Michael Hill loans its CEO A$1.1 million to help pay his tax bill

Thursday, 24 October 2024

Michael Hill has issued its chief executive Daniel Bracken a A$1.1 million (NZ$1.2 million) loan to pay for tax liabilities relating to company shares he owns.

The publicly listed jewellery retailer, with 300 stores across New Zealand, Australia and Canada, sought approval from investors during its annual general meeting held on Wednesday to issue an unsecured loan to Bracken, which he would pay back at the current but nominal interest rate over a period of three years.

The company said Bracken’s tax liability related to company shares he had acquired in 2021 and 2022 as part of his remuneration package.

Michael Hill did not divulge specific details, but it insinuated it was a problem resulting from the shares issue structure on the company’s part.

“The key terms are summarised in the explanatory notice, and include a term of three years, an interest rate which is substantially similar to the interest rate paid by the company under its finance facility, ensuring that interest costs incurred by the company are covered by Mr Bracken,” chairman Rob Fyfe said during the meeting.

“However, while the loan is outstanding, if Mr Bracken sells any of his shares in the company then the proceeds of those shares must be paid to the company to pay down the outstanding balance of the loan.

“Whilst we acknowledge the loan transaction is not one which the company would normally advance, the significant tax liability incurred by Mr Bracken in relation to the issue of shares as part of his FY21 and FY22 remuneration package, combined with low trading volumes and trading restrictions under the group's trading policy, have created an unintended outcome which significantly impacts the personal financial circumstances of Daniel Bracken.”

Fyfe went on to say that the “objective” of the company's equity incentive plan was to “reward and incentivise executives to deliver long term growth and to align their interests” with the interests of shareholders.

“For the reasons noted, this has not been the case in this instance, and therefore the company is seeking to rectify this unintended outcome by loaning funds to Mr Bracken to fund the tax liability arising in relation to the shares issued to him. The loan will allow him to pay the tax liability when due and ensure he remains focused on leading the group as CEO.”

Craigs Investment Partners’ investment manager, Mark Lister, said it was unusual for a company to issue a loan to its chief executive in these circumstances, but said it was common for a company to issue a loan for a new executive to buy company shares when they join.

“Often when you have a CEO come in and you want to get that CEO loaded up with shares so that they've got skin in the game, because that's always a good thing, and they don't have spare money, it is not uncommon for the company to lend them some money, at the nominal interest rate, for them to buy the shares. That's more common.”

Lister said this situation involving Bracken was different, but it could be the result of some bad tax advice, or that the company had structured the remuneration package badly resulting in him acquiring a large tax bill.

The Australian tax system was a lot more complex compared with New Zealand’s, he said.

Loaning Bracken, who is also managing director, funds could also be the company’s way of ensuring Bracken does not sell off shares to pay the tax bill, Lister said.

Michael Hill International grew its revenue by 4% to $644.9m in the year to June 30, compared with $630m in the same period a year earlier.

However, it posted an after-tax loss of $479m compared with a $35m profit a year earlier.

Australia and Canadian sales were up, while New Zealand sales declined 11.8% in the year.

The company’s share price was down more than 35% over the past year, trading around 58 cents per share, and down from a recent high of $1 per share recorded in December.

During the annual shareholders’ meeting, Bracken said New Zealand had been under-performing compared with other markets, but sales in the country had improved and overall trading had turned a corner in the first 14 weeks of the current financial year.

Same store sales were up 4% in that period on the prior year, with same store sales for Australia up 6.3%, Canada up 4.7% and down 4.2% in New Zealand, he said.

Bracken said Michael Hill was performing better than the overall jewellery market.

“As we prepare for the all important Christmas trading period, the positive momentum we have seen in the first 14 weeks is very encouraging.

“Our two largest markets in Australia and Canada are showing good and consistent growth, and our digital channels are performing well.

“While New Zealand is still under performing, the recent economic improvements are encouraging, and we are starting to see green shoots.”

The trans-Tasman business has embarked on a rebrand and transformation strategy since 2020, working to elevate its namesake Michael Hill brand to position itself as a premium jewellery brand. New branding, logos and store refurbishments have followed, along with a partnership with Miranda Kerr as its global ambassador, which the company said had proven lucrative.

Michael Hill has also launched TenSevenSeven ‒ a new high end brand ‒ rolled out gold recycling and jewellery repairs at its stores, and made progress with the acquisition of its low cost jewellery offering, Bevilles.

Bracken said the group planned to grow the Bevilles network to 100 stores in Australia.

He said the wider company had aspirations to be “one of the most sustainable jewellery brands in the world” and he was confident the group’s performance would improve.

'Leading into the final phase of network expansion and productivity, and the overarching growth ambitions for the group out to 2030, with each brand uniquely positioned for their target customer segments, and with both product and brand propositions established, the group will be well placed to grow revenue and profits through a more productive and expanded distribution network.”