A three-piece update to Nick Scali furniture
Nick Scali (ASX:NCK) released a trading update along with first half earnings guidance. Most analysts conclude that the update was a downgrade to the first-half consensus net profit after tax (NPAT); longer-term investors will look beyond the short-term effects of higher freight charges.
The headline numbers are as follows: the company’s 1H25 group NPAT guidance is now $26.3 – $29.7 million, versus consensus estimates of $36 million. Australia and New Zealand NPAT is expected to be $30 – 33 million. Meanwhile, Australia and New Zealand’s 1H25 revenue guidance is $217 – $222 million, compared with consensus estimates of $227 million. Gross margins are also lower than consensus estimates of 65.1 per cent (in line with FY24), at 63.6 per cent. Finally, the new UK business is forecast to produce a loss of $3.3-$3.7 million, which looks a little better than expected.
On first blush, the update looks like a 22 per cent miss to NPAT expectations, and it is being driven by a worse-than-expected 240 basis point impact on gross margins from “materially higher unexpected freight rates”.
There is also the UK business, Fabb Furniture, which Nick Scali purchased in May. The strategy is to transform the business to the Nick Scali business model and leverage the group’s capabilities for efficiency and scale before then moving on to expanding the store footprint.
Customer orders for Fabb Furniture items, at Fabb Furniture prices and margins, are flowing through with a benefit arising this half from an acceleration of order fulfilment after prior supply chain disruptions. Keep in mind revenues are booked when items are delivered, not when they are ordered. This ‘order bank unwind’ benefit will normalise in future periods. Indeed, the company noted it expects the second-quarter of UK-delivered sales to be reduced, to be closer to the volume of written sales orders in the first quarter.
Domestically, the company noted back in August, at the release of the full-year results, that written sales order growth for June and July combined were down -1.2 per cent. The reason for combining the months was July this year lacked an additional weekend the prior corresponding period enjoyed (keep in mind almost 80 per cent of business is conducted on weekends).
Now, written sales orders for the four months to September 2024 have increased by three per cent compared to 2023, with both August and September higher than the prior year. The company still expects to open two Nick Scali stores and five Plush stores in FY25, with most openings in the second half.
So, revenue in Australia and New Zealand looks fine despite a longer-than-expected period of higher interest rates having a negative impact on renovations, new builds and housing sales activity.
With the higher-than-expected shipping costs, it seems freight companies might not be honouring their contracts and are hitting customers with higher costs upon arrival before releasing goods. The good news is that although rates are double where they were last year, shipping rates are starting to decline, as Figure 1., reveals.
Figure 1. Container freight prices are declining.
Source: Trading Economics.
Finally, we believe the good news will start to appear as the company completes its sell-down of Fabb Furniture stock, commences putting through the Nick Scali range of furniture, redesigns and rebrands the UK stores and then begins the expansion process. This process takes years, not months, and given investors tend to overestimate the short term and underestimate the long term, we believe the share price weakness on the back of the trading update will be short-lived. Indeed, the earning multiple is not that of a company with solid offshore growth. A re-rating accompanying earnings growth is not beyond the realms of possibility.
The Montgomery Small Companies Fund owns shares in Nick Scali. This blog was prepared 22 October 2024 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.
