Nick Scali reports strong 1H25 results
Nick Scali Limited (ASX:NCK), a holding in the Montgomery Small Companies Fund has released its half-year 2025 (1H25) results. Despite the mixed headline picture, Nick Scali’s 1H25 results outperformed consensus estimates.
The key financial highlights are:
Group revenue: Increased by 10.8 per cent to $251.1 million.
Australia/NZ (ANZ) revenue: Declined slightly by 1.8 per cent to $222.5 million.UK revenue: Contributed $28.6 million.
Underlying group net profit: Fell by 22.8 per cent to $33.2 million.
Underlying ANZ group net profit after tax (NPAT): fell 16.3 per cent to $36 million
Statutory net profit: Decreased by 30.2 per cent to $30 million.
Interim dividend: Down 14.3 per cent to 30 cents per share.
Strong earnings beat despite ANZ trading weakness
Despite the mixed headline picture, Nick Scali’s 1H25 results outperformed consensus estimates, driven primarily by stronger-than-expected margins and what has been described as robust revenue performance in Australia and New Zealand. The company’s underlying net profit after tax (NPAT) of $33.2 million exceeded the guidance range of $26.7 million to $29.3 million.
January written orders fell by 8.5 per cent, with a pronounced fall in foot traffic over the Australia day long weekend, which potentially reflects people enjoying the warm weather… the following week, saw a 5 per cent year-on-year growth rate.
Gross margins: A bright spot amid challenges
ANZ gross margins were a standout, coming in at 64.4 per cent, surpassing the guidance of 63.6 per cent. The improvement reflects effective cost management, though higher freight expenses weighed on overall margins. Online sales also contributed positively, growing by 17 per cent to $18.6 million.
On the UK side, gross margins saw a substantial improvement, rising from 41 per cent pre-acquisition to 45.1 per cent. This improvement, which was well ahead of expectations, reflects strong margins on new products arriving in store, as well as restructuring costs.
Store expansion delays and guidance adjustments
Nick Scali’s store expansion strategy encountered delays, with fewer openings than initially planned:
1H25: One new store opened, and no new Plush stores were added.
2H25 outlook: One new Plush store will open in Melton, Victoria, but several planned openings have been pushed to FY26.
In the UK, the company rebranded four Fabb Furniture stores during the half and aims to rebrand another eight by the end of 2H25. While these efforts are expected to improve long-term profitability, they are currently contributing to near-term disruptions.
UK Operations – the important part of the growth story
The UK division reported an underlying net loss after tax of $2.8 million, which was better than the guidance range of $3.3 million to $3.8 million provided at the October annual general meeting (AGM). Statutory UK net loss after tax was $4.1 million, lower than the $5.1-5.9 million loss guidance also offered at the October 2024 AGM.
Nick Scali noted that UK written sales orders of $19.4 million were significantly impacted during the period, particularly in the second quarter FY25, from the disruption to the business caused by stores closed for refurbishment and the Fabb Furniture product range being cleared from showrooms and warehouse inventory.
While challenges persist, the improvement in gross margins suggests that ongoing restructuring and cost optimisation initiatives are beginning to bear fruit.
Management remains optimistic, as do we, about the long-term potential of the UK market, though short-term losses are expected to continue as rebranding progresses. We believe it is also the case that, as the company runs down the backlog of Fabb Furniture inventory, an improvement in metrics including turnover and margins will be seen.
If anything, it appears the transition or turnaround of the Fabb Furniture business is progressing quickly. The company noted its re-branded Nick Scali stores were the top three performing stores in January 2025 for written sales orders. Previously, only one store was in the top five under Fabb Furniture. The company is aiming to complete the re-branding of eight further by 30 June 2025.
Nick Scali product is reportedly now the top selling product in the UK.
Outlook and estimated valuation
Management acknowledged that trading conditions remain volatile but note that Anthony Scali has a track record of under-promising and over-delivering. January sales orders were down 8.5 per cent, but the month’s final week showed promising signs with meaningful uptick. The company’s immediate focus is on executing its rebranding strategy in the UK while managing its store expansion plans.
With its geographic and price point diversification, Nick Scali is exceptionally positioned to manage industry fluctuations. It is also positioned to benefit as the economic cycle eventually recovers, taking consumer sentiment and housing turnover higher.
In November 2022, I recorded a video describing three outstanding retailers, of which Nick Scali was one. In May 2023, with the share price at $8.80, we wrote,
“Over the long run, a well-managed (cost-outs?) quality company, one that leads its peers and progresses along its growth runway, will reward investors. Of course, the returns will be inversely related to the price paid. Investors, therefore, should now be calculating a conservative estimate for intrinsic value and assessing whether the share price represents value or waiting until it does.
Assuming a long-term return on equity (ROE) of 30 per cent, a payout ratio of 70 per cent, a required return of nine per cent, a constant 81 million shares on issue and FY24 beginning equity of $207 million, we estimate Nick Scali’s intrinsic value at $9.29.”
And in August 23, here, we wrote;
“Despite the inherent challenges and volatilities of the retail market, which will inevitably pressure the share price from time to time, Nick Scali has again proven it deserves its high-quality status. A retailing legend backs its management team and is undertaking a measured and disciplined approach to its operations and strategy.
And,
“Assuming a discount rate of 9.0 per cent, a sustainable return on equity of 30 per cent (it was materially higher last year) and an ongoing payout ratio of 70 per cent, the estimated intrinsic value of Nick Scali is close to $11, about eight per cent below the current share price of $11.98. We cannot guarantee what happens to the share price in the short term, and there are sufficient uncertainties about the state of the economy to warrant caution, however, the quality of the company remains high and the current estimate of intrinsic value is not far away.”
Despite a mixed Australian economic performance and frequent forecasts for a recession in the intervening year or so, Nick Scali shares have performed well and are up 100 per cent since November 2022.
Nick Scali’s 1H25 performance again highlights the company’s ability to exceed expectations despite facing significant challenges. Strong margins, effective cost controls, and online sales growth have helped cushion the impact of softer order volumes. Importantly, investors are increasingly becoming convinced Anthony Scali and his team at Nick Scali can replicate their ANZ operation, market share and margins in the much bigger UK market.
Valuation:
Assuming a discount rate of 9.0 per cent, a sustainable return on equity of 30 per cent and an ongoing payout ratio of 70 per cent, my estimated intrinsic value for Nick Scali is close to $17.70. Keep in mind this is an estimate and based on a myriad of assumptions about the future.
The Montgomery Small Companies Fund owns shares in Nick Scali. This article was prepared 11 February 2025 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Nick Scali, you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
