable.
- A significant 68.3% increase in online sales to $9.5 million.
- Branded collection sales up 11% to 20% of total sales.
- More significantly, management is targeting a further $5 million in annualised savings, which will double its initial cost saving target.
Management will have a busy second half to right the ship and has identified some priorities like lifting productivity at its Canadian operations, improving the product mix and implementing a more sophisticated and integrated operating model.
Foolish takeaway
But I am not sure if this will be enough to put the stock on a sustained recovery footing. There was a lack of any outlook statement, which is ringing alarm bells for me.
Michael Hill posted an upbeat trading update in January to talk about the strength of the Christmas trading period and the early signs of a turnaround and I would have thought management would continue to point to the light at the end of the tunnel.
There was a conspicuous absence of such talk in its interim results, which makes me wonder if the second half of FY19 will be worse than the first half.
Throw in the tough conditions among retailers, particularly those in the "luxury" discretionary spending area, such as high-end car dealer Automotive Holdings Group Ltd (ASX: AHG), and you can see why I would be avoiding the stock for a while yet.
