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A review of the priorities from last year
OVERVIEW OF THE FINANCIAL YEARÂ’S RESULTS The group profit result for 2006/07 of $21.017m was up on the previous year by 33.2%.This was achieved by a focus on lifting same store sales, an improvement in margin management and a continued focus on managing costs. After a difficult trading environment in 2005/06 the company reduced new store growth during 2006/07 to focus on quality of earnings resulting in only 18 new stores being opened and 3 non performing stores being closed. 23 new stores were opened in 2005/06. The result reflected a solid improvement in gross margins as the company began to reap the benefits from the centralisation of our supply chain and improved buying strategies. These initiatives should continue to deliver benefits going into the current year. The improved margins combined with a lift in same store sales delivered strong earnings improvement to the bottom line. Sales in the final quarter slowed somewhat, however this was largely due to our decision to change the structure of our June sale in New Zealand and Australia. This involved a move away from the traditional half price sale period in the last two weeks of June during which the company cleared large amounts of discontinued merchandise. During this period revenue has historically spiked at the expense of margins. Despite the lower revenue in June the gross profi t dollar earnings were actually up on the previous year. Last year we made a decision to invest in expanding our diamond ring range and to introduce the Michael Hill watch as our main watch brand resulting in a temporary lift in inventory values and I am pleased to report these initiatives have contributed to both sales and margin improvement in these ranges. Net operating cash flow improved dramatically this year to $41.114m, refl ecting a strong focus on inventory management resulting in lower closing inventory than at the same time last year, despite increased store numbers. During the year we introduced a new inventory budgeting and management system developed and managed by a dedicated merchandise planning team. This will allow the company to move to a forecast ordering methodology rather than our traditional min/max replenishment methodology used previously. This will allow us to better plan when product is needed and reduce out of stocks. This year we have continued with our strategy to evolve Michael Hill into a recognised brand. We engaged a corporate identity fi rm to assist with this strategy resulting in a review of our logo and the introduction of new packaging materials and colours. Our catalogues and television communication has evolved further and the company has virtually moved away from advertising discounted product other than for the three sale periods each year. Instead we are focused on delivering new and exciting ranges that represent exceptional value with a continued focus on our Evermore collection of diamond rings. This strategy is vitally important if we are to be successful with our international expansion plans. SEGMENT RESULTS In the segment tables below, the operating surplus numbers for 2003 have not been restated to the new segment definition. AUSTRALIA - A RECOVERY YEAR
In Australian dollars, total sales increased 13.2% to AUD$197,187,000 and same store sales grew by 3.4%. The operating surplus increased 30.5% to AUD$18,218,000 and represented 9.2% of sales (2006 - 7.9% of sales). Twelve new stores were opened in Australia during the year and two non performing stores were closed. The twelve new stores were opened at: " Kotara, New South Wales In total there were 126 stores trading as at June 30 in Australia. The company still has significant expansion opportunities left in Australia and we feel confi dent that at least thirty more stores can still be opened in Australia which provides the group with excellent growth prospects in the future. Our priority in the coming year is to continue working to lift the performance of the existing store base while identifying and opening further locations across the country. NEW ZEALAND'S PERFORMANCE STEADY
New Zealands performance during the year was very pleasing with total sales increasing 7.0% to $97,439,000 and the operating surplus up 33.3% to $13,570,000. The surplus as a percentage of sales was 13.9% up from 11.1% last year. Two new stores opened in New Zealand during the year at Fashion Island, Papamoa and at Sylvia Park in Mt Wellington. One store was closed. In 2007/08 our main objectives will be to continue to drive same store sales and margins while looking to open a further two stores. CANADA REACHES BREAK EVEN Total Sales in Canadian dollars grew by 59.5% to C$24,994,000 and same store sales increased by 2.9%. The Canadian operation reached a break even position by the end of the 2006/07 year which was pleasing when compared to the $957,000 loss last year. During the year we opened a further four new stores in British Columbia and Alberta. These were in the following centres: " Pine Centre, British Columbia Our priority in Canada is to continue building brand awareness and growing the average sale transaction. This will come from increased brand recognition along with a review of our merchandise ranges again this year, which will include a wider range of diamond jewellery. Our plan includes a move into the Ontario market with store openings planned in the greater Toronto area before Christmas. This will see us operating in British Columbia, Alberta, and Ontario. While we are confi dent in Canadas future we still have much to learn and our goal now is to achieve an acceptable return on investment in Canada. OUR PRIORITIES " To deliver a return on average shareholders funds in excess of 26%. THANKS TO AN INCREDIBLE TEAM
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