KEY POINTS:
Michael Hill's 236 per cent increase in first-half net profit - thanks to a one-off deferred tax credit - belies the difficult trading conditions the jeweller is facing.
The company yesterday posted a tax paid profit of $65.61 million for the six months to December 31, a huge increase on last year's record interim result of $19.5 million.
But the glittering increase was because of a one-off deferred tax credit of $52.94 million, which came from selling the intellectual property of the Michael Hill Jeweller System from Michael & Co Ltd to its Australian subsidiary, Michael Hill Franchise for $294 million.
This allowed it to book a deferred tax asset of $52.942 million for future Australian tax deductions. It picked up an additional $260,000 in tax benefits related to the inter-company funding arrangements involved.
But the company's net profit before tax was $17.892 million, down 37 per cent on the same period last year.
It argued that it had been affected by several one-off expenses - $1 million in costs associated with its acquisition of the 17 Whitehall Jewellers stores in the United States, $1.16 million in restructuring costs, $2.4 million in trading losses in the US and a margin loss of $4.3 million on Christmas inventory caused by a fall in the US dollar.
It said if these abnormal items were taken out its adjusted profit before tax would be $26.7 million. Operating revenue was up 8.5 per cent to $226.9 million, but same store sales were flat at 0.7 per cent up.
Earnings before interest and taxation were $21.31 million, down 30 per cent on the same period last year.
The company's previously announced New Zealand same store sales were not impressive, falling 9.3 per cent in the period. The Canadian operation fared no better, with a 10.7 per cent decrease.
However in Australia same store sales were up 1 per cent.
Analyst Guy Hallwright of Forsyth Barr said Michael Hill had outlined the situation surrounding the tax credit in December, and there was nothing much new in yesterday's announcement.
"They haven't really given us any outlook statements or anything like that except to say that they're going to be slowing down their store openings in the current economic environment." He expected New Zealand and Canadian sales to continue drifting, and said Australia may also suffer in the next six months.
"It would be hard to see the second half growing a lot for them."
The company is paying an interim dividend of 1c per share. However, it said, because of the restructure surrounding the intellectual property transfer it was unlikely to be able to fully impute dividends beyond 2009, meaning investors would need to pay the tax at their individual level.
Michael Hill shares closed down 1c yesterday at 51c.
