Coronavirus forces Nick Scali delays, amid warnings over sales

Nick Scali says its supplies of furniture from China have been disrupted by the coronavirus, with orders facing delays.

Nick Scali CEO Anthony Scali. Picture: Chris Pavlich

Furniture seller Nick Scali concedes its crucial supply chain from China has been disrupted by the coronavirus outbreak, with orders delayed by up to two weeks.

It came as the chain became the first major retailer to warn of an impact on sales from the virus, with many other Australian businesses set to follow given the region is a key supplier.

Nick Scali managing director Anthony Scali told investors that despite delays from factories in China, the impact should be cushioned by the fact it had reduced its exposure to China to 40 per cent of production from 80 per cent, with some furniture output shifted to Vietnam and Malaysia.

Nick Scali is the first major retailer to admit that its supply chain will be constricted by the coronavirus outbreak in China

“We have been in contact with our suppliers and the question to them was, our normal lead times are they going to be longer because of the virus? And the response is their expectations was one to two weeks,’’ Mr Scali told The Australian.

He said Nick Scali was contacting customers now, but he did not to be forced to offer discounts or free shipping to make up for the delays, which would hit margins.

The company was considering its options, including shifting more furniture production to Vietnam if the coronavirus outbreak worsened and forced Chinese factories and ports to close.

“If the impact became very significant and the delays became much, much longer, we would be moving more of our sourcing to other countries we buy from such as Vietnam and Malaysia.’’

The comments came as Nick Scali revealed a slump in store sales had shaved first-half profitability.

Unveiling a 2.5 per cent fall in first-half revenue to $137.5 million as profit dived 15 per cent to $21.6 million, the retailer warned consumer confidence was brittle and the coronavirus would likely hurt performance as well.

The uncertainty meant Nick Scali would not provide full year guidance.

“Despite seeing a recent improvement in sales and store traffic, there is still uncertainty around the current level of consumer confidence, which has been exacerbated by the coronavirus outbreak and other factors,” Nick Scali said.

“Consequently it is very difficult to provide guidance as to the profitability for the full year to June 2020.”

Investors appeared unworried by the fall in sales and coronavirus warning and welcomed the underlying profit of $20.1m, which beat earlier guidance of $17m-$19m. IN early trade shares rose 41.5 cents, or 5.75 per cent, to $7.635.

Nick Scali said a poorer consumer environment led by housing price pressures, flat wages growth and tightening home budgets produced large falls in sales over the first half. In recent times Nick Scali has been one of the best performers in the retail sector, with double digit sales growth.

During the half year, sales revenue decreased by 2.5 per cent to $138 million with negative same store sales of 7.5 per cent. But the company said solid profit margins were maintained with gross margin for the half being 62.2 per cent compared to 62.8 per cent in the corresponding period last year.

Mr Scali said sales had improved slightly towards Christmas but the negative sales momentum had pushed into January - its most important month.

“During the second quarter we achieved 3.5 per cent like-for-like written orders growth, which was a vast improvement compared to the first quarter,” he said.

“For the month of January, our biggest trading month, written orders declined 1.7 per cent and indicate that despite consumer confidence remaining fragile, we performed well in a very tough retail environment.”

The directors declared a fully franked interim dividend of 25 cents per share, flat against last year, with a record date of March 6 and a payment date of March 27.

One new Nick Scali Furniture store was opened during the half year ended December 31 - the company’s third store in New Zealand.

It now has a total network of 58 stores, and expects to open a further three new stores in the second half, of which one will be in New Zealand.

The company’s long-term store network target remains 80-85 stores across Australia and New Zealand.