Tristan Harrison from The Motley Fool shared some upgraded broker price targets in his commentary on Nick Scali today. The average price target from the three brokers mentioned below comes in at $14.72. https://www.fool.com.au/2024/02/07/this-asx-all-ords-stock-is-surging-6-amid-multiple-broker-upgrades/

“According to reporting by The Australian, the ASX retail share has seen three brokers increase their ratings on the ASX All Ords stock.

Broker Jarden Securities raised its rating to overweight (which is positive) and increased the price target to $13.87. A price target is where the broker thinks the share price will be in 12 months.

Macquarie analysts have raised their price target on the company to $14.90, which is slightly higher than where the Nick Scali share price is currently trading.

Wilsons increased its rating to overweight on Nick Scali shares and bumped up the price target by 36% to $15.40.”

$NCK announced their HY results this morning....always fast out of the blocks in reporting.

ASX Announcement

My Analysis

A slight beat on NPAT guidance of $40-42m ($41m consensus).

Revenues were down 20.2% cycling a very strong pcp half, and negative operating leverage pulled NPAT down 29%.

Online sales are doing well, up 22.5% - on a small base.

Improved GM%, up 360 bps and operating expenses were well-controlled.

On the cash side, operating CF of $66.79m is up 16% on the PCP, a strong result and a further $20m of debt was paid down, reducing LT debt from $89m to $69m. Not bad to be achieving that at or close to the bottom of the retail cycle, while still investing $14m in expansion and store upgrade.

Overall, a very good result in the context of the toughening environment for discretionary retail.

The store build-out program and rationalisation continued in line with strategy. There are now 64 Ncik Scali stores and 44 PLush stores, against the target of 86 (NCK) and 90-100 (Plush), which indicates ANZ store count growth remaining of 63-72%.

Looking to the FY, January written sales are up 3.6% over pcp (2.6% LFL) ... which I put down to strong promotions over the summer period, [judging by the number of 20-50% sale emails I received over the last 4-6 weeks. Whatever they have been doing on promotions hasn't hit %GM, so it will be interesting to see if this holds up in H2.]

While there's no forward guidance this morning, with consensus for FY NPAT at $74m, there is some room for a weaker send half of $31m to still meet FY consensus. The H2 FY24 number will be cycling $40.5m in H2 FY23.

The combination of the slide earnings beat and good news for January might see FY consensus tick up a few points.

My Key Takeaway

$NCK continues to weather the storm well.

$NCK SP rallied quite hard in December off the back of the strong November retail number, but has wound back somewhat in recent weaks, again due to the weaker picture on retail.

I'm not expecting a significant market reaction to today's result. The next 6 months could still be tough, particularly if the RBA doesn't cut rates until the second half, as this will be the first 6 month period with the lion's share of the mortgage fixed rate cliff run-off is largely played out, reflecting a lot of discretionary spending capacity out of the market. That said, with house prices and jobs market holding up, immigration still strong, and inflation moderating, consumer confidence can be expected to improve, aided by the redistribution of stage 3 tax cuts as this comes closer.

I'm still hoping to increase my holding of $NCK, but I don't think the market is going to offer me the opportunity this week. (I'd prefer to top up below $11.00)

So, I'm a HOLD for now.

Disc: Held in RL and SM

In todays AFR:

Nick Scali founder cashes out $50m via UBS

Expect only the finest in Christmas presents this year from Anthony Scali, the founder and CEO of ASX-listed furniture retailer Nick Scali

Street Talk understands UBS has underwritten a sale of $50 million worth of shares on Scali’s behalf, in his first selldown in nearly five years

The parcel of 4.6 million shares represented 5.7 per cent of issued capital. The trade was underwritten at $11 – or a 5.3 per cent discount to last close

Scali last sold shares in the company in 2018 at $7 apiece. He would be still its largest investor with 8 per cent ownership

It comes after the company posted record revenue – $507.7 million, up 15.1 per cent – as well as after-tax profits – $101.1 million, up 34.9 per cent – for the 2023 financial year. Its shares have risen 24 per cent over the past 12 months, and the latest trading update showed a slowdown in orders but was better than consensus expectations

It listed at $1 a share for an $81 million market capitalisation in April 2004. The company was capitalised at $948 million on the ASX as of Wednesday’s close

DISC: Held in SM & RL

$NCK gave a Q1 trading update today as part of the AGM address.

AGM Address

1Q sales were down 5.4% on the pcp and 6.7% on a LFL basis.

Store traffic was down 10-15% so the sales numbers are reported as showing a higher conversion due to "our better value products from both brands."

1H NPAT is forecast to be in the range $40-42m, which would compare with $60.5m for 1H FY23, reinforcing the negative operating leverage of retailers.

My Analysis

When FY23 was reported in August, it was noted that July was down 8.1% over PCP. So, to be down 5.4% for the quarter indicates that the decline moderated through the quarter. (Hence, the positive SP move on a down day?)

1H FY23 NPAT was 60% of the FY result. If $NCK comes in at $41m and if that turns out to be 60% of the FY result, that would indicate a FY result of $68m, vs. consensus of $71m. So, broadly in-line with the broker views.

That's a lot of "ifs" and dangerous to extrapolate given that we still expect a softening retail environment through FY24.

Overall, $NCK appears to be weathering the storm, and at the time of writing, is one of the few points of "green" on my screen this morning.

In RL, I am still only at 50% of my intended allocation to this small but quality retailer. However, I intend to see how the macro pans out and may wait until 1H or other opportunistic "event".

Disc: Held RL only

Thank you @DrPete for your kind words and your views on the future for Nick Scali.

After reading your straw I am starting to think that perhaps I have been too bullish with my valuation? Perhaps assuming a 5 year ROE of 40% might be a little too high?

Retail is definitely not out of the woods yet and I agree Nick Scali is in for a lower NPAT in FY24. I think in the short term putting a valuation on Nick Scali is a bit like gazing into a crystal ball. We’ve got to make some assumptions about the economy, interest rates, consumer sentiment, the housing cycle etc etc.

Post results, the brokers are starting to adjust their earnings forecasts and the 12 month price targets are starting to come through.

Taking a look at the 12 month price targets on Simply Wall Street the consensus for 7 analysts is $12.44. However, there is not much agreement here with the most bearish at $9.70 and the most bullish at $15.84. That puts my valuation of $16 in the bullish camp!

Source: Simply Wall Street (14/08/23)

The consensus earnings forecast for FY24 from six analysts is $69.3M, climbing up to $88M in FY26. Both significantly less than the $101M just announced for FY23.

Source: Simply Wall Street (14/08/23)

There is a large variance in earnings per share forecasts between analysts. Looking at forecasts from 5 analysts for FY25, the average is 98cps. However the highest is $1.18 per share and the lowest is 85cps.

This is how the variance looks graphically.

So this tells me there are probably too many variables for anyone to forecast Nick Scali’s earnings over the next few years with any degree of certainty.

I think the share price could vary wildly over the next 2 to 3 years depending on sentiment towards discretionary retail. I think there is likely to be trading opportunities for Nick Scali shares over the next few years. However, five years down the track I don’t think I want to be short on Nick Scali shares.

There has been some discussion on Strawman lately about when to Sell a stock. I think we currently have too much Nick Scali in our IRL portfolio (over 10%). For us, the higher the share price goes the higher the risk of holding it becomes. There is a risk of seeing potential profits evaporate! So if the stock approaches $15 to $16 per share I will most likely lighten off some shares and balance out our portfolio (unless there is some unforeseen good news about the economy and the housing cycle which Nick Scali will benefit from).

Similar to @DrPete, our cost base is $9.93 per share, so we could take some profits now. So you could say I am both a seller and a buyer of Nick Scali, a long term BULL and in the short term I’m CAUTIOUS. However, I can’t think of a better stock to get caught holding with a 5 to 10 year time horizon.

So we are holding too much Nick Scali in our portfolio at the moment and we have an opportunity to balance it out and take some profits now. But look at the chart!

I don’t claim to be an expert chartists, but I know enough to know this is not the time to lighten off. I will most likely hold until the MACD heads in a negative direction, then lighten off some of our holdings.

@mikebrisy, I wish I found selling a simple process. For me it is very hard, especially with a wonderful business like Nick Scali! :)

Here are my notes from Nick Scali's FY23 results. Thought these might be useful given I'm positive (hold IRL and SM) but less positive than recent vibe on SM. I've done well given I bought in avg price of $9.92, prompted by @Rick's past SM posts (thanks Rick for your advocacy and insights!), but with recent share price increase it's now in my Hold range.

• Mgmt quality is unquestionably exceptional with recent ROE > 50%, with Scali family owning 14%.
• Company is in great health, with essentially zero net debt.
• FY23 rev is extremely unlikely to be repeated in FY24. It cam off a Covid high, with massive Covid demand combined with supply chain delays that pushed a lot of order fulfilment into FY23. Compared to FY23 rev of $508m, new sales orders over last year were $437m. For me, this is the base case revenue for FY24 given the economic headwinds.
• It's likely that FY24 will break the long history of increasing dividends, unless payout ratio nears 100%. Assuming FY revenue of $440m, gross margin of 60%, operating expenses of $180m, we get a NPAT around $60m, far lower than the $101m in FY23. Even with a 100% payout ratio, that's only around 75c dividend, same as FY23.
• I have concerns about growth. FY23 sales orders were 14% lower than FY23 revenue, because of the Covid backlog of sales that fulfilled in FY23. With economic headwinds, I'm not confident there will be much or any growth from this "underlying" revenue in FY24. Also, store growth was just 3 stores from 104 to 107 in FY23. Another 4 are planned for H1FY24. Not bad, but not awesome. Historical growth prior to covid as about 13% pa. My base case is 5 yr CAGR of 6% (dip in FY24 then returning to around 10% with small ongoing decline).
• Perhaps it's the nature of the large heavy goods they sell, but Nick Scali hasn't cracked online sales. They are tiny at $26m, down from $29m in FY22.
• Despite my muted optimism, the sky isn't falling. Even with my scenario above of 14% decline in rev for FY24, assuming current operating expenses and steady gross margin, NPAT will still be around $60m, which would be 4.3% fully franked yield based on 70% payout and current share price of $12.12, growing around 10% pa.

$NCK report their FY23 results today and, overall, they are pretty decent! Before getting excited, remember that FY23 includes a full year of the Plush acquisition.

EPS of 124.8cps is a small beat on concensus of 122cps.

What's encouraging is to see that Gross Margin has increased due to acquisition synergies and easing supply chains offsetting other factors driving the increased CODB.

The darkest point is as follows:

"The second half written sales orders for FY23 were down 16.2% on the prior period. Trading was very volatile over the half although improved in June 2023 where written sales orders totalled $51.5m, up 4.5% on the prior year. Nick Scali brand online written sales orders 2H FY23 of $14.5m were up 14.5% on 2H FY22 with enhancements in the user experience driving growth. Nick Scali brand online written sales orders 1H FY23 of $12.0m were down 27.7% cycling off 1H FY22 where online benefited from temporary store closures due to Covid 19 lockdowns. 

The outlook of a soft July 2023 vs July 2022 is to be expeccted. -8.1% is not bad given the broader macro conditions in discretionary good, particuarly household equipment. While we may be at or towards the peak of the interest rate cycle, for many households we are just at the start of maximum pain as a big chunk of retail spending capacity goes towards higher mortgage bills.

The growth program is on track overall.

Balance sheet is strong, with another chunk of the debt from Plush acquisition being paid down. So cash and deposits of $89m completely offsets long term debt of $89m,

They are maintaining a reasonably conservative stance on dividend payout at 60%, with the final dividend flat cf. last year. It is however an increase of 7.1% at FY. The full year dividend yield is 7% (before franking credits), which is pretty good for a company which continues to be positioned for growth.

Notwithstanding the challenging retail environment, $NCK looks to be in rude health and well positioned to emerge strong through the downturn, as it continues to grow and drives internal efficiency.

At yesterday's closing price of $10.70, $NCK is on a p/e of 8.6 - historically well into its bottom quartile over the last 5 years.

Investor call at 10:00am

$NCK is towards the very bottom of my valuation range, and I am currently underweight. It is on my shortlist to add to, and provided everything is OK on the call, I'll be adding when I can. I know that there may be further to fall in the retail cycle, but I don't mind getting in a bit early with this quality.

Disc: Held in RL (1%) and SM

I haven’t heard the term ‘time horizon arbitrage’ coined before, but it makes perfect sense. Tim Carleton, Auscap Asset Management CIO talks about their approach to investing on ‘The Rules of Investing’ (Episode 170, 28th July, 2023).

Tim talks about looking past the 6 month horizon the market tends to focus on, and viewing businesses with a much longer time horizon.

In response to the final question, ‘Which stock would you own if the market closed today and didn’t open again for 5 years’, Tim’s choice was Nick Scali. He backed his conviction with the following reasons:

1. A founder run business
2. A long track record of high ROE, an average of c. 50%
3. Mostly ungeared, holding net cash 9 years out of 10
4. A very long runway of organic growth, with opportunity to double the store network over the next decade.
5. Recently acquired Plush where they have been improving the product, lowering costs to the consumer, while improving their own margins
6. Valuation is very attractive on a 5 year horizon. Tim said the biggest driver for furniture sales is housing turnover which is currently the lowest it has been in 20years

It’s an interesting podcast. He also talks about JBH, MIN, PLS, REH and REA, including some of their investing mistakes - both missed opportunities and acquired businesses going wrong.

He says they are long term investors, but talks about the reasons why they would sell a stock, with some real life examples.

Disc: Held IRL (8%), SM (15.6%)

FNArena's All-Year Round Australian Corporate Results Monitor - Macquarie reduced to Hold, Price Target $13.57

Disc: Held IRL (8.5%), SM (20%)

Here is a terrific summary of Why profits are up but share price is down at Nick Scali by Chris Bachelor for ‘Money Magazine’ published on 8 Feb 2023, copied below:

“Furniture importer and retailer Nick Scali (ASX:NCK) receives a Quality score of 99/100 based on Stockopedia's Quality ranking system. This means it is in the top 1% of all companies listed on the ASX based on a combination of quality metrics.

Nick Scali was established more than 50 years ago by the Scali family and listed in 2004. They raised $40 million in the IPO and have never raised any equity capital since.

During its listed life, earnings per share (EPS) has grown from 9c to $0.93, an annual growth rate of 14% over 18 years. The share price has increased from $1.00 to $10.33 today and they have paid out $4.275 in dividends. $10,000 invested into the IPO and held, would have yielded almost $140,000 in profits or an annual compounded return of 17.1% per annum.

This demonstrates how investors can accumulate large amounts of wealth by investing in high quality companies, and then remaining patient despite the gyrations caused by pandemics, property cycles, exchange rates and share market sentiment.

In the 2021 financial year Nick Scali, like many retailers, saw revenue grow at record rates as people were restricted regarding travel and going out, so they diverted their spending to sprucing up their homes. But unlike many other retailers, Nick Scali's revenue growth continued into 2022 and further growth is forecast for 2023 following a record first half.

However, a direct comparison is not entirely fair as Nick Scali's revenue growth was not all organic. It includes revenue from Plush-Think Sofas which they acquired in November 2021. Plush added another 45 furniture stores to the 62 under the Nick Scali brand. The acquisition was funded through debt and existing cash. The purchase price of $103 million represented an Earnings before interest tax, depreciation and amortisation (EBITDA) multiple of 3.8 which was not expensive.

Unlike many acquisitions this one is looking like it will add significant value to Nick Scali shareholders. They have already managed to strip out $20 million in running costs, benefits that go straight to the bottom line, as well as paying off $17 million in debt.

On Monday Nick Scali released their 2023 financial year half-year results. Revenue hit a record at $284 million for the half. Net profit was also up 70% to $61 million. Only two months of income from Plush were included in the previous period, versus the full six months this half year. The first half of last year also included extended periods of lockdowns in the eastern states.

Nevertheless, it is still a very strong result. Gross profit margins also rebounded to 62% helped by reductions in freight costs that had skyrocketed during the height of the pandemic. They have also seen big improvements in the gross margins at Plush as processes have become much more efficient.

Typically Nick Scali earns a little over 50% of its revenue in the first half, although the last few years have not been typical. If this held true, they could expect to earn about $560 million in 2023. Market analysts were forecasting full-year revenue of $537 million prior to the release of the results, so there is room for some upside to these expectations. Since the results announcement, some analysts have already started making small upgrades to their EPS forecasts.

Despite this seemingly strong result, the share price fell 13% on announcement day and a further 4% the following day. Which begs the question, why?

Admittedly the market as a whole also fell, but not nearly as much. It would appear that the declines were driven by a shift in sentiment regarding the outlook for the remainder of this financial year. Management expressed concern that rising interest rates may start to dampen demand, but so far they were not witnessing it.

Some of the commentary from the presentation of the results included that Nick Scali brand sales orders declined 3.0% but this is in comparison to the boom times of 2021. Further, written sales orders for January were 12.1% below January 2022. This includes prices reductions of 5% to 10% in January. Management expects price reductions across the industry. In part, this reflects the capacity to pass on some price reductions due to the benefits of the appreciating AUD, but the market probably also interpreted it as a sign that demand is softening. They also declined to give full-year guidance, citing uncertainty about the coming months.

There is no doubt that some pressure is building as interest rates rise and property prices fall, however, Nick Scali has ridden through many cycles in its history and has demonstrated it can come out the other side in good shape.

From a valuation perspective, some of the metrics are starting to look attractive following the price retraction. The forward PE ratio is only 9.2 which compares with a five-year average of about 13. The dividend yield is 7.6% fully franked.

The short-term risks for Nick Scali are heightened as the uncertainties around inflation, interest rates, the property market and the economy remain. However, the company is conservatively managed and has an outstanding track record of steady growth over the long term. The value proposition for the shares is much like that of Nick Scali's lounges. A quality product at a reasonable price.”

Disc: Held IRL (8%) and Accumulating. SM (20%). The writer of this article, Chis Batchelor, owns shares.

We were looking for a new sofa and looked at Nick Scali and Plush. The online reviews stated that the sales people were wonderful but the customer service was in many cases very poor for both brands. We chatted to another company in the space who used to manufacture in WA (yikes). For the last four years they have been importing instead to stay competitive. He said the Hampton style sofa we liked was from a US company, and then dropped the "but made in China" bomb.

So, fair to say the customer service needs a lot of attention plus I suspect the barrier to entry could be a bit low as China will sell to anyone with greenbacks.

James Mickleboro shared another broker view in an article he wrote for The Motley Fool on Tuesday:

“Investors have been selling this furniture retailer’s shares since the release of its half year results. Macquarie has also responded to its results by downgrading its shares to a neutral rating with an $11.30 price target. The broker appears concerned by the headwinds the company is facing from higher interest rates and a cooling housing market.”

The price has dipped even lower today, down as low as $10.10. I’m loving it, and it will be better still if it falls to $8 to $9. Bring it on!

Is the Scali family reducing their 13.6% holding this week? Not that I’ve seen. They are too focused on opening new stores and improving the margins at Plush. Will there be a recession? Possibly. Will Nick Scali have a few tough years? Possibly. While I’m waiting for the economy to turn around hopefully the grossed up dividend will remain around 9%-10% (ie. including franking credits. This year should be closer to 11.4% grossed up yield). I’m happy with that for the foreseeable future, even if the price continues to fall. The recession won’t last forever (hopefully)!

Disc: Accumulating IRL. SM, reached my limit until it goes lower!

[Not held]

Lots of good discussion on Nick Scali's result and business outlook here, with some pretty bullish expectations. Thought folks might be interested in Graham Witcomb's critique of Nick Scali's result over at Intelligent Investor which makes for some pretty somber reading.

To paraphrase: "furniture sales are a lagging indicator and highly correlated with new home builds; building commencements have collapsed over the past 12 months; ergo expect lower sales going forward unless new store opens can temper things somewhat, but new stores are not being opened fast enough".

He concludes with a hold rating and asserts that even on a FY24 forward PE of 11, the stock deserves to trade at such a discount "due to its lacklustre growth prospects". (II currently recommend buy below $7.50 and sell above $12.50).

II analysts generally seem to be pretty conservative to my mind, but the analysis passed my uninformed sniff test and so figured it was worth sharing here as fodder for thought/discussion...

I think NCK is a great business - one of those founder-led businesses often talked about. Very high ROE which has been maintained over many years - has been above 40% since 2016. It's managed very well over many years - with good products and thick margins. They sell quality products and I like the deposit model, which reduces working cap requirements and increases cash flow. Debt is low and they own some of their properties, which does provide a great buffer in troubled times, which may be coming given the discretionary nature of the product. Having said the outlook is bleak, I took the opportunity yesterday to top up my IRL holding, not many times you can get a business like this on close to 8% yield (noting the forward outlook is unclear), longer term I think this will pay off for me.

Thanks for your trading updates @Invmum and @Seasoning. Were you as stunned as I was with the market reaction to the 1H23 result, share price down 13%! Fair enough there was no full year guidance but 13% down after beating guidance and the business continues to improve…Go figure??

Nick Scali increased 1H23 NPAT by a whopping 70% over 1H22, beating profit guidance two months ago of a 57% to 66% improvement.This huge boost was partly due to delayed deliveries in 2H22 and a full half year of Plush sales. Cost of doing business fell and Gross Margins improved by 2.5% from 59.5% to 62%. Plush acquisition cost saving synergies realised $20 million. The Plush business is also continuing to improve monthly as they upgrade stock and store layouts.

While this was once again a cracker half year result, written sales orders grew very slowly at 3.4% for the half and January written orders were down 12% PCP. However, this was better than Nick Scali was expecting being up 22.9% on pre-COVID levels.

I think Nick Scali will surprise to the upside for FY23. Analyst forecasts (S&P Global data on Simply Wall Street) average $93 million NPAT for FY23. Given Nick Scali has already landed $60.3 million of this in the first half, I think they’ll romp this in. The analysts also have Nick Scali’s FY24. earnings falling to c. $75 million, a mere $15 million more than 1H23 earnings.

I think the analysts and the market are underestimating Nick Scali…AGAIN! For me yesterday was a buying opportunity and I topped up IRL, and I’m now looking forward to the 3.7% fully franked dividend (for the half year!) just over a month away. Apparently investors and analysts were expecting a higher dividend announcement? The market is getting pretty hard to please IMO! For me, this incredible business is a screaming buy at 9x FY23 earnings, while it returns investors 40%+ on their equity in the business. I am happy to buy and hold this high ROE, well managed, founder owned business for a VERY, VERY long time…perhaps forever?

Disc: IRL 6% and adding. SM…I can’t add more than 20% of my portfolio apparently (otherwise I would have!).

When will aussies stop spending?

Even Anthony Scali is surprised!

A quick recap of the HY report

• +57.4% increase in revenue (HY22 180.3 - HY23 283.9)
• +70.2% increase in NPAT (HY22 35.6 - HY23 60.6)
• +65.5% increase in EBIT (HY22 55.1 - HY23 91.2)
• Gross margin dropped from 63.2% to 62.0%
• Cost of doing business dropped from 35.2% to 32.3%
• EBIT margin increase from 30.6 to 32.1%
• EPS change up 70% was 44.0% now 74.8%
• Dividend increased by 14.3% (to 40 cents from 35 cents) - payout ratio of 53.5%

• They had record deliveries going through the backlog
• Plush integration complete with IT and distribution fully integrated
• Savings of 20m annualised compared to pre acquisition Plush cost of doing business
• Sales orders declined 3% cycling off strong demand from lockdowns
• The group had anticipated a slowdown compared to covid 19 boom but trading remains better than pre covid 19 despite rising interest rates.
• Comparatively sales orders were 12.1% below covid levels, but 22.9% above pre-covid

I’ll take a closer look when I have more time. However, the bottom line is Nick Scali had a cracker first half with NPAT guidance up 57% to 66% on the PCP.

Trading Update

“Group written sales orders for the four months were $148 million, 55% above the prior year, with the strongest trading months being July and October. Nick Scali brand written orders were 21.7% above the first four months of the prior year and 35% above the pre Covid 19 FY20 year.

Final net profit after tax for the first half will depend on actual deliveries achieved before the end of December, including the risk of any future unknown external impacts affecting our distribution operations. Based on current delivery levels we expect net profit after tax for the first half of FY23 to be in the range of $56 to $59 million, 57% to 66% above the first half FY22 of $35.6 million.

Trading to date this year has been robust, though uncertainty on future near term levels of demand remain in the current economic environment. Therefore, we are unable to provide additional guidance for the full FY23 financial year.

Disc: Held IRL and SM

I've been wondering about opportunities with retailers during tough financial times. I thought it might be useful to look at what a high quality retailer like Nick Scali went through when this happened in 2008. (I currently own on SM, but wondering what type of opportunity might present itself in the future in the right conditions).

First place I went was the share price - Nick Scali's share price was at about 2.51 late September 2007, it slides over the next few months hitting 0.50 by July 2008.

Comparing to the ASX over the same time period leads me to believe people were bailing on Nick Scali long before the rest of the ASX took the big hit, which began at the start of January, and by late January had hit rock bottom. The ASX drops by about half, but Nick Scali really gets hammered and ends up being around 20% of its original price.

I managed to dig up fantastic holdings (ASX:FAN) - which you can't really get to from Google finance since they delisted.

Their pattern went like this:

Following the ASX drop Fantastic holdings over 11 days drop from about 4 dollars to around 1.68 - a similar decline in price - much, much faster, and they recover extremely fast compared to Nick Scali. Yet Nick Scali ultimately beats them in the long run. So why did Nick Scali's price drop sooner than FAN and why did it take so long to recover?

I had a look at an unrelated retailer (JBH) to see if the pattern was similar to NCK or to FAN and found their pattern to be much closer to FAN in duration - but the hit there was 20% to their share price and not the massive hits these furniture retailers got.

Looking at news articles around 2008/2009 focusing on Nick Scali, they paint a pretty grim picture for NCK

https://www.smh.com.au/business/hard-times-hit-nick-scali-20080815-3wej.html - Hard times hit Nick Scali

https://www.smh.com.au/business/tougher-times-hit-furniture-retailer-nick-scali-20090213-876x.html - Tougher times hit Nick Scali

Articles like these don't do great for sentiment. Even when the articles get more positive in 2010, the share price barely budges.

https://www.smh.com.au/business/nick-scali-shares-jump-on-higher-profit-20100219-olig.html

Looking at their dividend history

Their dividend took a hit twice. In October 2008 it was almost halved from the previous final. In March 2009 it was completely absent.

I wonder if the signal of them slashing the dividend caused some shareholders to run to the hills, and not return until it was clear that there was stability. They made a sensible play, but maybe the sensible play turned off the shareholders who were in it for the dividend?

Some stuff I gleaned from annual reports from 2008-2014

They had 2 consecutive drops in EPS, in the FY08 report they showed what happens when you're in a high interest rate, high fuel price environment (sounds familiar) - they start dipping their EPS, in FY09 - the financial crisis had hit, we had a government stimulus (but come on 900 bucks ain't going to buy you a piece of Nick Scali furniture) and so the first half they have a pretty bad time, but some level of recovery in the last half. In 2010 things are looking up, yet their share price just doesn't follow the recovery. It isn't until we start seeing big double digit growth (36%) in FY13 that their share price begins to start picking up.

So what might I expect if I bought NCK today?

If they follow their history, and we really do find ourselves in an environment thats hostile to NCK then we might see a significant drop with the share price going sideways for quite some time, potentially with a dividend being slashed/gone for a little while - but the business itself has demonstrated it can endure through these times and if you were lucky enough to buy them when no one wanted them you'd have made out like a bandit.

Bad Habits

Once a popular darling, Nick has developed some bad habits that no one wants:

1. Chases Retail
2. Very Discretionary in nature
3. Loves your home
4. Makes you wait for your lounge

Other wee issues

1. Interest rate
2. Inflation
3. Transport
4. Higher wages
5. COVID and Lockdowns (at home, China and Vietnam).

Nobody wants Nick

It’s not just Nick, it’s the entire discretionary retail sector.

But wait…This could be Nick’s BEST YEAR EVER!

”Given the scale of the outstanding sales order bank and deliveries in Q3 FY22, the Group entered the final quarter of FY22 in a strong position to deliver revenue and profit growth on the prior year.

This is despite lockdowns impacting sales orders during the first half of FY22 and temporary impacts to margin a result of unforeseen increases to freight costs following the Vietnam lockdown

The Group’s result will continue to benefit from the inclusion of Plush which will contribute positively to profit this financial year”

Heaps of orders…but there could be a wee problem with delivery!

“With current lockdowns in sourcing locations and ongoing delays in shipping as a result, the extent to which revenue and ultimately profit will be recognised this financial year cannot be accurately forecast at the current time (Macquarie Presentation, 4/05/22).

Nick gets the jump on FY23 too!

“Regardless of the level of deliveries that are completed by 30 June 2022, the Group expects to enter FY23 with an elevated order bank, and this will provide a solid platform for revenue delivery in Q1 FY23”

Tough times ahead? Nick has a good model

Note: NOT a Nick Scali lounge

My wife and I ordered a Nick Scali leather lounge at the end of January 2020, just before the full impact of COVID. We shopped around at a number of other retailers before eventually settling on the lounge at Nick Scali. Why? We liked the modern styling and quality of Nick Scali lounges. We fell in love with the lounge!

I tried to bargain, with no success (it’s not part of Nick Scali’s model). I also questioned the minimum upfront 30% deposit, but that wasn’t negotiable either. We put down the deposit of $1870 expecting an 8-12 week delivery. Of course with COVID the delivery got blown out to 4 June 2020, 4 months later. Before delivery we paid in full for the lounge (Total $6170). We also paid extra for a care package (conditioning treatment) and additional warranty (5years).

I asked the delivery driver (contractors) how business was going with COVID. He said they were run off their feet and couldn’t keep up with deliveries. I bought shares in Nick the following day. They were cheap at the time (around $5) because the market was worried about the impact of COVID. How did that turn out? Best year ever!

So why is this a good model? When Nick takes the order they bank 30% of the retail price and before the customer receives their lounge they are paid in full, plus any add on extras. The lounge is not handled by Nick Scali, it is delivered directly to the customer. Factory, Ship, Warf, Transport, and Customer. Nick Scali’s job is to arrange the logistics and collect the profit. The delivery is done by contractors.

The only stock they own is the display stock which they sell at a slight discount when they discontinue a line.

There are 3 models for retail:

1. Just in case - warehousing stock ready for sale (done to avoid delays in delivery, risky, costly, double handling, risk of outdated stock, cash tied up in inventory)
2. Just in time - careful inventory management, minimal stock held, less cash tied up in inventory. JB Hi-Fi does this well.
3. Order/Deliver after payment (This is the Nick Scali model- Less risk, less handling, lowest cost, no old stock when they discontinue a style)

‘The time to buy retail stocks is when no one wants them’

I think it was last year when retailers were just starting to come off the boil I heard Jun Bei Liu say something like, ‘the time to buy retail stocks is when no one wants them.’ If there was ever a time when no one wants retail stocks it would have to be now.

I think Nick Scali will have a decent FY22. Next year could be a bit tougher, but I think this is a quality business that should ‘pay you to play’ while you wait for them economy to improve.

Disc: Held and accumulating

In today's AFR story “Smashed Small Caps that can turn into portfolio treasures” Paul Biddle, portfolio manager for Celeste Funds Management said “The time to put money to work is when everyone is running for the fire exits.”

He also said “At times like these, few people want to own small-cap industrials. That’s when they get oversold”.

“In a weakening market, our preference is small caps that can reliably deliver a 4-6 per cent yield, before franking,” says Biddle. “That’s not a bad outcome if the sharemarket is flat this year. We liken an attractive yield to being ‘paid to play’ while we wait for market conditions to improve – and for our industrial small-cap portfolio stocks to re-rate higher.”

I whole heartedly agree with Paul Biddle’s comments above, particularly this one, “being ‘paid to play’ while we wait for market conditions to improve”. Thats how I’ve been reshaping our SMSF portfolio this year. As a retiree, CASH FLOW in your SMSF is just as important as it is for a company you might hold in your portfolio. It’s ALL about CASH FLOW for retirees when you are in pension phase. You are required to withdraw a minimum amount each year (reduced to 2% for us this year) so if you are mostly invested (like we are) you must have dividends, or you’ll need to sell some shares! Not a good outcome in a bear market. Now back to the AFR story.

Coincidently, I also go along with some of Paul Biddle’s stock picks:

Biddle said “Housing-related stocks have challenges as rising interest rates reduce demand for new furniture and other discretionary items. Nick Scali has fallen 44 per cent from its 52-week high.”

“Biddle likes Nick Scali’s expected yield of about 7 per cent, the strength of its forward order book and its recent results.”

”We don’t doubt that some people will be less inclined to buy a new couch as interest rates rise,” says Biddle. “But Nick Scali delivered yet another strong quarterly update and has a lot of cash locked in through its forward-order book. They have used excess cash through COVID-19 to acquire Plush (a rival sofa retailer), which will significantly grow Nick Scali’s medium-term earnings.”

Not all fund managers agree with Paul Biddle about housing related stocks though:

“Richard Ivers, portfolio manager of the Prime Value Emerging Opportunities Fund, is wary of housing-related stocks. “We’re avoiding any small caps that rely on the housing cycle or consumer discretionary spending, unless it offers compelling value. With interest rates just starting to rise, there’s too much earnings uncertainty.”

I guess this is where the risk lies with businesses like Nick Scali especially if the Aussie economy goes into a recession. Personally I think our economy will be much stronger than most countries over coming years, with the backing of mining and agriculture.

Other small caps Biddle likes are Smart Group (SIQ) and HT&T. I like SmartGroup, but personally I wouldn’t include HT&T because of it’s historical low ROE of 3.5%. I prefer businesses with ROE greater than 15%. Nick Scali has a consistent historical ROE of 50% over several years. Smart Group has an historical ROE of 20% to 30%.

Read the full AFR story for small cap picks from other fund managers.

Disc: Shares held in Nick Scali and Smart Group.

Last week (10 & 11 May) the Nick Scali Chairman, John Weir Ingram, bought 25,000 shares on-market averaging $9.42 per share coming to a grand total of $231,000. That’s $31,000 more than his annual board remuneration of $200K. ASX Announcement

If the Chairman thought it was a good time to buy shares in the company last week, today looks even better, down 4.5% to $8.80 during the day.

Disc: Adding today IRL

After gleaning the Macquarie Conference Investor Presentation it looks like Nick Scali is on track for another record year (FY22). The only thing that might prevent full sales being realised in this financial year is the current lockdowns in sourcing locations and ongoing delays in shipping.

Macquarie Conference Investor Presentation

Trading Update:

• H2 FY22, to 30 April Written sales orders for the four months to April, including Plush, totalled $182.2m, up 36.5% on FY21
• Total written sales orders for Nick Scali for the four months from January to April 2022 were in line with the same period last year. This is despite a decline of 6% in January 2022, due to the escalation of the Omicron outbreak that significantly reduced store traffic at the start of the year. This improvement has been underpinned by the performance of the Australian stores.
• The Q3 trading momentum continued through April, with written sales orders for the Group up 41.4% on April 2021
• Nick Scali stores recorded sales orders growth of 7.5% in April, with comparable store sales order growth of 4.4%. Consequently, the outstanding order bank at the end of April remains elevated, up almost 90% on the previous year

Historical Performance:

FY22 Financial Year:

• Given the scale of the outstanding sales order bank and deliveries in Q3 FY22, the Group entered the final quarter of FY22 in a strong position to deliver revenue and profit growth on the prior year. This is despite lockdowns impacting sales orders during the first half of FY22 and temporary impacts to margin a result of unforeseen increases to freight costs following the Vietnam lockdown

• The Group’s result will continue to benefit from the inclusion of Plush which will contribute positively to profit this financial year

• However, with current lockdowns in sourcing locations and ongoing delays in shipping as a result, the extent to which revenue and ultimately profit will be recognised this financial year cannot be accurately forecast at the current time.

• Regardless of the level of deliveries that are completed by 30 June 2022, the Group expects to enter FY23 with an elevated order bank, and this will provide a solid platform for revenue delivery in Q1 FY23

Disc: Accumulating

I am not going to disagree with @Rick on the financial outlook for this company, but I want to give a different perspective, as whilst current price levels look compelling, there may be the opportunity to buy at a lower price and increase the overall return.

The current chart is in a short term downtrend and it would be prudent to see where the sellers start to dry up and a new uptrend start before jumping in.

Removal of government stimulation and headwinds of higher inflation and rising interest rates are all likely dampeners on consumer spending and I suspect the share price will not rally soon.

As an estimation of where the bottom may occur, then the confluence of the prior uptrend slope from 2017,8,9 and a period of prior resistance may be a good estimate and so a price of around $9 would be entering a buy zone.

FY results and the Annual Report were released today.  Some highlights included:

- FY21 revenue up 42% to $373m

- EBITDA up 93% to $126.6m

- NPAT up 100% to $84.2 (zero dilution so EPS up by the same amount)

- ROE is now to an astonishingly (and unsustainably) high 74% - but even at the 50% plus they’ve averaging for the past few years now it’s pretty remarkable

- Order bank is 35% higher YoY

- Impressive online growth

What are the yellow flags for me:

-          The final dividend of 25 cents is down on the interim of 40 cents and the payout ratio is down on FY20.  That either suggests they’re keeping their powder dry for an acquisition (they have disclosed they in negotiations for purchase of Plush) or they are nervous about COVID lockdowns/the bring forward of COVID demand rolling off.  On the results call they flagged nervousness about COVID.

-          Although the order bank is 35% higher YoY it is down from $191m at the half year to $111m at 30 June.  It does appear to be seasonal though so I’m more alert than alarmed by this.

-          No forward guidance but given the state of lockdowns around the country - and NSW in particular – you can’t really knock them for this.  Commentary about performance of Vic and SA as they came out of lockdown suggests there is still pent up demand out there.

I wouldn’t mind lightening up on my retail exposure and this is pretty close to FV for me but it’s a properly quality well-run business and it’s not yet giving me an excuse to bail out.

@Anni8 – you beat me to this one.  I think you’ll find the final divi is only 25cps though.

[Held]

Overview

Furniture retailer Nick Scali Limited ("the Company") (ASX: NCK) today reported its results for the half-year ended 31 December 2020, with underlying EBITDA of $60.2m and net profit after tax of $40.5m1 , in line with recent guidance on 5 January 2021. After an exceptional six months of trading, this represents profit growth of approximately 100% on an underlying basis.

Written sales orders for the period were $191.1m, representing growth of 52% on the prior corresponding period. On a same-store basis, sales orders increased 58% on the prior comparable period. Sales revenue for the half increased by 24% to $171.1m, less than the rate of sales order growth primarily due to supply chain and shipping delays affecting the Company’s ability to deliver within the half. The closing order bank at 31 December reached an all time high.

Gross profit margin for HY21 was 64.0%, compared to 62.2% in the prior comparative period. The Company was able to improve margins through reduced SKU discounting.

Also Company presentaion

https://www.nickscali.com.au/media/wysiwyg/Investor_Info/210204_NCK_H1_FY21_Investor_Presentation_FINAL.pdf

Nick Scali has upgraded guidance for the first half of FY21, saying it expects underlying profit to come in double that of the previous first half (!) -- due to increased delivery volumes and continued strong sales.

It appears sales accelerated in the second quarter; increasing from 45% in Q1 to 58% in Q2, thanks to the reopening of the Melbourne store and successful sales campaign.

Importantly, written sales exceeded delivered sales by $20m at the end of calendar 2020 -- which means investors can expect a very stroing second half (you cant book sales until delivery is made).

New Store opening and ongoing success with the online channel and will further help.

It has to be said, Nick Scali is one of the best managed companies on the ASX. Remember, this is a furniture retailer (!!) but it consistently has a return on equity >40% (huge, albeit off a levered balance sheet), per share sales and earnings have grown at ~12% and ~20% (respectively) since 2011. Dividends have also grown at around 20% per year, on average, over the period. Even stronger in the past 5 years.

Over that time, the company has raised no fresh capital, with the share count remaining completely unchanged. 

At present, shares are on a PE of ~13 and offer a yield of 4.5%.

Managing Director Anothony Scali (son of founder Nick) owns 13% of the company.

(interesting side note, the family sold down a large stake a few years back -- something that has cost them millions and a good reminder that insider selling isnt always a bearish signal)

I've previously worried that such high rates of growth could not be sustained, and that performance was very much tied to housing construction. That may (or may not be) true -- but these guys are clearly doing something very right!!

ASX announcement here