Thank you all for standing by, and welcome to the Michael Hill analyst briefing for H1 2022 Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question at that time, you'll need to press star one on your telephone. I'd now like to hand the conference over to CEO Daniel Bracken. Thank you. Please go ahead.
Good morning. Welcome to Michael Hill International Limited's H1 FY 2022 results briefing. I'm Daniel Bracken, CEO, and I'm here today with Andrew Lowe, our CFO. Today, we will be taking you through a review of our H1 results, our current trading performance, and providing you with a strategy update, and of course, ending with a Q&A session. Turning to slide four. I'm particularly pleased with our results for the half. We delivered a strong comparative earnings result of AUD 51.6 million, a lift of 15.5% on last year, along with same-store sales growth and margin expansion in all 3 markets. Despite experiencing significant disruption across Australia and New Zealand, resulting in a loss of 20% of store trading days, our revenues still increased by 2.3% on the prior year.
While the COVID pandemic impacted our retail operations significantly, our global supply chain and vendor network remained robust and reliable, with constant and regular product flow to our stores. These results were driven by the exceptional resilience and commitment of our team and demonstrates the strong culture, engagement, and values underpinning all that we do at Michael Hill. Our strategic initiatives are delivering results and truly gaining traction. Our brand continues to elevate across all facets of the business. Brilliance by Michael Hill, our loyalty program, now exceeds more than 1 million members. Deployments of digital-first initiatives, including Click and Collect, helped to underpin a 37% increase in digital sales for the half. The continued focus on retail fundamentals delivered strong lifts in average transaction value, conversion, and gross margin.
These initiatives are leading our transformation agenda and underpin our strong same-store sales performance of +11% and, most pleasingly, gross margin expansion of 240 basis points. I couldn't be prouder of the successful planning and execution of Christmas, which delivered a record second quarter. All aspects of our business contributed to this result, ranging from the highly engaging and emotive marketing campaign to the deployment of new digital initiatives, excellence in supply chain and inventory management, and our Christmas recruitment strategy. More than 2.5 years of building and executing our strategy is best evidenced by now 10 quarters of comp sales growth together with sustained margin expansion. Now I'll hand over to our CFO, Andrew Lowe, to update you on our financial results and provide some insights on current performance and outlook.
Thank you, Daniel. Turning now to slide five, FY 2022 H1 group results. As mentioned by Daniel, given the disruptive trading conditions, we're particularly proud of our half-year results, driven by both sales and margin expansion in combination with continued disciplined cost management. Despite the ongoing impacts of the global pandemic, both in terms of temporary store closures, seeing nearly 10,000 lost store trading days across the global network and the challenging retail operating environment when stores were opened, the company has nonetheless reported a 2.3% increase in group revenue to AUD 327.1 million for the half, along with an 11% lift in same-store sales.
This performance is a credit to the resilience and focused execution by our teams and the culmination of our ongoing focus on retail fundamentals, digital initiatives, and strong brand-led marketing as the elevation of the Michael Hill brand continues. Gross margin was a standout, lifting by 240 basis points to over 65% for the half, proving the company's brand elevation strategy and ongoing focus on margin expansion continues to deliver. Pleasingly, gross margin significantly increased in all markets, with the highest margin in Australia benefiting from investments in loyalty, digital, and personalized marketing. New Zealand contributed the highest comparable EBITDA as a percentage of revenue, as a lift in sales productivity was driven by a disciplined focus on increasing average transaction value and conversion rates.
Canada saw record H1 revenue, along with a significant lift in performance underpinned by strengthened leadership and retail fundamentals. Following a three-year deliberate focus on productivity, this now sees Canada's profitability levels in line with its ANZ peers. Please refer to appendix A for a breakdown of our segment results. At the end of the half, the company had nil drawn bank debt and a healthy cash position of AUD 99.1 million, reflecting our continued unwavering focus on costs across every facet of our business, along with strong working capital management. Our cost-conscious culture has been critical to the company's successful navigation of the global pandemic. We have delivered broader choice and cost efficiencies for our consumer credit offerings.
Our global supply chain has seen immediate benefits arising from the successful opening of our new Canadian 3PL distribution center in Ontario, providing a lift in productivity and an improved customer experience. Given the current strength of the balance sheet, the company has undertaken a considered capital management review. As a result of this review, the board has updated and released to the market the company's revised dividend distribution policy, which establishes a target range for dividends of 50%-75% of adjusted annual NPAT. In updating the policy, the board has also introduced greater flexibility on weightings between interim and final dividends, given the seasonal nature of the company's earnings.
After taking into consideration H1 earnings, current sales performance trends, and the strength of the balance sheet, the board has declared an interim dividend of AUD 0.035 per share, unfranked, fully imputed, and with conduit foreign income. Turning now to the next slide on key performance results. As Daniel mentioned, this outstanding result reflects consistent operational and strategic execution, best evidenced by 10 quarters of comp sales growth, together with sustained margin expansion and a now well-embedded cost-conscious culture, which together have delivered a significant lift in comparable EBIT. Pleasingly, our digital sales have gone from strength to strength and represented 8.2% of revenue for the half. These results have been bolstered by the execution of our company's omni-channel strategy, which saw the launch of Click and Collect in all markets for the all-important Christmas trading period.
In the last 18 months, the company has rolled out a number of customer-led omni-channel offerings comprising Click and Reserve, digital appointments, virtual selling, ship from store, and then most recently, Click and Collect. Our ongoing focus on inventory management has led to a significant reduction in our closing inventory holdings from the December peak in 2018 of AUD 220 million, with delivery of target closing inventory levels between AUD 170 million and AUD 180 million for the last two December half year ends. Now moving on to Slide seven, Outlook. In January, Australia and Canada were impacted by Omicron with significantly lower foot traffic, challenging rostering and reduced store trading hours. Potentially, similar impacts may arise in New Zealand in the coming weeks. Against this backdrop, in the first eight weeks of FY 2022 H2, group same-store sales were flat.
Group all store sales were up 14%. Gross margins remained strong. I'll now hand back to Daniel to provide an update on the key strategic initiatives.
Thank you Andrew for your insights on the results for the H1 and current trading performance. Now turning to slide eight. Much of the company's strong H1 performance can be attributed to the strategic transformation of the brand, with an emphasis on sales and margin growth. Our strategic framework has evolved, reflecting the progress we have made in the business. The strategic framework continues to underpin future growth for the group. Turning to slide nine. The company's increased focus on the Michael Hill brand and Brilliance by Michael Hill loyalty program are resonating with customers, delivering results and gaining traction in the market. This is best evidenced by the increasing ATV, continued margin expansion, and higher purchasing frequency of our loyalty members. Brand elevation and our loyalty program are key to driving medium to long-term sustainable growth in both sales and margin for the group.
Turning now to slide 10. Michael Hill's digital platforms delivered another strong performance with increased traffic and higher conversion, and now represent over 8% of company sales. The successful deployment of Click and Collect enhanced our omni-channel capabilities as the company continues its customer-led digital transformation journey. Customer-driven omni-channel fulfillment solutions now represent between 30% and 40% of all digital sales. Additionally, the company is continuing to establish its marketplace strategy across its three core markets. Following the launch of The Iconic late last year, we are now in the early stages of a Canadian partnership with The Bay. Turning to slide 11. With more than 90% of the company's sales still coming from the store network, our focus on retail fundamentals sits at the core of the Michael Hill transformation strategy.
An unwavering focus on people and performance, operational excellence, and visual presentation underpin our retail initiatives. As we continue to invest in digital technology solutions to support our store teams, we have also increased the focus on rostering and labor management to drive store profitability. Elevating the customer experience in our stores will continue to be a priority for the business, the success of which is best evidenced by continued improvement in productivity, conversion, ATV, and margin expansion. A new senior leadership structure is also now firmly in place across all markets and delivering strong results. Turning to slide 12. Product evolution is at the center of a customer-led retail strategy and is critical to achieving sales and margin growth. Laboratory-grown diamonds are gaining momentum in the business, delivering increased quality and higher margins while providing customers with a certified, sustainable, and climate neutral choice.
Elevated quality and craftsmanship are essential to our aspirational brand journey, and this will be delivered through the evolution of our supply chain and further investment in the artisanal capabilities of our Australian manufacturing facility. The company's ongoing focus on product mix continues to be a key enabler to sustain margin expansion, and product newness is critical to achieving higher inventory turns and frequency of purchase, which has most recently seen the successful relaunch of our Sir Michael Hill Designer Bridal collection, our most premium range. Finally, turning to slide 13, exploring new business opportunities. With the transformation program now well established in the business, the opportunity to stretch the brand into new territories, markets, and services is being explored. The company is conducting the appropriate market analysis to evaluate new territories that are most suitable for the Michael Hill brand to enter via marketplace and dot com channels.
Additionally, to drive incremental revenue streams, new service offerings with a focus on sustainability underpinned by a new digital ecosystem are also under consideration. Turning to our capital management strategy, given the strength of the balance sheet, the company has undertaken a capital management review. This review incorporates the release of a new dividend policy with a view to providing a consistent dividend that aligns with the company's growth profile. In addition, considerations have been given to the group's capital requirements for existing organic growth and incremental investment opportunities. As a result, the company is actively exploring a number of investment opportunities across the jewelry sector. We look forward to sharing more information on these opportunities as the business continues to pivot from transformation to growth. That brings us to the end of our presentation.
I would like to thank you again for your continued interest in Michael Hill, and we are now happy to take questions.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you need to cancel your request, please press the pound or hash key. Our first question comes from Andrew Steele at Jarden. Please go ahead.
Good morning, Daniel and Andrew. The first one for me is just on gross margins and expectations into the H2. I would appreciate you probably don't provide specific guidance, but in terms of the shape of margin uplift into 2028, should we be expecting something similar as what we saw H1 year-over-year? Or were you expecting to be a little more muted than that?
Good morning, Andrew. Thanks for that question. I kind of thought that might come from you, seeing your release this morning. I think what we're signaling in the outlook statement says is that we anticipate continuing to have strong margins in the H2. I think the reality is we are facing increasingly better margins as we reflect on last year's results as we get through the year. We did have a very strong margin performance from the H2 of last year versus the H1. I think margin gains are more challenging to deliver in the H2. That being said, we certainly have an ambition to sort of maintain the levels of margins that we've been delivering.
65 was an extraordinarily strong result for us in the H1, and I guess the things that potentially dampen a little bit of our enthusiasm around that in H2, we don't quite know what's gonna happen in the Russia-Ukraine situation. We all know when war times come, gold becomes a safe haven stock, and we're already seeing gold prices rise. We're already seeing impacts on the Aussie dollar, and there are separate to global economic challenges, there are some movements in diamond pricing upwards, for the first time since sort of the onset of COVID.
I think it's fair to say we've got some pressure on our cost of goods as we move through the H2, but again, that being said, our incredibly rapid stock turn that you know well does insulate us a little bit against that challenge. Look, we remain confident that the sort of margins we've been delivering in the H1 are achievable in the H2, but that doesn't automatically equate to the same growth levels because obviously they're coming off a higher base in the H2 of last year.
Great. That's very clear. Thanks, Daniel. In terms of operating costs, you saw, you know, good margin gains across all segments. But operating costs in terms of sales in both Australia and New Zealand almost fully offset the gross margin gain in those two markets. I mean, whilst that's impacted by lockdown restrictions, I mean, is the deleveraging impact from lockdown the key driver there? Or is there another element at play, such as, you know, increased staff payments for their performance?
I mean, Andrew, I'll let you give your perspective in a moment. Sorry, I'm talking to my Andrew now, not you Andrew on the call. Andrew Lowe, I'll let you give your perspective in a moment. I mean, I think broadly, Andrew, we recognize that we are facing some cost headwinds. Certainly the announcement of minimum wage increases in New Zealand, not that we're at minimum wage, but that then has a ripple effect on all of our thinking around our core wages in New Zealand. That, as you know, was a 6% lift in minimum wage. That doesn't automatically translate to that sort of lift for us because we're paying well above minimum wage in most cases. Increasing inflation across all of our key markets.
We are anticipating some headwinds on costs in general, but I don't think there's anything materially out of whack in the H1 between the countries. You know, Australia you know had more closures than any of the other markets, but I think equally they would have all incurred a similar cost profile. Andrew, is there anything that comes to mind that was abnormal for you?
Hi, Andrew. Nothing specific. I think just being aware that some of the benefits that we did see flowing through in prior years won't now be flowing through. A lot of the rent support and rent relief that we'd seen coming through out of the initial closures, we're largely at the end of that journey with landlords, so we're just not gonna be seeing that rent relief coming forward. I guess Daniel's comment on inflation, we're conscious of. Our leases, like all retailers, will be pegged to a CPI. As that lifts, our rent costs will lift as well. And generally just input costs across the board. Daniel touched on minimum wage. We are also seeing labor lifts in terms of key talent and key areas of capability across the Australian market here for our corporate office as well.
Andrew, I mean, specifically going to your question, I think, I assume you're looking at Appendix A in the pack when you ask the question and the comparable EBIT variance is lower impact in New Zealand than Australia. That is also a reflection of the sales profile for the half as well. You know, sales revenue change is sort of in line with the segment EBIT change and sort of prorated equally across the two countries.
Yeah. Great. Thank you. Just in terms of your comments on looking at acquisitions, could you be a little bit more specific of the types of assets you're looking at? And you know, what sort of size of deal are we talking about? Are they sort of smaller, sort of AUD 10 million type bolt-ons, or are they sort of AUD 100 million plus type transactions? And what are sort of the, you know, the investment hurdles that you'll be looking to meet?
We, I think it's fair to say we're looking at a very broad range, to be totally honest, not just traditional retail investments. We're also looking at potential digital investments, potential value chain, supply chain investments. There's really a very broad variety of opportunities that we're considering. Each of those, to be totally honest, Andrew, would have a different set of investment criteria around it. Difficult to sort of specifically give a view on ROA or ROI. In answer to your first question, you know, they range from pretty small to medium sized. Nothing quite up at the top end of the range you gave us, but sizable all the same.
Just to clarify on that, what does sort of medium-sized mean? Is that sort of around the AUD 10 million mark?
Oh, not AUD 100 million, but maybe sort of somewhere around half that point.
Great. Thank you. Just on the updated dividend policy, I see there's now a specific discussion in there on special dividends. You know, could you just sort of clarify when you would expect to use this option? You know, given your current, you know, elevated cash balance, what would you consider to be, I guess, a target level of net cash that you want to carry or, you know, even net debt? You know, what's sort of the right level of ongoing, you know, gearing for net cash within this business?
I'll go first again and then let Andrew jump in. I think part of the reason we put that diagram on slide 13, showing our capital management framework, is that we are considering all aspects of that framework, and certainly with a lens on growth first. The board's approach to this is the business is in a privileged position of having the cash reserves that we've now got. We're therefore applying a very considered lens to this. Where might we best make investments to drive growth for the business in the short to medium and long term?
Once we've gone through that process, and only once we've gone through that process, might there be a view to some form of capital returns, and very deliberately, very broadly left as capital returns. The process is, you know, we've issued a dividend policy which gives clearer guidance to the market of what the anticipated dividend should be. Within that, we've geared our weighting or we plan to gear our weighting in a greater sense towards the weighting, the performance, hence the elevated H1 div.
We are very clear about the continued growth of the core business, hence the organic investment will continue in the business, and if not more so than in the past, because the core strategy of the company is to build an aspirational brand journey, and that means elevating everything we do in our business. The organic plus investment profile, as we're calling it, is this exploration of new channels, new markets, new services that we're certainly waiting to conclude our review on before we apportion the investment strategy behind that. Running alongside and parallel to that, what might our more external investments, if you like, and potentially within that acquisition profile look like? All of those pieces of work are sort of running alongside each other, Andrew, in tandem.
The results of that work and the execution of those plans could then result in a review for further capital deployment, depending on where all of those other pieces of the puzzle land. It's complex, but for now, the real focus is on investment strategies and growth.
Thank you, Daniel. Just to clarify one point, I mean, do you have sort of a target gearing that you'll be looking to work towards in the medium term once you get through this process?
I think, Andrew, that, as Daniel mentioned, we're privileged to be in a cash position at the moment. We are and remain open to being in a geared position. But having said that, we're very conscious of COVID. We probably all thought we were through it. Omicron as a wave has come and moved through, it seems, Australia and Canada. New Zealand still to probably experience the full effects. We're just mindful of what might sit beyond that. What it means from an economic point of view, be it war, inflation or interest, and also just consumer confidence. Then what reopening of international borders might mean. There's a wariness around there. I'd suggest that the gearing level that we land at will be something less than what it was before COVID.
I think any retailer will be considered and ensure adequate buffer there in terms of cash reserves or debt reserves as the case may be. The board is not adverse to dipping into a debt position. Facility is there and available.
Great. Thank you, guys. That's all from me.
Great. Thank you, Andrew.
Thank you. We have no further questions in queue. But just a reminder, if you would like to ask a question, please press star one.
Tara, I guess we'll give it another minute, but I think if we don't hear from anyone, we're happy to conclude the call. We know it's a very busy morning for everyone on the call, and many of you on the call, we've got one-on-ones with. If there's no one else clicking the star button or whatever the button is, Tara, they have to press, I think we're happy to conclude the call. Thank everyone once again for following and showing interest in Michael Hill's journey. We look forward to talking to you individually or together, down the road. Thank you.
Thank you so much. Ladies and gentlemen, that does conclude the call. Thank you so much for attending. You may now disconnect.