Retail is a tough business at present, but Sydney-based furniture importer and seller Nick Scali Limited (NCK) is bucking that trend.
For the year ended June 30 2013, Nick Scali lifted sales by 16.5% to $127.4 million, despite Australian Bureau of Statistics (ABS) figures showing that the national furniture market was down 4.4% for the same period. Reported net profit by 77% to $16 million. This included a one-off compensation benefit of $3.8 million: underlying net profit was up 36% to $12.2 million, a record result.
The strong financial year followed a 17% increase in revenue at the half-year, to $62.9 million, and a 23% increase in interim profit to a half-year record of $6.4 million.
The full-year dividend of 12 cents, fully franked, was a 50% upgrade from the eight cents paid in FY12. The dividend payout was 79% of underlying profit. Earnings per share (EPS) were 19.8 cents on a reported basis, and 15.1 cents on an underlying basis, compared to 11.1 cents in FY12.
Four new stores opened during the year, three Nick Scali and one Sofas2Go. With the closure of the Bella Vista store in New South Wales – compulsorily acquired by the NSW government, hence the $3.8 million compensation payment booked – there were 38 stores at balance date of June 30, 33 Nick Scali and five Sofas2Go, compared to ten stores when the company listed in 2004.
The stores are spread across NSW, ACT, Queensland, South Australia and Victoria, served by four distribution centres. The company expects to open two to three Nick Scali stores in FY14, and has a number of Sofas2Go stores in negotiation. NCK also has the Australian rights to upmarket Italian furniture brand Chateau d’Ax: it opened the first Australian Chateau d’Ax store at Moore Park Supa Centa in Sydney in June 2011.
Given the mix of pros and cons in the “volatile and uncertain” trading conditions, a lower currency and historically low interest rates – which could boost housings ales and furniture retail growth – the company did not give profit guidance for FY14, although it said that its strong balance sheet has it “well-positioned to capitalise on any improvement in consumer confidence.”
Founded in 1962 by Nick Scali, NCK was floated in 2004 at $1 a share in an $81 million IPO. Nick Scali came on to the ASX screens at $1.29 but five years later, the shares were in the basement at 38 cents. Since then, despite trading mostly sideways for the two years to February 2013, NCK has risen to $2.94 – up from $1.45 at the end of 2012.
Nick Scali senior, who handed the reins to his son Anthony in 1982, remains a non-executive director and is a consultant to the company. Anthony Scali is managing director of NCK and the third generation, Nicky Scali, is the company’s marketing manager.
The success of this company comes down to knowing its business. There is very little that the Scali family does not know about importing and retailing furniture into Australia: Nick introduced modular kitchens into the Australian market. About 80% of its revenue comes from selling sofas, with the rest coming from dining and entertainment furniture. The average spend of customers is about $3,000.
Nick Scali Limited imports more than 4,000 containers of furniture per year: that volume delivers excellent buying and pricing power. While the Australian dollar is high, the company is able to import furniture at good prices: as the A$ falls, however, NCK has to work harder on its product range, managing price points and using promotions and discounts to move furniture. In 2011 the company rolled out a second brand, Sofas2Go, to compete in lower-priced furniture segments. The company’s online strategy is to drive customers to its stores: NCK believes that customers buy furniture on ‘feel’ – that they will always want to sit on a sofa before buying it.
The company is lowly geared, with borrowings of $6.8 million and cash of $26.4 million at 30 June 2013. Net assets were $36.3 million as at 30 June 2013, up $8.9 million on last year. With a healthy cash position and minimal debt, Nick Scali’s balance sheet certainly looks capable of supporting continued growth.
This well-performed retailer is not cheap, at 19.5 times trailing underlying earnings and an historical fully franked yield of 4.1%, but investors are entitled to think that the price/earnings (P/E) ratio they’re paying will come down a bit and the yield increase with a further uplift to earnings and dividend in FY14. Broker consensus expects EPS of 16.8 cents a share and a dividend of 13 cents: that takes NCK’s prospective P/E to 17.5 times earnings and the dividend yield to 4.4%.
