Nick Scali books interim record sales and is not seeing any slowdown in January despite economic headwinds

Despite a 70 per cent jump in interim profit and record revenue, Nick Scali shares drop amid outlook concerns and a lower than expected dividend.

Investors dumped Nick Scali shares amid fears slowing orders would hit long-term earnings, with the combination of a smaller than expected interim dividend and lack of annual profit guidance generating the largest slide in its stock for two years.

Nick Scali shares dropped 13 per cent to $10.80 on the ASX on Monday, despite the retailer posting a 70 per cent jump in interim profit and record revenue as well as stronger than expected trading conditions in January. Concerns remain that rising interest rates would hit consumer spending and the Covid-19 shopping boom would draw to a close.

Sales orders for the chain in January were almost 23 per cent above pre-Covid-19 levels and chief executive Anthony Scali remained upbeat about consumer spending, especially in the furniture category.

Nick Scali is the first major national retailer to report its interim results for fiscal 2023 and its guidance that sales through January – traditionally the chain’s strongest month of the year – had remained strong despite the economic headwinds bodes well for the wider sector this reporting season.

The furniture group also enjoyed the extra sales and profitability for the first six months of 2023 from its acquisition of Plush-Think Sofas with profit margins from the newly acquired sofa specialist improving through the first half.

But analysts took a more pessimistic view of the furniture chain’s first-half results, pointing to a 26 per cent drop in customer deposits for new furniture against the same time last year and a slide of a third against 2022 as an indicator of easing supply chain delays and slowing demand.

Citi analyst Sam Teeger had pencilled in a 10 per cent fall in like for like sales for the second half, against a 12 per fall in January orders.

Mr Teeger had also forecast an interim dividend of 48.5c a share, against the interim dividend declared on Monday of 40c per share.

“Nick Scali is doing better than expected on gross margins and costs, however it’s possible that the stock could trade down given the slowing topline and the weak start to calendar 2023,” said Mr Teeger.

Nick Scali shares under pressure amid fears that slowing orders would hit long-term earnings, combined with a smaller than expected dividend. Picture: Attila Csaszar

On Monday, Nick Scali said revenue soared more than 57 per cent to a record $283.9m over the six months to December 31, which helped to drive a 70 per cent jump in profit to $60.6m. As a result, the group announced a 14.3 per cent lift in the interim dividend to 40c a share, payable on March 28.

The dividend was weaker than hoped with Mr Scali saying he would like to pay down debt, and was open to other property acquisitions where Nick Scali could buy the stores it operates from.

Mr Scali said he was unsure why the market reacted so savagely to the result, sending the stock down 13 per cent, but that his core customer base was in a strong financial position and had continued to spend on new furniture.

“Interest rates aren’t impacting (customers) as much as you would have expected. I think because of wage inflation and low unemployment people are still feeling okay, they know they can get a job anywhere tomorrow.”

He said Nick Scali had also taken the decision to adopt a more conservative view of the way its new acquisition Plush recorded sales, with sales now only recorded when a 35 per cent deposit was taken.

Mr Scali said falling international freight prices had enabled him to cut the prices of some of his lounges, sofas and home furnishings to pre-Covid levels and that he expected further price cuts in the year ahead. Early in the pandemic Australian companies were squeezed by the shortage of shipping containers and soaring freight prices, with the cost of standard shipping containers rising as much as sevenfold.

He said the retreat in freight costs had helped him to cut prices for his customers with some furniture reduced in price by between 5 and 10 per cent. The price reductions should help improve volumes, Mr Scali added.

The cost of doing business as a percentage of revenue improved 2.9 per cent to 32.3 per cent. Total expenses reflect the inclusion of Plush for the full current period, and additional temporary local distribution costs to support the increased delivery volumes in the period. The Plush integration is complete with IT and distribution now fully integrated.

“Record revenue in the half has been a tremendous achievement by our distribution teams which demonstrates the operational capacity in the business to support future volume growth,” said Mr Scali.

“The integration of Plush is now complete with IT and distribution operations integrated during the half and we are well placed to grow our store network under both brands. In the second half of 2023 we are commencing a twelve-month program of refurbishment of over 40 Plush stores with new and improved product, image and store appeal to customers. We are excited about the potential to improve foot traffic and conversion in the current Plush store network.”

In terms of outlook there was no profit guidance provided and Nick Scali said the retailer had anticipated a slowdown compared to the Covid-19 boom yet trading remained better than pre-Covid 19 despite rising interest rates.

Nick Scali brand written sales orders were 12.1 per cent below January 2022 but 22.9 per cent above pre Covid-19 January 2020.