$NCK announced their 1H FY25 results this morning.

ASX Announcement

Their Highlights

ANZ Group

• Revenue $222.5m, gross profit margin 64.4%.
• Underlying profit after tax $36.0m versus October 2024 AGM guidance $30-33m.
• Statutory profit after tax $34.1m.

UK

• Revenue $28.6m, gross profit margin 45.1%
• Underlying loss after tax $2.8m.
• Application of AASB16 to the acquired UK property leases increased the UK loss after tax by $1.2m for the period. The adoption of AASB16 has no cash impact.
• Statutory loss after tax $4.1m.

Group Balance Sheet

• Cash and bank deposits $87.6m at 31 December 2024.
• Interim dividend 30 cents per share fully franked.

Other Significant Points from the Presentation

As expected, the 1H ANZ sales were subdued, with the suply chain problems communicated earlier further eating into %GM. ANZ revenue was down on pcp, although undeyling profit came in well ahead of guidance.

UK is now into the transition, with the Fabb range being run down, and some sales disruption due to the conversion of stores from Fabb to Nick Scale.

The UK Nick Scali website is up and running (view it here: https://www.nickscali.co.uk/ )

Integration is proceeding, with $KCK processes and systems implemented, and $2m run rate of costs taken out.

UK performance was also ahead of guidance.

UK is still running the old distribution centre, which is on 3-month notice, pending identification of the new operation.

Despite the transition, the UK operation is already seeing an improved %GM off the old range, and $NCK are guiding to a %GM of 57%-59% for the NickScali range and stores. Bearing in mind Australia achieves 64%-65%, this is an encouraging start, as the %GM should increase over time as the store network grows and the business benefits from scale and supplt chain benefits.

Positively, there are early indications of a good product-market fit. The rebranded $NCK stores were the 3 top performing stores in January 2025 for written sales orders, only one of which had been in the Fabb top 5.

The target is to complete 8 further re-branded stores to Nick Scale by EOFY, with ongoing sales disruption due to store conversions.

Importantly, $NCK are already evaluating potential new store locations in the UK.

Outlook

There were a few questions on the surprising soft start to the year, with written sales orders down 8.5% in January 2025, although Anthony cautioned against reading much into this, pointing out that the sale week of the January Sale in Feruary was up 5%.

My Assessment

FY25 and 1H FY26 represent an important period of transition, during a time of sluggish sales in ANZ.

The early signs of a positive start to the UK are there, although there will be a drag on performance as the Fabb brand is transitioned out and stores closed for the $NCK uplift. There is also a change yet to come around identifying and implementing a new distribution centre, which brings some transition risk, and certainly some addition cost.

I retreated to the sidelines on the SP recovery before Xmas (considering the tranisition risks in the UK coming at the time of a slower ANZ period, added to news of supply chain problems). As it turns out, it would have done me no harm to have held on but that said, I don't see positive performance catalysts in 2H FY25.

This morning's SP response (SP up to $18.00 at time of writing!) indicates that the market is looking through the sluggish current period, and seeing the potential for what the UK can achieve for SP. That was always the risk of selling on relative strength ahead of the result. Never mind.

The $NCK SP tends to be reasonably volatile, and I'll be happy to get back onboard around $15.00-$15,50, should I be presented the opportunity. Otherwise, it is not a stock I have to own, so patience and discipline are required! I think FY26 and FY27 could be transformational, as UK starts to drive the group result, and monetary easing contributes to a better retail environment, so if I can get back on in the next 6-9 months at a reasonable price, then I will.

Overall, Anthony and team are doing a good job (and I am looking forward to my new armchair arriving in April .... I did my bit to help January written orders!)

Disc: Not Held

$NCK get us warmed up for earnings season as usual, as one of the early reporters.

Results Release

Some quick comments ahead of the Investor Call at 10am

The results are complicated by the UK acquisition, which we won't be able to judge for a good couple of years, so I focus my remarks on the ANZ business and the underlying report.

ANZ written sales orders of $4447.4m up 2,4% Y/Y is a reasonable result in the current environment. On a LFL basis, sales expanded 1.0%. Of course this is less than inflation, so depending on the level of discounting volumes were fairly flat, possibly a slight decline. However, in the context of the current macro-economy and impact on discretionary spend, not a bad result.

Encouragingly, Gross Margins continued to expand strongly, up 2.5% to 66% on the PCP.

Expense control is not bad, all things considered. Total Operating Expenses (including D&A) increased 6% - which includes the UK expenses and acquisition costs. Stripping out D&A and $1.5m acquisition costs, expense growth is +4.9%, so, pretty good actually when you consider the inflationary environment.

The Y-o-Y revenue decline is explained in terms of things that happen in FY2023 around the FY22/FY23 transition. Need to understand this further, as I don't recall it having been called out as exceptional before - but I need to check.

Online continues to grow reasonably for the Nick Scali brand - written orders of $34.8m vs $29.5m in the pcp.

On outlook in ANZ, June and July are down -1.2% vs PCP - discretionary continues to be under pressure. No surprise there.

Balance sheet is strong, given the capital raising with Cash+Equivalents+Term Deposits at $111m up from $89m, and with $20m of long term debt having been paid down, which will reduce interests. LT Debt now $69m.

EPS seeing the drag of lower NPAT as well as increased share count following the capital raise.

Store expansion plans broadly in line with strategy. UK exapansion plans yet to be decided (need to uplift the acquired properties first).

Good news - a UK CEO has been appointed. Rodne Orrock, ex-CEO Best & Less. Interested to hear if any StrawPeople have views on him, as I don't know him.

Initial thoughts

An OK result - $NCK continues to navigate the challenging discretionary retail environment, maintaining a strong balance sheet (supported by the capital raising).

Will see if there is anything else to report after the call.

Some of the numbers look a smidge under consensus, but I am not sure hot much to put into that, given the muddying of waters due to the UK acquisition. Happy long term holder.

Disc: Held in RL only

Result of the SPP are out:

From the release:

As the total value of applications received exceeded the SPP offer size of A$10 million, the Company has undertaken a scale-back of applications consistent with the terms of the SPP3 . The scale-back principles were structured with consideration to shareholder fairness as follows:

• applications for A$1,000 of New Shares (being the minimum application amount) received from eligible shareholders were not subject to any scale-back and will receive A$1,000 of New Shares, rounded down to reflect a whole number of shares; and

• applications received from eligible shareholders for more than A$1,000 of New Shares were scaled back on a pro rata basis based on the shareholdings of those eligible shareholders as at the Record Date.

Approximately 97% of eligible shareholders who submitted valid applications will receive an amount of shares that exceeds their percentage holding in Nick Scali as at the Record Date.

Well done to all who helped in the lobbying. It sounds like our voices were heard!

Unsurprisingly, the institutional placement was fully taken up.

ASX Announcement

And Anthony has said that investing shareholders who bid up will be allocated their pro rata share, despite new institutional investors also showing up.

The market has liked the announcement with SP up 11% at time of writing, making the SPP off of $13.25 looking very attractive.

Good to see such a great reception for the move.

$NCK has just gone into a halt pending an announcement about a capital raise.

Is this the long hinted at UK acquisition coming to fruition?

I can’t think what else, given that it’s so cash generative.

$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.)