Nick Scali Limited (Nick Scali, the Group, ASX: NCK) was established 60 years ago by Nick D Scali and listed on the ASX in May 2004. Its shares traded at $1.21 on the day of listing, up from the $1 issue price. Today the Group has 128 stores and showrooms across Australia, New Zealand and the UK.
Higher freight costs crimp gross margins
The Nick Scali share price was down more than 5 percent following an announcement that an unexpected spike in freight costs had reduced anticipated gross profit margins by 2.4 percent to 63.6 percent for the first-half-year to 31 December 2024. The lower margins mean that the expected first half net profit after tax will be approximately 26 percent lower compared to the December 2023 half-year. Net profit after tax for the December 2024 half-year is expected to be between the range of $30 to $33 million, compared to $43 million for the December 2023 half-year. The higher freight costs are particularly impacting the December quarter of the current half-year.
While written sales orders in Australia and New Zealand for the four months between June to September 2024 are 3 percent higher compared to 2023, delivered sales revenue for the first half of FY25 is expected to be in the range of $217 to $222 million. Delivered sales revenue for the December 2023 half-year was $226 million. However, 3 percent higher written sales orders between June and September 2024 imply that the slight sales revenue shortfall should be fully recovered in the second half of FY25 as sales orders are converted to sales revenue.
UK Furniture retail business
Nick Scali acquired the specialist UK furniture retail business trading as Fabb Furniture in May 2024 for $1 million plus existing debt of $6.7 million. Nick Scali also injected $11.5 million in net working capital and is currently refurbishing and rebranding the 21 existing stores and setting up a new distribution centre. The existing stores are being re-branded to establish the Nick Scali brand in the UK. A new distribution centre is being established and new store openings are planned to leverage Nick Scali’s buying power and supply chain.
Early UK sales volumes appear promising. Written sales orders have been impacted by the anticipated supply chain and business disruption arising from the initial restructuring and transformation activities that typically accompany a business acquisition. First quarter delivered sales of $17.8 million were boosted by an elevated opening order bank resulting from the initial supply chain disruptions relating to the change in ownership. Second quarter UK delivered sales revenue is anticipated to reduce to closer to the volume of written sales orders in the first quarter which were $12.5 million.
First half-year gross profit margins on UK sales are expected to be in the range of 42 to 44 percent, although this figure is set to improve from the second half.
One-off staff restructuring and system integration costs of about $2 million are expected to be incurred in the first half-year of FY25. Expected cost savings from the staff restructure are estimated at $2 million per year commencing in the second half of FY25.
The UK operations are expected to incur losses of up to $6 million in the first half, including up to $2.3 million in one-off integration costs.
Outlook for FY25 and beyond
Delivered sales revenue for the first half-year of FY25 is expected to be between $217 and $222 million, compared to $226 million in the first half of FY24. Although inflation continues to impact property and wages costs, higher freight charges may not persist throughout FY25.
The Group plans to open two Nick Scali stores and between three to five Plush stores in FY25. The new Queensland distribution centre is now operational and provides logistics capacity to support the increased Queensland Nick Scali and Plush store networks. Net cash of $39 million at 30 June 2024 means that shareholders are unlikely to be called upon in the near term to fund this planned store growth.
The UK retail market is subdued at present, and any strengthening of the UK economy may lift UK store revenue from FY25. The alignment and integration with the Nick Scali business model before expanding the UK store network should drive earnings higher in the medium term. Applying the same out-sourced delivery model in the UK that is operated in Australia and New Zealand should optimise UK gross profit margins which currently are 44 percent compared to 63 percent in Australia and New Zealand.
Looking beyond FY25, Nick Scali’s earnings prospects remain positive. Opportunities to expand the existing store network of 128 stores are significant. Based on demographic data, and proximity to existing showrooms, Nick Scali have identified 50 potential new sites. However, timing of store roll out is dependent on site availability and commercial terms. This estimate does not include the potential for new stores in the UK.
Nick Scali’s medium term prospects remain positive, and the current share price weakness may prove to be a buying opportunity in this well-run furniture retailer.
