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Date : 14/08/2023

Nick Scali

ASX :

NCK

Market Cap : $866.70 Million

Dividend Per Share : $0.75

Dividend Yield : 6.19 %

Hold

52 Week Range : $8.10 - $12.54

Share Price : $12.12

An impressive result with strong revenue and profit growth. However, macro pressures to constrain results for next few years. We advise "Hold."

Company Analysis

Nick Scali (ASX: NCK) has released its FY23 results and has continued to deliver impressive growth. The headline revenue result of $507.7 million is an increase of 15.1%. Gross margins rose by 2.5% to 63.5%, leading to an impressive NPAT of $101.1 million, up 34.9%.

The company didn’t provide any profit guidance for the full year. However, the market has been understandably cautious about Nick Scali, and a more subdued result was anticipated.

Our last update on NCK can be found here.

Highlights from the FY23 results include:

  • Revenue increased 15.1% to $507.7 million
  • EBITDA increased 20.8% to $197.1 million
  • NPAT increased 34.9 % to $101.1 million
  • EPS increased 34.9% to 124.8 cents
  • Gross profit margin increased 2.5% to 63.5%
  • Cash up $14.6 million to $89.23 million
  • Final dividend of 35 cents, full year of 75 cents.

For yield chasers, the 35 cent final dividend will be paid on 18 October 2023, with an ex-dividend date of 26 September 2023. The full-year dividend of 75 cents is a modest 7.1% increase on the prior year. It represents a 60% payout ratio.

Swimming in Turbulent Waters

Nick Scali is a great business. There’s no denying it. This is a team that knows how to run a retail business. It’s one of the few retail businesses with consistent 60%+ gross margins and solid long-term growth. Return on Equity sits at 56.2%. Such high and consistent margins make it look more like a tech company than a retailer. They make it look easy, but there’s a lot of hard work and expertise underpinning their results.

While it’s a great business, it has some drawbacks. It’s a niche player, which means its growth is constrained by the total size of its segment. It also means it is susceptible to the cyclical nature of its market. And high-end furniture is highly cyclical.

Part of this great result was the business playing catch-up on supply chain bottlenecks that were a hangover of the pandemic period. The clearest sign of this is in transit inventory which dropped from $22.5 million to $12.9 million, a 42.7% reduction. This shows us that less inventory is being caught up in transit. On hand inventory fell more modestly by 13.1% to $41.7 million.

Written sales orders is a better indicator of performance. Rather than what was delivered and paid for, it tells us the actual customer demand for the period. Sales orders decreased this year by 7.8%, down to $437 million. The company has noted that sales are volatile but saw a strong finish. Second-half sales were $226.7 million, up 7.8% on the first half. June, in particular, was strong, with $51.5 million in that month alone.

This tells us that there is a lot of uncertainty in the demand for their products. There’s a dramatic discrepancy between written sales orders and revenue. $437.0 million of sales versus revenue of $507.7 million.

The following chart shows Australian retail spending on household goods. It certainly doesn’t look horrible. It has plateaued at the highs, but no sign of a dramatic deterioration. However, there are two reasons to be cautious.

Household goods retail turnover (Source: ABS / Shares in Value)

Firstly, this strong recent data is during a time of full employment and strong fiscal and monetary stimulus. Consumers were showered with cash during the pandemic to ensure everyone was happy to be locked up at home, and the markets were flooded with QE money. This won’t continue. It can’t. It’s the cause of our current inflation issues, which need to be reined in.

Secondly, this data looks OK, but much less so when you factor in the current 30-year high inflation. CPI is down from 7.8% to 6%, but that’s still far too high. The RBA’s target is roughly 2.5%.

Australian long-term inflation (Source: RBA / ABS)

That means two things. Firstly, household spending numbers today are worth less than in the past. Therefore a sideways household spending over the last few years is actually decreasing spending in real terms. Secondly, monetary – and, in an ideal world, fiscal – policy will remain hawkish as long as it takes to bring inflation to heel. This means higher taxes, higher interest rates, and smaller household discretionary budgets.

Outlook

2023 has had a respectable start, with July bringing in $39.7 million of orders, down 8.1% from the very strong July 2022 and down 22.9% from the month prior. While this might look disappointing on the surface, it’s important to keep the turbulent environment in mind.

Based on $12.16 per share, NCK is trading at a trailing twelve-month PE of 9.7. The consensus analyst forecast is for EPS to drop to 85 cents for FY24 before reclaiming FY22 levels of 95 cents by 2026.

That’s a dramatic fall from FY23 EPS of 124.8 cents. 85 cents would put FY24 PE at 14.3. While these numbers might seem a bit pessimistic, it’s certainly hard to see how NCK can top FY23 numbers anytime soon. There’s too much supply chain hangover benefit to repeat a performance like this in the current environment.

Some investors will get carried away with these results and extrapolate them into the future. However, the next few years could be challenging.

Recommendation

Nick Scali is a great business and well positioned to continue growing. There are certainly headwinds for the business, and caution is warranted in the medium term. It’s also worth keeping in mind that this is a niche player with currently constrained market potential.

We love this business but are very cognisant of macroeconomic headwind risks. If you want a business to hold for ten years, then NCK is not a bad choice. If you are looking for something to keep growing and expanding for the next 2-3 years, it’s certainly possible that NCK can do it, but it’s not the base case.

We have a current “HOLD” recommendation on Nick Scali, and we reaffirm this rating. There’s nothing wrong with being in this stock right now. It’s a great company. It just brings with it a lot of medium-term uncertainty.

Technical Update

The Nick Scali share price has been volatile but more or less sideways for the last 2-3 years. Longer term, it has been in an uptrend. The most important technical aspect here has been a triangle forming, as shown by the blue uptrend line and red downtrend line in the following weekly chart.

The triangle’s support was broken a few months ago, but we did not see any follow through. Frequently with this setup, we will see price reverse and break through the other side of the triangle.

Triangles are just a way of describing decreasing volatility. Often when the volatility gets too tight, it is followed by a sharp increase in volatility, and that is what we are seeing now in the NCK share price. The strong result has given the stock a catalyst to break the upper bound of the triangle with enthusiasm.

The most important level to watch now is the previous swing high at $12.54. Above this level, we are looking at the all-time highs as our next target.

Source: TradingView / Shares in Value

 

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