@Solvetheriddle and @Karmast Good pickups on the results and post-meeting notes. (My focus yesterday was $NEU before spending the pm/evening on my side-hustle, and between the two of you, you've picked up the main points)

I recently added to my RL $NCK holdings when it got near $13 and, as I wrote yesterday, the result was "OK" but, of course, one hopes for better. I wrote "OK" in the context of where we are in the cycle. For example, even though the dividend is trimmed, its still a decent payout, and the negative operating leverage could have been worse.

I was positively surprised by the strong Gross Margin, and had expected more of the sea freght issues to have materialised. However, because they are booked when the revenue is recognised and not when the sales are written (I think?), then the bad news from these is coming in 1H FY25. Another question I am not sure about is whether the sea freight issues will push out delivery times, which in turn may inhibit writing of new sales orders?

On %GM it sounds like $NCK were effective in exploiting the global discretionary durables slowdown to negotiate better prices from their manufacturers. Of course, with EU/UK now into monetary easing, and the US likely to follow in September, if a soft landing is achieved in US, and UK/EU recovers, then their could be a reversal of this if Chinese factories start getting busy again. Taking freight and China together, we're probably at peak %GM, until perhaps increased volumes from Group growth leads to better procurement.

So I think the next half might be the bad one: 1) ANZ expansions still stalled - may take time to see movement there, 2) full impact of a UK business which is only starting to be transformed and which will carry a heavier cost structure and low sales; 3) full impact of increased freight costs, espeically to UK; 4) higher-for-longer interest rates in Australia (Michelle Bullock seems pretty clear the date of cuts doesn't have a 2024 in it, even if this was a bit of jaw-boning inflation expectations); 5) peak gross margins behind us more generally; and 6) indications of a soft start to the year.

Add to this, it will take a few years for the newly branded UK $NCK stores to be doing decent volumes.

Of course, this will be partly offset by the tax and energy handouts providing some cash into the discretionary channels in Australia - ballpark of $1500-$2000 pp. Of course how much of this can flow into the discretionary channel I am less than clear about, as the boost will come just in time to assist those households that have only been holding on with elevated mortgage and rental payments. And of course immigration is easing and who knows where the house price "wealth effect" moves next.

@Karmast makes a good point. P/E is in the top band, so arguably today is not the time to buy. However, $NCK is a good and well-run business, and I don't think I am sharp enough to add up all the plusses and minuses to intelligently be able to trade $NCK.

@Solvetheriddle on your projections, I note that you have $NCK in ANZ delivering PBT in 2029 of $188m at 25.6% margin vs. my numbers of $176m at 27.4% margin, in the closest, middling scenarios. So, not a million miles away.

Your UK numbers look reasonable, with sales/store of $4.25 UK vs. $5.33 ANZ, and I like how you're gradually building up the UK store margins over 5 years. I'll certainly run these numbers as one scenario when I update my $NCK model!

If I am running your numbers correctly with 2029 PBT of $208m with 84.231 SOI, applying 30% tax rate, I get a 2029 EPS of $1.73. Discounting back at 10% from 2029, then at a P/E=11, I get a valuation of $12/share and at a P/E=16, then I get $17/share. My range of scenarios is probably just over $1 higher, by eyeball (but I have to update my model) - so lets say my range with your UK numbers yields $13-$18/share.

In conclusion, I saw nothing in the result to stop me holding this one long term. Patience will be required to see the UK kick-in. However, when it does, I am picking it to be a winner.

I'm prepared for 1H FY25 to be a disappointment, but not so high conviction on that outcome to be prepared to trade $NCK.

@Karmast- as ever, you've called out some good points on corporate governance. I was less bothered by the reporting niggles, as it is a sufficiently simple business to take these into account. I guess I do need to take a closer look at the remuneration. I am perhaps prepared to be a bit more forgiving on the extra $25k for the CFO. I take your point that management is reasonably well paid. But having worked on M&A on the other side of the world to where I live at the time, I can imagine the circumstances leading to a one-off extra recognition. Personally, its a price I am prepared to pay if the deal delivers its promise!

Disc: Held in RL and SM

Thanks @mikebrisy and a good summary of the published numbers. I tuned in to the earnings call yesterday and as usual a bunch of broker analysts just digging with Anthony to get more sales and margin guidance going forward, so they could plug it in to their price target spreadsheets! Several even kicked off with "congrats on a good result". Perhaps they hadn't actually looked at the result, as sales were down 8% and profit down 20% YOY...this is not a good result even if it was roughly expected.

I was also disappointed with the way they have chosen to report underlying earnings. They have excluded $1.5 million of cost to buy Fabb in the UK...but included the $8 million in sales since they bought it. We all get why they would have done that but it's "tricky accounting" at best in my view - you shouldn't include the short term sales if you don't want to include the short term costs.

Anthony also said that this is the peak for gross margins and they will come down a couple of points from here. Makes sense given the UK is going to be a lower margin business and they are going to have a bunch of extra costs now, to redo and rebrand all the UK stores.

They also didn't deliver 2 more Plush stores and 1 new Nick Scali store in Australia for the half, that was in their commentary at the half year report. He said they did open 2 Plush but also closed 2 and the Nick Scali store is just running late. Fair enough but we dont get to 180 stores in ANZ over time unless we get 5 or so net new openings most years.

I will go to the AGM this year and put these questions and the capital raising scale backs to them, to see what the response is but I have trimmed my position for now on these concerns -

• Group sales are likely to go up over the next 1 to 2 years with the addition of the UK business but group EPS might shrink another 10 to 20% in the same period due to all the extra costs involved in the UK strategy and a likely soft ANZ retail market
• Margins will compress as the UK business brings them down vs. ANZ average
• The business doubled earnings in FY21 during the Covid period. Of course they should have taken advantage of that but earnings are still the same 3 years later. It now looks like it could be another couple of years until we get some reasonable EPS growth again.
• This year they have used discretion in several places on remuneration, so despite sales being down 8% and profit down 20%, management have been paid 10% more than the year before. For example they excluded all the costs associated with the UK acquisition which increased the incentive payout by 14%...I highly doubt they will excluded the sales and profits from it this coming year though when they calculate incentives!
• They also paid the CFO an extra $25k for her help with the UK acquisition. This is someone being paid a $500k base salary and another $400k in incentives for the year.
• The Board is becoming a bit of a worry. The Chair is showing signs of age and struggled to run the AGM last year. I worry that we have a Chair and Board mostly under Anthony's control now given the rem and capital raising decisions of the past year. And while Anthony seems to be a good guy, that is less than ideal as minor shareholders.
• Last but not least the PE is close to the highest it's been in the last 5 years. And that's likely to be even higher on a forward basis if EPS shrinks in the next couple of halves as expected.

Bottom line for me is this is still a really good business, with a great founder operator but the next couple of years are looking tough, so the current high multiple is too risky for me and I am trimming 90% of my holdings. Hopefully will buy back in the next year or so at a much lower multiple.

Currently held IRL