$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

$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

$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

@Invmum @Seasoning @Rick have given good reports and perspectives on $NCK which I will not repeat, but largely agree with.

Overnight, several brokers have adjusted views. Here is a summary of Citi's update as reported in FN Arena this morning:

"Nick Scali's December half net profit after tax outpaced consensus and Citi's forecasts by 8%, and also outpaced guidance, thanks largely to synergies from the Plush business, but the top-line results show signs of a slowdown, says Citi.

Gross margins of 62% outpaced Citi's forecast of 61.3%, again most likely due to Plush, advises the broker.

The company now expects to open four stores in the June, which compares to the broker's forecast three stores.

On the downside, the broker observes a slowing in customer deposits, which it says suggests weakening demand, the dividend disappointed both consensus and the broker, and operating cash flow was nearly half consensus forecasts. No guidance was offered.

Buy rating and $15.83 target price retained."

So far, from what I can see, consensus for FT23 EPS has moved from $1.16 to $1.22, based on not all yet updated(I think).

With DPS of $0.40/sh, if that is repeated at the final for $0.80/sh, then the payout ratio is only 65%. Historically, they paid in the 80-90% range, so that gives some headroom to maintain dividend, even if we see a softer 2H.

As I said earlier, I have been tracking $NCK for some time, and have taken the price weakness as my entry point, taking a 2% position in my portfolio, re-allocating a recent 50% selldown in SUL based on SP strength. I'd like to hold a larger position, but will monitor how the macro plays out, in case we are presented with a better opportunity.

(Sometimes, when the "talking heads" say "sell" that's a green flag I cannot resist.)

Disc: Held in RL. (I tend not to hold proven, quality companies on SM.)