Reporting season starts on positive note

Listed New Zealand retailers are expected to provide a positive reporting season, which started yesterday with Michael Hill International reporting an improved profit for the six months ended December.

The jeweller, which reports its results in Australian dollars, had a 3.3% rise in its operating profit to $A43.9 million ($NZ46.4 million). Its earnings before interest and tax (ebit) rose 0.8% to $A35.2 million ($NZ37.5 million) and the reported profit was up 5.1% to $A24.9 million ($NZ26.5 million). There was no change in the interim dividend of NZ2.5c per share.

Sales revenue for the company was up nearly 10% to $A310.8 million ($NZ330.8 million) and net debt fell to $A26.3 million ($NZ28 million) from $A33.8 million ($NZ37 million).

Michael Hill chief executive Mike Parsell said while the first-half results were satisfactory, it was particularly pleasing to see both revenue and ebit growth come from the largest market, Australia, given the continuing lack in consumer confidence in many parts of that country.

The Canadian and New Zealand sectors performed strongly with 46.7% and 10.3% increase in ebit respectively.

The US segment faced a difficult half with one of its ‘‘triple A'' stores in Chicago closed for three months for refurbishment as part of a broader centre redevelopment.

The pre-opening costs of the new store at Roosevelt Fields, in New York, were carried in the current period, he said.

Forsyth Barr broker Suzanne Kinnaird said the first-half ebit for the Michael Hill group was marginally below her expectations of $A35.8 million ($NZ38.1 million).

Unallocated costs were ahead of expectations, largely reflecting the differential in the foreign exchange gains and losses from the first half 2015 to the first half 2016.

The board appeared to be taking a conservative balance sheet approach, given an outstanding tax dispute with the New Zealand Inland Revenue Department.

No specific guidance has been given for the full year although outlook commentary indicated Michael Hill expected its key markets of Australia, New Zealand and Canada to continue showing strength through the second half.

‘‘This is in line with our expectations, particularly given the weak comparative [period] Michael Hill is cycling.''Store rollout plans provided in the result were in line with expectations, Ms Kinnaird said.

Looking ahead, Ms Kinnaird expected Hallenstein Glasson and Pumpkin Patch to be the exceptions in what was forecast to be a positive reporting season for retailers.

Kathmandu was likely to be the top performer, helped by a weak comparative period and strategic changes. Margins were expected to be mixed for the New Zealand retail sector. A 3.5% gross margin expansion was forecast for Kathmandu through to a 4% contraction in margins for Hallenstein Glasson.

To date, there have been five updates from the retail sector after the key Christmas trading period, with further confirmation of a good Christmas for most retailers. Briscoe Group, The Warehouse and Kathmandu provided positive guidance. Hallenstein Glasson was the only retailer to disappoint, with guidance for a material profit decline following weak sales growth and margin pressure, she said.

Restaurant Brands, the operator of KFC and Pizza Hut, would provide further insight in March, ahead of reporting in April, while Pumpkin Patch typically provided specific guidance.

Anecdotal evidence suggests kidswear and fashion apparel remained highly competitive, characterised by aggressive discounting.

‘‘We expect these categories are also being impacted by the online channel, with apparel one of the fastest growing categories online.''

Both Hallenstein Glasson and Pumpkin Patch were being affected by the lower New Zealand dollar, given the limited pricing power of an apparel retail model, Ms Kinnaird said.

Given Hallenstein Glasson's ‘‘fast fashion'' model, it was expected to report a greater impact from currency movements this season. Pumpkin Patch still had some favourable hedging cover.

The recent material depreciation in the New Zealand and Australian currencies against the US dollar created problems for retailers, placing margins in the spotlight.

Currency movements affected all industry participants as respective hedging rolled off.

Kathmandu was expected to have the largest lift in gross margins this reporting period because it had just weathered a period hard hit by aggressive discounting after a warm winter.

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