19-June-2020:  Update on COVID-19, Trading, Dividend & Outlook

Market likes!  NCK up +21% at 1:30pm Sydney time.

Response to COVID-19, Trading Update, Dividend Update and Outlook  
 
Nick Scali Limited (ASX:NCK) today wishes to provide the following update on its operational and financial performance since temporarily closing its showrooms on 30 March 2020. 
 
Summary

• 4Q20 QTD written sales order growth of 20.4%*1
• 2H20 HTD written sales order growth of 7.0%*1
• 2H20 NPAT expected to be up 15% to 20% on 2H FY19
• FY20 revenue expected to be in the range of $260m to $263m
• FY20 underlying NPAT expected to be in the range of $39m to $40m*2
• Successful launch of digital sales channel 

 
*1: 4Q20 QTD is the period from 1 April 2020 to 14 June 2020, 2H20 HTD is the period from 1 January 2020 to 14 June 2020

*2: Underlying NPAT excludes the impact of the gain on sale of property, and the impact of the adoption of AASB 16. 

Response to COVID-19 
 
In response to the COVID-19 pandemic, Nick Scali implemented a range of measures across its showrooms to ensure a safe environment for staff, customers, and the community. Selected showrooms within the network began reopening on a test basis in April, and all showrooms within Nick Scali’s retail network were reopened by the end of April with the support of our landlord partners.  Since reopening, all showrooms have traded strongly and recorded positive sales order growth. 
 
Nick Scali’s New Zealand operations were impacted by government restrictions, which forced both the retail and distribution networks to temporarily close. Trading and deliveries have now resumed at all locations with solid operating performance recorded since reopening. 
 
Nick Scali responded to showroom closures by launching its digital offering, allowing customers the opportunity to purchase the entire range of Nick Scali products via digital channels. Whilst this initiative remains in the early stages of development, the Company is pleased with the growth it is demonstrating and sees further scope to invest in this capability.  

 Trading Update  
 
The significant decline in sales orders during the second half of March and the first half of April when the showroom network was affected by closures, meant that approximately $9m11m of sales were unable to be recorded in the current financial year.  However, due to the successful implementation of a range of cost reduction initiatives across marketing, employment and property, together with government assistance, profit for the second half will be up 15% to 20% on last year. 
 
Nick Scali has experienced a significant rebound in customer activity during May and the first half of June. Given the strong trading, the Company expects sales orders for the months of May and June to be up 54% on prior corresponding period, driven by the easing of government restrictions and a reallocation of discretionary consumer spending toward furnishings and homewares.  
 
Dividend Update 
 
On 23 March 2020 the Board decided to defer the payment of the 25c interim dividend until 2 October 2020. In light of strong recent trading and a significant increase in the sales order bank, the Board have decided to bring forward the payment of the previously deferred interim dividend to 29 June 2020. 
 
Outlook 
 
Given the nature of Nick Scali’s business model and the significant increase in sales orders during May and June, the Company anticipates sales revenue for Q1 FY21 to be approximately 30% up.  This is expected to underwrite profit growth for the first half of FY21. 
 
Management and the Board would particularly like to thank our staff for the flexibility and support they demonstrated during this difficult time. Nick Scali’s strong performance during the period of uncertainty was a testament to the hard work and commitment of our people. 

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Disclosure:  Unfortunately, I do NOT hold NCK shares.  I sold them on October 15th last year when they downgraded their profit guidance.  I had been a little worried about the Scali family selling half of their stake in NCK (in March 2018) to a major Chinese supplier of theirs - and then that same Chinese supplier - Jason Furniture (Hangzhou) Co Ltd - better known as Kuka - who had become NCK's largest shareholder - selling all of those shares (through UBS in Aug/Sept 2019) for $6.85/share, being slightly less than the $7/share that they had paid for the shares in March 2018.  Kuka had paid $77m for the stake, then sold it for $75m around eighteen months later.  The guidance downgrade one month after Kuka sold their entire stake in NCK was enough to make me uncomfortable to keep holding the shares.  So I sold - at $5.78/share.  NCK closed at $5.75 yesterday, but they're up over +20% today, and were trading at $6.95 at 1:50pm Sydney time this afternoon.  You can't pat ALL the fluffy dogs...

06-Feb-2019:  NCK has this morning released their 1HFY19 results, see here - and declared an interim dividend of 25c fully franked, putting them on a dividend yield of 9.5% FF (over 13% when grossed up to include franking credits) based on their $5.16 share price at yesterday's market close.  Their previous dividend, paid in October, was 24c, so that's 49c/year.  However, they have a history of increasing dividends - every dividend has been larger than the one for the previous corresponding period (pcp) since 2012 - see here.

Same-store sales growth has been flat, but they have still managed to increase both revenue and earnings through their continued new store rollouts.  Despite Anthony Scali warning us (in the results conference call) 6 months ago that "this is probably as good as it gets" in terms of their industry leading gross margin, they have managed another small improvement to that already stunning number - up from 62.6% to 62.8%.  Revenue was up +10.3% and NPAT was up +8% (over the pcp).  EBITDA +7.5%.  EBIT +6.5%  EPS +8%.  Interim dividend up a whopping +56.3%, with no net debt.  It looks like Anthony has elected to return more cash to shareholders rather than engage in the M&A activity that had been rumoured.  They have increased their payout ratio to 80% now.  They rolled out a further 4 stores during the period, and the roll-out is continuing.  They are just getting started in NZ, with only 2 stores there so far. They successfully launched their Bedroom and bedding category on 26th December (2018) in 24 stores across Australia.  They have 55 stores currently, with a long term store network target of 80 stores across Australia and New Zealand.

For their full 21-page Half Year report, see here.

For their 11-page results presentation, see here.

They declined to provide specific guidance, saying only:  "As evidenced by H1, the company can achieve profit growth in periods of flat comparable sales through the expansion of the store network.  However, given the volatility in recent sales and global uncertainty, it is difficult to provide guidance around profitability for the full year to June 2019."

I hold NCK shares.