Interesting case

Quite surprising to see that Michael Hill reached record results in FY 21, while their stores in Australia, NZ and Canada have been largely affected by lockdowns.
Unlike some other retailers, they have not benefited much from online sales which represented just 6 % of their sales in FY 21.
So, these good FY 21 results seem to be mainly explained by the transformation plan implemented by their new CEO (Daniel Bracken) who arrived in 2018.

This transformation plan had 1 clear objective : re-establish growth* and focus on margin improvement.
Results are quite clear looking below at FY 21 results into details (pre-AASB 16 to exclude the impact of accounting change) :

- Revenues : + 13 % (+ 8.6 % for same store sales, increasing in each of their 3 countries) at 556 m
- Gross Profit : + 17 % (GM increased by 210 bp, with an increase also across the board),
- Employee benefit expenses : - 1 %
- Occupancy costs : - 5.3 %
- Marketing expenses : - 2.1 %
- Selling expenses : - 3.7 %
- Other expenses : - 6.4 %
Total costs : - 2.5 %
EBITDA : + 212 % at 84.9 m.

These were the results of a clearly articulated strategy** to increase sales and margin :
- sales are now driven both by higher average transaction value (ATV) and higher items per sale,
- gross margin benefits from reduced discount-led campaigns, increase ATV, strongest increase in sales with digital (+ 53 %) highest profit margin channel,
- the cost structure benefits from higher sales, but also elements like roster optimisation, increase of shipping from stores and rent renegotiation.
Another major element for them : better control of inventory which is still a key element for them and explain why working capital represents 19 % of their FY 21 sales (vs 28 % the year before).

The cumulated effect of higher margin, better working capital and low Capex (few new stores) has enabled the company to reach a high level of free cash flow (after lease payment), which corresponds to a free cash flow yield of around 20 %, after correcting the cash flow from one off elements like government grants.

* without increasing the number of stores (which have been slightly decreasing during the last couple of years)
** 7 point strategy around brand, digital, retail fundamentals, omni-channel, loyalty, product evolution and cost conscious culture.