NCK was also covered in todays AFR: Record profits for Nick Scali, but retailer warns of slide in orders

For those not behind the paywall ...

Nick Scali boss Anthony Scali says he is bracing for a tougher year ahead, warning that consumers are “very cautious” and spending on big-ticket items such as sofas is coming under pressure.

He did not provide any firm full-year guidance for the new financial year but flagged that July orders fell 8.1 per cent from strong sales in July last year to $39.7 million.

Shares rocketed up 14.5 per cent to $12.26 at lunchtime after the early update to the year was not as bad as the market had feared.

“Consumers are very cautious and looking at the CBA result this week, they talked about savings going up, so that confirms that,” Mr Scali told The Australian Financial Review.

“We have seen the volatility month by month because the consumer is going through interest rate increases. But unemployment is low. Foot traffic is down, but June was a surprise, so it is all over the place.

“We’re certainly a very highly discretionary product, particularly lounges, [they are] a big-ticket item, so you’ll see that volatility as people get concerned about things like interest rates and inflation.”

His comments came as the retailer topped expectations with sales for the 12-month period rising 15.1 per cent to $507.7 million, pushing net profit after tax to a record $101.1 million.

The double-digit gain in top-line sales was underpinned by increased deliveries, helping to reduce the order book wait time. The year also was boosted by 12 months of revenue contribution from Plush-Think Sofas, which Nick Scali acquired in November 2021.

“We are pleased with the Plush aquisition and integration is complete, and now we are focused on improving sales,” Mr Scali added.

Mr Scali called May a really tough month, with shoppers opting to wait until June for the end-of-financial-year sales when foot traffic jumped.

He said July sales were OK and he did not expect to have to discount to move stock this year.

Statutory net profit after tax (NPAT) rose 34.9 per cent to $101.1 million over 2023, ahead of market expectations of $96.3 million. Underlying NPAT climbed 4.6 per cent.

Group earnings before interest and taxes reached $154.3 million, a 23.8 per cent gain on the year before. The purchase of Plush also helped expand profit margins.

Nick Scali flagged a final dividend of 35¢ per share, in line with a year ago, to be paid on October 18.

However, sales orders in the six months to June 30 were down 16.2 per cent on the prior period amid volatile trading over the half, although they improved in June, when written sales orders totalled $51.5 million – up 4.5 per cent on the prior year.

Mr Scali has returned from a trip to the UK where he was checking out other retailers. Longer term he would like to have a presence, flagging possible acquisitions in future.

“We’d like to be in the UK, but it’s more than likely going to be an acquisition. So, I was there to make sure we understand the market,” he said.

There are 64 Nick Scali stores and 43 Plush stores around the country, with the group planning to open three new Plush stores and one new Nick Scali store by December. The group’s long-term target is to have at least 86 Nick Scali stores and up to 100 Plush stores.

In a note to clients, Citi analyst Sam Teeger said conditions were more difficult in the sector, and it was unsurprising the market expected a 37 per cent fall in NPAT for Nick Scali in the 2024 financial year.

“We expect the stock to be supported today after delivering a better-than-expected FY23 result and July 2023 not being as bad as feared,” he said.

DISC: Held in RL & SM

Thanks for the summary @mikebrisy

Nick Scali is really one of the standout retailers. I mean, just look at the dividend history:

Over the last 5 years, the compound growth rate in dividends has been 13.4%pa

At the current price ($10.70), the current yield is 7% fully franked. That's 10% when grossed up! You don't even need growth at that level.

It kind of feels too good to be true. Is the market really that silly? Or just too focused on the short term?

Looking at analyst forecasts on Commsec, there seems to be an expectation that per share earnings will be significantly lower in the current year -- like 38% lower!!

First of all, what the hell do analysts know? These forecasts usually prove to be way off base, so we probably shouldn't put too much stock in them.

Still, it's the operating leverage that gets you. If sales drop 15% in FY24, and we apply the same gross margin and fixed costs, pre-tax profit for NCK drops about 35%. And maybe a 15% drop in revenue isn't unreasonable -- especially if higher rates do take a lot of heat out of property and associated expenses such as furniture. When things are tough, you can always defer that new couch.

At the same time, that phenomenon works in the other direction too.

I just tend to think with retailers you need to expect things will be very cyclical. What really matters is the growth through the cycle -- and from that perspective I have extreme confidence that there's nothing structurally wrong with Nick Scali. It's not a bold claim to say they will still be around and prospering in 5, 10 and even 20 years. Even if growth eventually and inevitably moderates as the reach full penetration.

And your point on the PE is a good one. Let's assume the analysts are right and NCK does 76c in EPS this year. Well, that's a forward PE of 14. Yes, that's towards the upper end of their historical range, but far from extreme. Or, let's use dividends. If they have a 70% payout ratio this year, the dividend will be 53c. Which gives you a forward yield of 5%, or 7% grossed up to account for franking credits. Not terrible.

Anyway, I guess I'm saying that for patient and longer term oriented investors, there's a "time arbitrage" play here if you assume a near term economic deterioration. And if such a thing doesn't materialise, or is rather mild, things are just really cheap. Maybe things are worse than what the macro bears suggest -- anything is possible -- but even then I don't see an existential risk. And when we come out the other side there'll likely be a lot of upside.