Nick Scali profit slides as shoppers show hesitation

The furniture retailer has suffered an uncharacteristic slide in December half profit, but better than expected earnings triggered a 20pc share price spike.

Furniture chain Nick Scali, one of the best performing mid-caps on the market a favourite of funds managers for many years, has suffered an uncharacteristic slide in interim profit and kept its dividend flat, although its sales orders improved towards Christmas.

On Tuesday, Nick Scali became the first major retailer to report its December half results and kick off earnings season, with its revenue down 20.2 per cent to $226.6m and net profit down 29 per cent to $43m.

The dividend was kept flat at 35c a share, payable on March 26.

However, the market cheered the retailer’s performance in a tough market and with the profit also better than forecast when the furniture chain was forced to water down its profit forecasts at its annual general meeting last year, the shares rallied almost 20 per cent on the interim results.

Shares in Nick Scali hit a high of $14.37, up 19 per cent, before closing up $1.99 at $14- a two year high.

Nick Scali, which also owns the Plush furniture chain, has been a strong performer for some time, and in August it posted a record full-year net profit of $101.1m for fiscal 2023, up 26.1 per cent, well ahead of market expectations of about $96m.

In October at its annual general meeting, chief executive Anthony Scali warned shareholders that sales orders for the first quarter to September were down 5.4 per cent compared to the same period last year and that on a like for like basis group written sales orders were down 6.7 per cent. In-store traffic slowed by as much as 15 per cent in that quarter.

The market was handed earnings guidance for the first half of $40m to $42m, with the December half results released on Tuesday slightly above that range.

“Written sales orders were solid for the period, with strong improvement in the second quarter over the prior corresponding period,” said Mr Scali on Tuesday. “Efficiency on both gross profit margin and operating costs contributed to a net profit outcome of $43m, slightly ahead of the guidance provided at the October 2023 AGM.”

Nick Scali’s profit slides as shoppers pulled back on spending. Picture: David Clark

Mr Scali later told The Australian he believed the stage 3 tax cuts changes as proposed by the Albanese government would boost consumer spending and confidence.

“It is like a pay increase, isn’t it, it’s like your wage going up.”

Mr Scali said the improved sales in January was across his category range.

Nick Scali’s profit that slightly beat earnings guidance provided at the AGM was also 5 per cent ahead of market expectations, and the better than expected result looks to have been primarily due to better-than-expected gross margins that offset weaker-than-expected sales and higher operating costs.

“Hats off to Nick Scali who has delivered better-than-expected interim profits, which should be positive for investor sentiment following the recent selldown,” said Citi analyst Sam Teeger on Tuesday in a note to clients.

“We think at least mid-single-digit fiscal 2024 net profit upgrades to consensus are likely from higher sales and gross margins, which could be partially offset by higher costs.”

The company said that group written sales orders for the December half were $212.7m, up 1.1 per cent on the prior corresponding period. Same store written sales orders were flat, down 0.4 per cent, on the prior corresponding period but second quarter written sales orders were 8.2 per cent higher with both November and December being particularly strong.

Nick Scali brand online written sales orders were $14.7m for the half, up 22.5 per cent compared to $12m in the first half of 2023 with the majority of growth coming from sales orders which were completed on the website compared to online orders which were completed by phone.

Group gross profit margin of 65.6 per cent for the half improved 3.6 per cent.

Also providing a trading update, the company said January 2024 written sales orders of $58.9m were up 3.6 per cent over January 2023, with like for like sales up 2.6 per cent, continuing the positive momentum of the second quarter from the first half of 2024.

The retailer ended the half with 64 Nick Scali stores and 44 Plush stores.

Some analysts were disappointed with a slowing pace of store roll outs, and Mr Scali said it had been a “bit of a struggle” to find land for new stores.

“The truth of the matter is that they haven’t really built anymore large format retail centres since Covid began so there is less supply and less new centres available. It is quite tightly held, large format centres, at the moment,” Mr Scali said.