Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nick Scali Limited FY '20 Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Scali, Managing Director. Please go ahead.

Good morning. This morning, we'll start with a summary of the results and the highlights. In terms of sales, written sales orders were up 9%, $293 million compared to FY '19 of $268 million. Sales, which are deliveries, were down 2% to $262 million. Our gross margin was 62.7% compared to 62.9% in FY '19. Underlying net profit after tax was $42.1 million, above guidance of $39 million to $40 million previously given. Cash flow, net increase in cash of $26.8 million, underlying operating cash flow of $62.8 million. The final dividend was $0.225 for the half, final dividend is $0.225, with a total of $0.475 for the year. In terms of our store network, one store was opened during the year, which was our first store in New Zealand. And our online sales channel was successfully launched in April 2020 during the shutdown. Looking at our sales orders. Written sales orders, as I mentioned, were up to $293 million. When we look at it in terms of the half, the second half written sales were up 18%. This is driven by increased traffic in the stores of 20% to 30%. We estimate during the closure and towards the end of March when sales [ foot sales ] that we lost $9 million to $11 million of sales revenue in the first half due to the closure. However, written sales orders were up 7% in May and June following our reopening, and we saw traffic up 30%. Sales order bank finished the financial year at a record level following May and June trading. Sales revenue, which is when we're delivering our goods, which is normally 9 to 13 weeks after we write a sales order, was down, as I mentioned, 2.1% and down 6% -- 6.7% on a like-for-like basis. This is mainly attributed to the closure in April and the lower trading at the back-end of March, which impacts our deliveries in the final second half. Despite the closures, the sales revenue, it was greater initially when opening than it was anticipated. So there was some improvement in sales or delivery from the in-stock product categories that we carry. Profitability. As mentioned, gross profit margin maintained despite the significant devaluation in AU -- in Australian dollar. This was driven by our pricing initiative and very good support from our suppliers. Operating expenses for the full year were reduced by $5 million. It's through cost and reductions in property, employment, marketing and general operating expenses. Second half net profit after tax was up 25% in the prior year despite the lower revenue. And the final profit of $42.1 million is in line with FY '19 above guidance of $39 million to $40 million. Balance sheet and cash, I'll let Chris Malley, our CFO, take you through the 2 items.

Thank you, Anthony. Good morning, everybody. The balance sheet, excluding the impact of the AASB 16 implementation, is relatively stable year-on-year. Our cash increased quite significantly on the back of the strong trading at the back of May and June, and we'll talk about that in a second on the cash flow side. Our receivables are higher due to the outstanding COVID-related amounts from the government in terms of wage subsidiaries and from amounts outstanding at the end of June. The inventory balance remained consistent with prior year at around $36 million. There's a change in the mix of the inventory between what's held in the distribution center and what was in transit due to the trading in May and June. Change in the fixed assets were due to positive transactions during the year. So we sold a property in [indiscernible] and purchased a property adjacent to our existing store in Auburn. Post the year-end, we purchased a third property in Adelaide. Obviously, that's not reflected in the balance sheet at the moment. So deferred revenue balance increased $14 million due to the growth in the order bank that Anthony has already mentioned as a result of trading through May -- a strong trading in May and June. Moving to the cash flow. As I noted, on the balance sheet, the cash is up $26.8 million from the same time last year. $17 million of that is through ordinary core trading and the $9.8 million of that is due to the one-off transaction such as the [indiscernible] sales during the year. The operating cash flow is up over $17 million and represented a 96% conversion of our EBITDA for the period. CapEx exclude -- CapEx included the purchase of our new property, the new property in Auburn, the relocation of the New Zealand distribution center, store refurbishments and another -- other business as usual items. And during the year, we paid $36.5 million in dividends, and that's what resulted overall in the net cash flow of $17 million before the one-offs. Anthony?

In terms of the overview of the impacts of COVID-19, in terms of the store network, traffic was down 40% in the last 2 weeks of March. All stores have closed between 2 and 4 weeks, 7 weeks in New Zealand. And the traffic was up 30% since we reopened. In terms of sales and revenue, we estimate $9 million to $11 million loss in sales due to the store closures. Since reopening, sale orders have been very strong. May and June sales orders were up over 70%, with June sales orders exceeding the company's previous largest trading month on record by 40%. In terms of our supply chain, initially, due to the shutdown in China, there were delays with up to 4 weeks in March and April and we worked very closely with our suppliers to ensure delivery lead times back to normal by early May. Online sales channel successfully launched in April 2020, with an average monthly sales order intake of $1 million. The online segment contributed EBIT positively and -- at 50% of EBIT contribution margin. Cost reduction. We were eligible for the JobKeeper subsidy for 6 months from April to September. We received rent concessions on 85% of landlords. We reduced our store operating hours, and we reduced our media spend through the quarter 4 in FY '20. Cash flow. In the last quarter, operating cash flow was $43 million, up 144% from $18 million in the same period last year. And we have our interim dividend from the payment date from the 27th of March to the 29th of June. New store opportunities, we are being careful, and they're being -- we're very focused ensuring rents are at sustainable levels in the long-term and in the downside. Going to our online. As mentioned, we launched in April 2020 and have performed strongly since we've opened. The website traffic was up 75% from April to June 2020 despite our reduced advertising spend. The average transaction value online is $1,800. That's still slightly lower than what we see at store level. Contribution margin of 50%. 60% of sales orders are for case goods, which are dining and bedroom furniture, coffee tables will be in it as opposed to lounges. We see a lot of opportunities for product expansion categories in online and we'll learn for this as time go. We are targeting a $4 million EBIT contribution in FY '20 from the online. In terms of the store network, we opened one showroom in St. Luke’s [indiscernible] in the Northland in FY '20. And we plan for 2 new showrooms to open in first half FY '21. Bennetts Green in Newcastle in November. And our fourth exploring New Zealand in Wairau Park, it's [indiscernible] in November. There are 2 relocations planned in the Wairau Park with [indiscernible] in the second half FY '21. Now we have a presentation on company-owned properties, which demonstrates we now have 37,000 square meters of property owned, which are retail properties in which we operate and it all have tenants paying us rent in the additional space. Turning now to outlook. As highlighted in the trading update in June 2020, we have experienced a significant rebound in customer activity during May and June, with sales orders up 65% on a comparable store basis and 70% on a total growth. This level of growth continued in July, with written sales orders up again 70% when comparing July '19, as consumers continued to reallocate discretionary spending towards furnishings and homewares. As approximately 65% of our products are made to order, with current delivery lead times of 9 to 13 weeks, the recent strong order intake performance means the company's opening order book for FY '21 is significantly higher than in previous years. These orders will be delivered in the first quarter and contribute to revenue in FY '21 financial year. Based on the large increase in written sales orders for the month of May, June and July, sales revenue growth for the first half of FY '21 will increase substantially when compared to the same period last year. As a result of the strong sales revenue growth and after allowing for 6 weeks of temporary closures in our Melbourne showroom in the first half, the company expects first half profit will be up by at least 50% to 60% when compared to the first half FY '20. This, of course, remains subject to no further extension of existing restrictions in Melbourne, further store closures across the network as a result of government imposed lockdowns or any material delays in the supply chain affecting the deliveries. And that's it. Thank you. So we'll now turn to questions.

[Operator Instructions] Your first question comes from Sam Teeger with Citi.

Given you would largely know what profit you'll be printing for the September quarter given -- considering your orders, just keen to understand regarding the first half guidance, some of the assumptions around the December quarter.

Yes. Look, we actually we actually can see forward through the end of October in terms of our sales revenue, that's because of the sheer volume generated during May, June and July. So all in May, June and July, customer orders will be delivered in over a 4-month period in the first half rather than over the third quarter. So the assumptions are -- so the sales orders for August, September and half of October will be delivered in the half. So our assumptions are for those 2.5 months, that sales orders would be flat to lower, possibly, and without Melbourne open to 6 weeks.

Right. Okay. And given the rate of sales growth you're achieving right now, you should be generating some pretty solid operating leverage in the December half. Are there any types of cost increases worth flagging which would mean that very strong operating leverage won't come through?

No, no. The only cost or -- increases our variable cost to sales, which is bonuses to our sales team, but they're not material. So really, all our other costs are pretty much it. In fact, the costs -- we believe we can maintain -- our underlying costs are down at the moment, and we believe we can maintain those through the whole half.

Sure. And you talked about some rental relief which you successfully have obtained from landlords. Can you perhaps talk about for how long have you negotiated that for? When did that come off? And any kind of quantification so we could get a sense of the monthly benefit?

Well, all the landlord concessions will support from landlords [indiscernible] so really come in FY '20. There are none in FY '21.

So it's very short term. And by July, you're done?

By June, the end of June.

All right. And then, yes, thanks for all the additional information on the company-owned properties. Can you remind us just how the market value all these properties may differ from the book values because you've [ earned ] some for quite a while?

Yes. That's difficult. It's always very difficult to value properties when you are an owner-occupier. It's easy when you're having investment properties with someone on rank and say, look, yes, certainly, there's no doubt the value in our balance sheet are at historical cost and the value of those properties would be higher. Very hard to give you an indication, to be honest. But certainly, they'll be higher.

Great. And then just last question. How are you thinking about gross margins into FY '21?

Yes. We're pretty comfortable with our margin. We're pretty sure. Well, we -- no, we're fairly comfortable with that. We're sitting at 62% range.

Your next question comes from Callum Sinclair with Macquarie.

Maybe as an extension to the last question from Sam around gross margins. I mean I understand that you pushed through some sort of small price increases early during COVID when the Australian dollar fell. And now that it's back to above sort of $0.70, do you expect to keep some of this and improve gross margins potentially?

Well, our account -- we obviously use hedge accounting. We're out 9 months. So we're -- I don't -- in the short -- in the first half, I don't see any potential improvement because of that. And maybe by the time we have hit -- covered the part level which we want to the second half, there might be opportunity there or we might have -- get it back in terms of price reduction. But we haven't decided. We'll see how the market evolves during that period.

Okay. Great. And maybe just in the consumer trends just that you've seen through this period. I mean really the category is doing exceptionally well and it looks like probably you're getting -- you're outperforming that category. But is there any customer behavior that's specific in terms of average price points or category mix within your business that you can talk to? Or is everything sort of up at similar amount in terms of those written orders?

No. We're seeing -- I think where we gained some ground is in our case range, which is -- well, all other things other than lounges, I mean, with all [indiscernible], well we've seen the proportion increase on case goods, which is wine, [indiscernible], coffee tables, in bedrooms. We're seeing that in through proportionately more. The online is obviously helping with that because the propensity, the online customers really to buy those type around rather than the lounge or the lounge that they like to sit in and go to the store. So yes, that's the only change, I'd say, in terms of product category shift, the proportion and shift of sale, if you like.

That helps. And maybe just an extension to that. I mean given the performance of the online store even in just a short trading period, has this changed, I guess, your longer-term strategy around how to capitalize on this? And maybe where can you easily increase range given the maintenance strength from a top floor space?

Yes. Look, there's no doubt, we -- it's changed our thinking dramatically. We will continue. So as the business -- there's no doubt we see a lot of growth online. And we're still learning from this. And we're in a great position because we've got distribution centers all over Australia and New Zealand. So it's very, very efficient for us. We don't have to ship between states in that respect. So we certainly -- there's a lot of focus on how do we increase our online presence, we can expand product categories and do that efficiently because that's the key. And it's -- a 50% EBIT margin contribution, very significant. Having said that, doesn't stop. We still need to continue our store expansion alongside that. But yes, it's been a great learning during this period.

Yes. And maybe just one last one. Are you hearing anything from competitors around stock-outs of delivery time that might lead sort of market share gain opportunities? And given you've been able to reduce your delivery time back to that normal 9 to 13 weeks, just wondering if you're hearing anything about other people struggling to keep up with that elevated demand at the moment.

Yes. Look, we ourselves -- because of the jump in volume, a significant jump in volume over this period, we've had to work really closely with suppliers, and lead times have got a little bit longer. But even some of our cases, we -- our out of stock periods were a little bit longer. So I think everyone in the furnishings should experience that because no one ever anticipated this would -- the pent-up demand is so much to this level. So -- but we -- our suppliers have been quick to react. And despite the enormous increase in volume, the lead time has gone a little bit longer but not significantly longer.

But you're not seeing customers come in where they've been sort of unsatisfied with delivery times or lack of [ building materials ] where -- is that -- you said that?

Yes. No, no. We've heard particularly -- because of going back, yes, in May and June, particularly, we -- a lot of our competitors had some enormous lead times with China factory. Yes -- where we -- the way we're quoting 9 to 11 weeks on a custom made order for a lounge, some were talking 20 weeks. So yes, I'd say regarding -- during May and June, I think we would expect by now those factories get back and then lead times, I'm not sure where they're at now in terms of our competitors.

Your next question comes from John Hynd with Wilsons.

If we could start on online. Obviously, the impact has been pretty encouraging from day 1, but it looks like I think demand through that channel would have ramped up perhaps in May and June from our earlier discussions in April. Can you give us some color maybe how you exited June and how July's looking? And then, I guess reconciling that with the implied revenue you're telling us from the $4 million of EBIT you expect in '21, please.

Yes. Well, if we look through it, I mean May and June in terms of total sales, while growth was similar at 70%, there's a big difference in terms of sales orders written in June compared to [ May ] because June, our second biggest month of the year. So the online performed really in proportion to as the stores did. So June was the peak for online in terms of sales orders. July, however, it actually grew again. So compared with the stores, our July total numbers aren't as big as June numbers at store level. The online basically was pretty stacked in terms of the sales level in July compared to June. So there was a difference. So our view on that is that, that's almost like a growth within a month compared to what we see from that respect.

Yes. And then are you saying perhaps different contributions by state? Is Victoria stronger in that regard for online demand?

Well, it hasn't -- it's been pretty proportionate, I've got to say, across the board. Victoria would be the second largest state online. It will be interesting now to see what happens with the shutdown we expect this month as our Melbourne store closes out, the proportion will swing more towards Victoria.

Okay. And what just still online? Could you explain or just let me know what's in the 50% or 30% from contribution to EBIT margin? What's that cost line?

It means the people. It's a -- really employment. Where people are employed online really.

So it's just the call operator -- center operators or the call center operators taking your orders?

In some general expenses allocation, there's no advertising allocation because we're not in -- when we're looking at advertising spend as a percentage of sales, we split online because we think they should run off the back of that rather than we ramp up to do it. So we're trying to bank -- look, the advertising is pretty material as it is. Our view is we're not spending -- we'll spend digital money in terms of the online, advertising and marketing spend, but not traditional media allocation is just based on store sales orders. So therefore, the marketing spend is pretty small for our online business.

Got it. And just a couple of housekeeping items before I jump back in the queue. Just wanted to reconcile some of the, I guess, points made in the pack. So you had about $6.2 million of benefits from, I suppose -- or I guess, positives from the COVID-related issues like job keeper and rent relief in the second half, and you're expecting a further $4.1 million in first half '21. Is that right?

From JobKeeper, it's about $3.8 million.

That was the benefit in the first half and the second half?

So the second half -- sorry, the second half was -- in terms of the benefit, the second half was about $3.8 million from JobKeeper.

Yes. And then what are you expecting? There's just the $4.1 million receivable that you flagged in the pack. What's that and sort of what that relate to?

Well, that's [indiscernible] under AASB 16.

Yes. So we say the [indiscernible], yes.

Got it. Okay. Cool. And then what -- I haven't got to yet, but there's a one-off item of $1.8 million. What was that?

That was the sale of the our [indiscernible] property.

Okay. Yes. And then the clearance stores, it looks like they've sort of dropped off the pack. Is that on purpose? You're just sort of flagging 58 stores at the moment? Has there been a change there at all?

Our clearance stores, some get closed, some get relocated. They're just depending on a lot of -- so we -- so our method on clearance scores is do the short-term rent deals that significantly reduce reduction. So if there's a bulk and goods center that has space not let for 6 months, we open a -- almost like a pop up clearance store in those locations. So it's moving all the time, so that's why we just left it off. It's not permanent.

Okay. What was -- was there revenue contribution about the same this year? Or I know you've had a bit of success with it -- and since you've sort of started switching it out from sofas to go.

Yes. Look, yes, so the contribution is about the same, yes.

[Operator Instructions] Your next question comes from Shane Bannan with Bligh Capital.

And I imagine the second half to be a little bit crazy time before the government stimulus measures given that lift through May, June. I just see interested in your interpretation when it comes to a narrative as to what has been driving that particularly and also worth getting some sort of a that scenario going into the FY '21. Obviously, it's depending on a whole range of issues. I appreciate that. But I just be interested to get the narrative around what you're seeing.

Yes. I think -- well, I think your question is relating to why had -- why did people spend so much money in furniture, yes. And this is a surprise to all of us. And I think what the view is that people are spending a lot more time at home. They also spend a lot of money in holidays, which they can't do now, particularly our customer in our demographic, they're a little bit more affluent. And so it's a reallocation of their spend, I think. And the realization they're going to be spending more time in their home and less time out of their home for a while. Yes, with government, when we got to the government stimulus, that certainly gave confidence to people that [ are in the brink of ] losing their job. But I was still, still surprised how people reacted and not -- they're not so concerned about losing their jobs, I guess, going forward, uncertainty moving forward. Having said that, in Melbourne closure and the -- I think will, for a short period, have an impact on consumer confidence. So I think people are now living it more nervous. I think we thought we were out of the woods going back in May and June, but -- and with the Melbourne situation, I think that falls into the old state. And I expect a little bit of a slowdown in the next few months. So the numbers come down even before.

And with respect to the progressive withdrawal of the stimulus measures over the course of the next 6 months or so, presumably that's also going to have a bearing and reinforce that sort of trend.

Yes. I mean the extension of the JobKeeper in March should help. And yes, there [indiscernible] rent relief continues to those [indiscernible] under the $50 million turnover as the government support that [indiscernible] with respect to that. So yes, it's hard to tell really what, but it looks like the government will continue to provide some stimulus in certain areas and in certain segment.

Yes. Clearly, just ask you, just refresh from memory. The -- I just got this change over the years. The exposure you've got to foreign currency. I'm assuming the vast majority of your stuff is bought in U.S. dollars. And I think you touched on this on the -- your earlier commentary. This suggests you hedged 9 months forward. Could you just retouch those bases again for me?

Yes. We -- our policy is normally 6 to 9 months forward, we're hedging, covering currency. And the reason we do that, obviously, is we have the prices that can be stable along the period. And if there is a significant drop in the dollars, as we saw in the last 8 months, we're able -- we've got time to read us our range that may -- which is what you do when the currency devalues, you tend to readjust your range. You need to bring different products with different price points. And then as part of the range, we're increasing prices in some products, so are able to perform with higher prices, so that they will be replaced. So it gives you all that time to do that. And also, I protect -- now we're making -- we're selling orders, sales orders were turning after a 7 week lead time and we've got to protect that as well at margin.

And the exposure is U.S. dollar?

Yes, it's U.S.

Your next question comes from Oliver Stevens with Hartleys.

Just a quick one. With the rent concessions, you've got that $2.3 million after landlords have been seeing your sales result and seeing this result of any of the mask for the [indiscernible]?

It's going to be early, yes. That [indiscernible]. Look -- yes, at the time, our stores were closed. My view -- and we weren't -- we don't receive [indiscernible] in there. So I think at the time that [indiscernible] outcome of those negotiations.

Just on the -- you noted the headcount reductions as well, and it looks as though your full time -- your numbers drop by about 40 people. Do you see those reductions as permanent? And what sort of annualized cost saving would that be?

Look, it's -- yes, we think it is permanent. And that -- look, it's not certain material, that amount in trading. There are also stores operating at reduced hours. We've changed our hours from 9 to 5:30 7 days a week, including Thursday night and Friday nights depending which state to now 10 to 5 and no longer open on a Thursday or Friday evening. So there's been -- there've been savings. There will be savings in that going forward. But at the moment, that's being offset by commissions. Our stores have been learning obviously record commissions, and we're really happy for them to do that. So that's been offsetting that saving at the moment. But going forward, there'll be further employment savings based on the reduced sales, which we think we can maintain in the long-term now.

Yes. Okay. Yes. And just one last one. The earlier question, in terms of your guidance, was based on the sales order assumptions of flat in August, September and then half of October. Just that's flat versus [ PCP ], I imagine?

Yes.

[Operator Instructions] Your next question comes from [ Dale Richardson with Richardson Superfund. ]

Yes. I'm not sure if I can be heard at the moment. Just asking a question about the stores that you own. Is it currently only the 4 is listed in the prospectus?

Sorry. Yes. Could you just repeat that again? I can't hear you.

The question was, again, the stores -- the number of stores that you currently own outright. Is it the 4 in the prospectus? Do you intend to be purchasing and growing more owner -- owned operator stores?

Yes. The answer is yes. If there's a good opportunity that allows that, we will do that. Yes.

I will now hand back to Mr. Scali for closing remarks.

All right. Thank you and we'll end it there. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.