Nick Scali profit slides 11pc as China lockdowns, higher freight costs and Plush acquisition drain margins

Nick Scali chief executive Anthony Scali says the recent reopening of factories in China after lengthy Covid-19 lockdowns will ease furniture supply delays.

Nick Scali’s annual earnings hit by lockdowns in China, soaring freight costs and its acquisition of Plush. Picture: Attila Csaszar

Nick Scali chief executive Anthony Scali says the recent reopening of factories in China after lengthy Covid-19 lockdowns will ease furniture supply delays.

While elevated freight charges through much of the year had drained earnings, they had started to moderate, helping to bolster margins for the furniture retailer.

Now the company has a new headache in getting goods into its customers’ hands. “The biggest problem we have is getting people to deliver product – that’s the real challenge,” Mr Scali said on Monday after the chain posted revenue of $440.957m for the year to June 30, up 18.2 per cent, while net profit fell 11 per cent to $74.922m.

“It is not causing delays as much, as we are trying to catch up because of the backlog,” he said.

“We are catching up slowly but as fast as we (can).

“It is difficult (hiring staff). Volumes are holding and July was a fairly good month, and so we have a very large order bank – the challenge for us is getting it delivered.”

Nick Scali has blamed rising freight costs for transporting its furniture from its Asian factories for an 11 per cent drop in annual net profit.

The inclusion of its recently acquired, lower-margin Plush retail chain also diluted earnings.

The company’s underlying profit fell 4.9 per cent, excluding the impact of one-off items relating to the acquisition of Plush.

The retailer also revealed it is still carrying the bruises from harsh lockdowns in China earlier this year, which have left it with an elevated order bank of $185.3m at the end of June – up 67 per cent from last year.

Nick Scali expects gross margin and the cost of doing business to improve as the synergies of Plush acquisition are realised.

Mr Scali said a higher-margin sofa recently launched by Plush had been a big seller, and was typical of new ranges it would release.

Anthony Scali, chief executive of Nick Scali. Picture: Hollie Adams

In October, Nick Scali widened its exposure to the mid-market sofa sector with the purchase of the Plush sofa business for $103m.

The deal almost doubled its portfolio of showrooms to more than 100 and deepened its exposure to furniture and home furnishings, one of the hottest retail sectors during the pandemic.

Sales have been improving in the new year. The retailer said July trading was positive, with total written sales orders for the group of $43.2m, up 64.1 per cent on last year. However, given the current global economic environment, the business expects to face challenges in respect of potential rising freight costs and inflationary pressure on operating costs over the next two years.

Despite the many headwinds, the retailer still lifted final dividend payments. Nick Scali declared a final dividend of 35c per share, up from 25c in 2021, payable on October 24.

Mr Scali said 2022 was a particularly challenging period, with store network closures and lockdowns in sourcing countries impacting the business at various stages throughout the year.

“Despite these challenges, the group was still able to deliver a strong result and end the year with a significant order bank which will translate to revenue in 2023. We continue to be pleased with the Plush acquisition and have seen increased scope for synergies as the integration of the business has progressed,” he said.

Nick Scali’s order growth was affected by store closures in the first half, with more than half of the network closed for three months, and softer trading in New Zealand. As a result of reduced margins and the reduction in revenue due to lockdowns in China, underlying net profit fell by 4.9 per cent to $80.2m.

Total group revenue rose 18.2 per cent during 2022, due to the Plush acquisition. However, revenue for Nick Scali was down due to the store network closures and the China lockdowns which restricted delivery volumes in the fourth quarter.

The Plush acquisition also diluted Nick Scali’s overall profitability, as Plush is traditionally a more lower-margin retail business. Plush contributed $88.8m to group revenue in the period post-acquisition.

Nick Scali’s online written sales orders of $29.3m were up 59.9 per cent on 2021, driven by temporary store closures and launch of transactional websites.