Analysts at Wilsons are betting the next move for Australian listed furniture chain Nick Scali could be an acquisition overseas.
The retailer purchased Australian furniture business Plush in 2021 for $103m off Greenlit brands.
The analysts say now that has been successfully integrated, with $20m of cost synergies and gross margin expansion of at least 12 per cent achieved within two years of the deal, there was merit to replicating the success of Plush via an acquisition in the UK.
Nick Scali trades on 13.2 times forecast net profit for the 2025 financial year, which is 8 per cent below its peers, despite recent market share gains and growth opportunities.
Wilsons says that while consumer tastes and industry fragmentation is similar between the UK and Australian consumer, they note that the UK sofa consumer spends 19.1 per cent less than the Australian consumer on a per capita basis.
Online penetration in the UK of 20.5 per cent is above Australia at 13.7 per cent, and credit, such as interest free and payment plans, is used to differentiate offerings in the UK.
“We believe these market nuances do not act as a barrier for Nick Scali, and can present opportunities to bring strategies back to Australia and New Zealand (with digital platforms being an example)”.
In the UK, key speciality furniture market players include Sainsbury’s Argos and Habitat, DFS Group, SCS Group, Furniture Village and Sofas and Stuff.
Wilsons says recent mergers and acquisitions activity, where SCS was acquired in October 2023 by Poltronesofa for £99.4m, could now incite other private and public market players to consider their own valuations and a potential divestment.
Additionally, the soft consumption backdrop increases the risk of near-term insolvencies, Wilsons said.
They believe that the gross margin of key UK players points to the opportunity for Nick Scali to replicate the Plush acquisition playbook.
The gross margins for DFS and Furniture Village are 54.4 per cent and 45.8 per cent respectively, and are well below Nick Scali gross margins of 65.6 per cent in the first half of the 2024 financial year.
“While an acquisition of DFS is difficult due to size (at $1.6bn including debt, with 175 stores), (the privately held) Furniture Village is far smaller, with 58 stores,” Wilsons said.
“We are conscious of the challenges in replicating Nick Scali’s strategy offshore, however we believe execution risk is now lower.”
The analysts said this was given the success of the Plush deal, stronger relationships with Chinese suppliers and the scale potential from having three strong verticals in the group.
The UK Furniture, Lighting & Homewares market size is about £13bn (A$25bn), and the Australian Furniture market is about $19bn.
However, in the UK, consumers spend about 50 per cent less than Australians on a per-capita basis.
This relationship is driven by the smaller average house size (average detached dwelling size -35.9 per cent vs. Australia, on a per square metre basis).
In the UK, the market was only moderately fragmented, which made it possible for a new market entrant by way of acquisition.
The analysts believe a case can be made for either a small, medium or large acquisition.
Nick Scali finished the first half of the 2024 financial year with net debt of $3.4m and while the current available acquisition facility is about $37m, Nick Scali’s strong operating cashflow and assets on balance sheet ($113.6m of land and buildings) places it in a strong negotiation position with lenders.
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