Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nick Scali Limited FY '21 Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Scali, Managing Director. Please go ahead.

Good morning, and welcome to the Nick Scali FY '21 Results Presentation. Running through our FY '21 highlights. Sales revenue was $373 million, 42% up on the prior year. Gross margin, 63.5%, up from 62.7% in FY '20. Underlying NPAT, net profit after tax, is $84.2 million, 100% up in FY '20. Operating cash flow was $137.9 million compared with $76.5 million in FY '20. Total dividends for the year was $0.65. Our store network is currently 61 showrooms, 57 in Australia -- sorry, currently it's incorrect. As at June FY '21 was 61 showrooms; Australia, 57; New Zealand, 4. There's 1 additional showroom that has opened in July in New Zealand. As mentioned, revenue was up 42% with comparable store sales growth of 34%. We split the growth -- the $110 million growth in revenue was made up of $87 million from comparable stores; approximately $1.9 million of the new stores opened in '19 and '20; $5.1 million from stores opened in FY '21; and $14.4 million Online; and $1.4 million from the clearance stores. The new stores opened in FY '21, their revenue contribution, based on the fact they're open at different times in the year, were -- all the 3 new stores with an average of 2.5 months contribution only. So we look forward next year to a full 12-month contribution from those 3 stores. Sales orders. Total written sales orders was about $401 million, representing growth of 37% in FY '20. The written sales also in New Zealand were 95% up in FY '20. Total written sales order for Nick Scali Online were $18.3 million, up $15.3 million on the previous year. 3 new showrooms that we're opened throughout the year have performed strongly, and they contributed $10.7 million in sales orders. So that's at an -- averaging at 5.5 months. The closing order bank is up 35% on June 2020, which -- yes, which does reflect the continued strength of our trading throughout FY '21. When we look at the financial performance, underlying profit is $84.2 million, as mentioned it's 100% on the prior year. Clearly, the result was driven by the sales growth. Operating expenses were up, but the majority of those expenses were from new stores, $2.6 million. And commission and bonuses at elevated levels given the result of $4.1 million, offset by savings in marketing. In respect to cash flow and the balance sheet, I'll let our CFO, Chris Malley, run through this.

Thank you, Anthony. The strong trading has resulted in a strong operating cash flow result. There were no significant or unexpected cash items during the year. Our operating cash flow was $11 million more than our EBITDA due to working capital improvements; a $12 million increase in customer deposits on the back of our increased order bank, which was offset by increased inventory holdings in our distribution centers and showrooms. We used around $15.5 million of the generated cash on CapEx projects, primarily the purchase of the Adelaide flagship showroom in Keswick, South Australia, new store fit-outs and store refurbishments. After tax, interest and dividend payments, the net cash inflow was $44 million for the year. Moving on to the balance sheet. Our cash balance increased by $44 million, as just mentioned. And our inventories increased in total by around $10.5 million, $4 million of the inventory increase related to in-transit inventories, which is a result of the elevated level of trading and is offset by the increase in the payables balance of 30th of June. Aside from the in-transit inventory, the increase in the inventory has been driven in the DCs and showrooms, with a $5 million increase in the inventory, supporting additional $110 million of revenue, which reflects the efficiency across our DC and store network. Our property balance increased due to the purchase of the Keswick showroom, which is our ninth property. It was fully paid in cash. And there was no change to the overall level of borrowings, which remained at $33.7 million, which are all secured against our existing property portfolio. With that, I'll hand back to Anthony now to talk about our New Zealand business.

Our New Zealand business continues to perform very well. And we have -- starting to grow the network of stores, which will continue. And we can see that the total growth in terms of written orders [ AU ] was 95% on the prior year, with comparable store growth of 40%. The new -- we opened a new showroom in November in Wairau Valley, which has -- is doing very well. In fact, it's our #1 store. And we will realize the full benefit of that store in terms of sales revenue during FY '22. We just opened our fifth showroom in Hastings in July, which is in obviously this financial year, and that has also performed well year-to-date. Nick Scali Online had reported written sales orders of $18.3 million, and that -- which was the first full year of operation and obviously a sixfold increase on FY '20. The Nick Scali Online written sales orders of $5.5 million in the quarter 4 of FY '21 was an increase of 84% in the same quarter the prior year. The full year revenue was $15.3 million, with an EBIT contribution of $8.8 million. Lounge visualization tool was launched in July. And certainly, we've seen an improvement in lounge sales Online. And the e-commerce will be launched in August across both Australia and New Zealand. Looking at our store network. We have 61 stores, 57 fully -- actually, we had 57 stores, 4 stores in New Zealand with a total of 61. The target for Australia is 73, new Zealand is 13, bringing a total target of 86 stores. As Chris talked about in our property, there was an additional property that was purchased in South Australia with a photo. We now have 9 showrooms, properties that we own. And that's a strategy that the company will continue to expand the number of stores we own. In terms of the outlook, our growth is primarily driven by the continuation of our new store rollout and increasing Online penetration. And trading during July was impacted by the government-mandated lockdown in Greater Sydney, Victoria and South Australia, with written sales orders down 27% compared to July 2020, but up 24% on July 2019, despite Greater Sydney being locked down for the whole month. Victoria and South Australia have traded exceptionally well since coming out of lockdown towards the end of the month. New Zealand continues to perform well with written sales orders up 91% in July, whilst Online growth continued with written sales orders up 80% (sic) [ 88% ] compared to July 2020. Despite the buoyant trading condition, there is a high degree of uncertainty in the current retail environment. This is due to potential future lockdowns, supply chain challenges caused by lockdowns in sourcing countries and the continuing escalation of global shipping costs. Given the uncertainty, it is not possible at this point to provide profit guidance for the company for the first half of FY '22. So I'm happy now. That's the end of our presentation. We're open to any questions.

[Operator Instructions] Your first question comes from Mark Wade from CLSA.

I guess the last 12 to 18 months has been a real roller coaster ride for you guys in the entire retail sector. I mean what do you think is going through the heads of your -- the typical Nick Scali customer at the moment?

That's a lot of customers. Yes. I think -- my view is -- I think there's still -- look, having looked at what's happened recently with Melbourne and Adelaide coming out of lockdown and it certainly -- that came out strongly [indiscernible]. My expectation, the customers are still wanting to worry about the land they sit in and the dining they have and the propensity to spend, particularly given -- you're in lockdown, and that's why I think how the customer cycle continues to be and particularly while we can't travel.

Okay. Sure. And looking ahead, I mean, the -- and is your sense that these lockdowns are just simply postponing purchases, yes? You're not seeing any kind of demand that's been crimped technically, yes?

Sorry, I didn't understand it. Could you repeat?

Well, I'll just -- yes, I was just trying to elaborate on your point around the lockdowns. And I guess the question investors are probably asking is the -- is it just a matter of the customers just postponing their purchases when they're coming out of the lockdown? Or is it -- do you think like there's some demand erosion?

Yes. Look, that's difficult. I -- yes, there is -- probably there was, yes. They -- the people, they -- during maybe this period -- Sydney has been locked down that they wanted -- they were intending to come and buy land because they finished some renovation or just moving house. And yes, obviously, you get the uptick in reopen. But the elevated levels continue throughout this period, whilst we're in this COVID situation where we can't travel.

Your next question comes from Marni Lysaght from Macquarie.

I just had a question around your strategy. You've said here, your future growth will primarily be driven by the continuation of store rollout and increasing Online penetration. Can you talk to maybe the -- your scope to potentially acquire another business? And how we should be thinking about that at the current juncture?

Yes. Look, we're always open to acquisitions if it works, if that makes sense for our business. And as you know, we made the announcement on the 19th of July about -- that we were currently in due diligence for another business, don't know how it is -- most certainly that will occur. There may be other opportunities if this doesn't proceed. But irrespective of acquisitions there, our -- we're very motivated to continue our store rollout and really grow our Online.

Sure. Just a question on the outlook comment. You said here Online has been up 88%. Is that for the group or New Zealand?

No.

Group.

Group.

That's the whole group.

That's the whole group.

Yes, that's clear.

Your next question comes from Sam Teeger from Citi.

Just wanted to elaborate on that recent announcement for Plush. Can you confirm, are you still in the due diligence process?

Yes, we are.

And is Plush the only business that you're involved in nonexclusive discussions with? Or you're considering other targets?

Not at this point.

Got it. All right. And how many still...

There are opportunities. There's lots of opportunities there at the moment, Sam, that we're looking at, but we're not in due diligence.

Okay. Great. And how many stores are you planning to open in FY '22? And can you just provide a bit of color in terms of, of that, how many are you going to do first half versus second half and the split between Australia and New Zealand?

Yes. So we've already -- so we -- look, our plan is to open -- excuse me, 3 to 4 stores at the minimum.

3 to 4, you said?

Yes, in FY '22. That's what we would target. We've opened already 1 in New Zealand. And hopefully, the balance will be across New Zealand and Australia. There's a number of opportunities we're looking at now. There's some we're very close to executing soon.

Right. So you've done 1 so far. Of the other 2 to 3 that you're going to do, is that going to be first half or second half?

Sorry, yes. I think, hopefully, at least 2 to 3 will be first half. The balance, second half. It depends. There are a few balls in the air, yes, on the new stores. It's always not easy to predict when you can open. The other issue is about the lead time on our furniture. So we basically specifically always order from our suppliers new stock for different showrooms and those lead times are a bit longer, so we've got to deal with that as well in terms of -- with respect to the opening. So that's why it's a bit of a moving target.

Got it. All right. Cool. And what's driven the lower second half gross margins compared to the first half?

I think the first half was just exceptionally high. It's just a movement in the freight, bit of freight in the second half, a little bit higher freight content.

Your next question comes from John Hynd from Wilsons.

Congratulations on such a strong result. If we could -- I've got a couple of questions. If we could start with New Zealand, obviously, a really strong result. Could you perhaps give us a reminder of the strategy there? And 40% sales growth, is that -- or like-for-like sales growth, is that, I think, evidence of the strategy taking place? And how do you think about the profile for that region going forward?

Yes. Look, I think the brand awareness has -- is building in New Zealand. And when -- and that -- we opened with 1 then 2 stores then 3 stores. And obviously, our marketing spend has to be proportioned in control to our sales revenue. So as the store network has grown, we've been able to spend more on marketing. And therefore, the brand awareness is improving. And that's helping. Obviously, there's the COVID impact helping with the like-for-like. The stores that opened have been very -- performed really well. So the brand uptake is really good. And we're very happy with the result.

Do the stores -- forgive me, I haven't had a chance to do the back-of-the-envelope math. But do the stores typically trade in line with the Australian store? Like -- I mean the rule of thumb for you guys is sort of $4.5 million of revenue per store annually and you're at a 25% sort of type margin. Is that how you think about New Zealand?

Yes. Look, New Zealand probably performing a tick up on that, to be honest with you. So they're doing well, yes. But yes, more or less, yes.

Okay. And what about the -- like early on, it was -- and retail was very strong and housing is very strong in New Zealand at the beginning when you started rolling out in New Zealand. Given you sort of -- I guess clipping off more stores at a faster rate now, has that changed? Is it easier to find the right sites? Or have you changed strategy? Or have you got a good partner now?

Yes. No. Well, I think the answer is no, it's not that easy to get good stores because our template is 2,000 to 2,500 meters, and that's not easy to get, a site of that size, and that really always limits our store availability as you saw because of the size. And we've pinpointed locations we want to go, the areas, but we always look at the position. We're careful about the position in those areas we want to open stores. So that's why it takes a little bit longer than we like sometimes. Just to answer, no, it's not about partnering with anyone, but it's just about having access to sites. Yes, we've always got the ability also to buy sites, as you know, and develop our own stores if we have to, or at least, we can either -- we go all the way, opposite direction and go there. It's more like the limitation on the speed of getting new stores is always basically because of the size of our stores. So it's a strong discipline we have to ensure that we don't compromise on that.

Okay. Great. That makes sense. And just while we're on stores, I'm still a touch confused about the rollout profile. So you talked about 3 to 4 stores for '22 and 2 to 3 in the first half. Does that include the 1 already opened in New Zealand? So essentially a further 2 probably in the first half and 1 in the second?

No. For the year, it's 3 to 4. We've already opened 1. So there will be another 3. So that we might -- we hope to open the second or third in the first half. That's what we would like to do.

Got it. Okay. And finally from me, Online, obviously, still doing well. I'm just interested in just, I guess, optically about the split you've got. So you've -- written orders were up $18.1 million (sic) [ $18.3 million ], and then revenue is $15 million (sic) [ $15.3 million ]. I understood that the majority of the volume coming through the Online was more of your flat pack type offering. I'm just surprised in the sort of delay there, given I think you did bring in a lot of inventory pre-COVID. Is that a profile we can expect to remain with that Online business? Or is it just a timing and digestion issue as you get more familiar with how the business works?

Yes -- no -- yes. I think -- well, firstly, the written orders were more than the revenue because a portion of our Online orders are lounge, and they have to be delivered, right? So there's always that lead time. But...

June.

Sorry?

That's at June.

Yes. Correct. In the June period, yes. But irrespective of that the -- I think in -- John, what you're asking is that what we've seen, why the volume growth's up is we've learned a lot about different marketing initiatives that are working, that we're going to put it. So we've introduced the lounge visualization tool, which has brought us better penetration in lounges because it's always been challenging to sell a lounge above $2,000 Online without someone having gone and sat on it. So I think there's all that -- and we've just got better execution. The average unit sale is $1,900. And we see growth by just executing better, bringing more categories. We've got the launch of a new e-commerce tool that will be launched in August. And so we're very comfortable with the growth.

Great. I heard Chris whispering June in the background there. Was June strong? Yes. And what was your sort of monthly run rate then versus what the print is on an average basis for the year?

Yes, June is always a bigger month, and it's a bigger month for Online, too. So we get the -- but those sales aren't delivered yet.

I think Chris is trying to explain why the orders are a lot more than the revenue as at end of June. June's the elevated month in terms of orders, traditionally, so it's a seasonal month for us.

Okay. Cool. And so you were happy with how you exited FY '21 with Online?

Yes.

Your next question comes from Aryan Norozi from Barrenjoey.

First one for me. Just on the trading of that and just how you're seeing the consumer, I mean, if you look at it at sort of the lockdown states, are you noticing a big impact in terms of confidence or visitation?

Yes. Sorry, it's wasn't clear. I couldn't hear -- understand clearly your question. There's a bit of interference. Could you repeat it? Sorry.

Is that better? Can you hear me better?

Yes, that's better.

Yes. So first one, just in terms of states that are not in lockdown at the moment, are you noticing any sort of material change in terms of their purchasing pattern or footfall in your stores?

No. It's -- and as mentioned, it's pretty elevated. The foot traffic is up. And so -- like no, there's no different pattern. It's very similar to what happens continually when you come out of lockdowns. There seems to be a bit of pent-up demand. Sales are elevated. And then it lowers down, but still at elevated levels.

Yes. Perfect. And just in terms of the gross margin, can you sort of explore that a bit more? I mean it was down about 25 basis points in the second half and it was up [ 118 ] in the first half. I know you mentioned there's a bit of normalization in freight. How do you think about the impact from rising freight in fiscal '22? And how do you think about managing that as well from a pricing perspective?

Yes. That's -- it's a very -- it's a challenge. I think we've got -- traditionally October to December is the peak season for freight normally. And freight traditionally goes up this period. So there will be further impact on the freight. The way -- I think -- and the currency has been helping us because we've come off our lower hedges and on to higher currency for a while, so that will offset that first half. And then, I think ,the freight situation slightly will stabilize. And I think that the rates are at peak rates now. It's unsustainable, I think. And I don't think those shipping lines are going to be able to keep at this level in the long term. But yes, it's a difficult area to manage at the moment.

You manage it through pricing because I think the last time, you put prices up within March, April 2020. So have you put any price increases through yet? And is that something you'll be thinking about doing?

Correct. That's -- yes, at the end of the day, if the freight continues at this level, prices have to go up.

And just next one, just in terms of the dividend, I think there was a bit of delay sort of what others are expecting. Is that just sort of giving yourself a bit more wiggle room around M&A?

Look, I think it's more around the -- just a degree of uncertainty in the moment in terms of lockdowns, particularly, we've got lockdowns in -- from countries where we source from. Like Vietnam, at the moment, completely locked down. Malaysia is completely locked down. China is continuing. So there's just this uncertainty and concern about supply chain. So we thought it's a good -- and we can always address the dividend in the next year, the next financial year or this year, FY '22, if things stabilize.

Yes. That -- and just last one. I mean just thinking sort of medium to longer term, how has COVID, if it has at all, changed the way you're thinking about your cost base? Is there any line items within the cost base that you're sort of structurally lowering as a result of COVID and you sort of see yourself at a higher sort of margin business exiting COVID?

Yes. I think -- well, we've certainly learned the capacity we've got in our distribution network, which has been very pleasing. The distribution network and the management of our distribution network has done an exceptional job. We basically delivered the sale of revenue growth of extra $100 million without incurring additional costs, just pure leverage. And we learned a lot about how to manage higher volumes in a very, very efficient way. And we've had some incredible initiatives we've implemented, which we'll continue to improve on. So -- and the other thing is I think we've learned a little bit on the marketing side, how free initiatives and savings on that part. So they're the big 2 lessons for us, it's been marketing and distribution.

So just -- last one, just in terms of your comparable written sales orders and apologies if I missed this, but I don't think you guys called that out in the project. I mean you said it was up [indiscernible] in the first half. What was the comparable written order growth since this was coming on, please?

Sorry. What was the question? I didn't...

It's just what...

Sales orders comp you -- here.

We didn't mention that in the presentation. The revenue growth was 34%.

Your next question comes from Keegan Booysen from Jarden.

First one for me. I'm just interested to see how you've -- if you've seen anything change from a commercial intensity standpoint. You can see some of the discretionary categories out there having promotions return pretty quickly, just if you've seen that in your category.

No, not really. No.

Okay. And then maybe just following on from that. Just trying to think about your gross margin a little bit more. Is it still the case that the Online growth should be gross margin accretive, just given the mix Online there.

Yes, you're right. That's correct. As -- because not -- the majority was a -- it's different to our stores. In our stores, it's more or less 68% lounges, the balance to case goods. And it's almost the reverse in Online. Having said that, though, the lounge penetration is better now Online so that it is starting to move down a bit in terms of case growth of a larger percentage. But yes, if you talk about last financial year, the margin was helped by Online because the -- 68% was case goods, which is over a high margin.

And then maybe just given Online has been successful since you've launched it, is -- it seems that you're introducing any other sort of adjacent categories. And if so, can you talk us through any that makes sense for the brand? And I guess what categories would be easy from a supply chain perspective as well?

Yes. Look, we are looking at the other categories. And we -- well, there's 2 things. Firstly, it's about giving more depth to your existing ranges. Meaning you can, for example, this -- in a range where we sell a dining buffet coffee table, lamp table, we can introduce a lot more choice in those ranges of smaller buffets, big buffets, bigger -- smaller tables. So we can broaden the depth of that range, I think, by -- through Online. And secondly, yes, the other categories that we thought that -- without, we -- we've identified those and we're yet to execute.

And then maybe just the last one for me, just looking at some sort of a CapEx investment perspective from the supply chain side. Do you suspect that given you're adding more categories on -- or do you think that there needs to be a step up in CapEx outside of what you're spending in stores or maybe from a data online capability standpoint?

No. Look, the CapEx is immaterial. We don't need any CapEx in the distribution network. We sold -- CapEx, there's some towards Online development and in tools and it's all been slightly very immaterial.

So it sounds then like the majority of the CapEx going forward is primarily just going to be within the store network in the store network and nothing on the back-end side?

Correct.

Your next question comes from Shane Bannan from Bligh Partners.

Just wondering -- I went to look elsewhere in the slides you put out today, but just some commentary around the dividend, why it's bouncing around so much. The fact the payout ratio has dropped away as much as it has and yet the prognosis remains quite positive, particularly given the net of that balance sheet of yours.

Well, that -- the dividend is up. It's -- the payout ratio is lower. And I think, as I said before, we -- at the moment, we're a little bit concerned about the lockdowns of our supply -- of the countries where we source from. And that might potentially impact our cash flow. So we're just being conservative. Irrespective, the dividend yield is above 5% and the payout ratio is still fairly high. Not as high as it traditionally has been but we just think it's prudent at this point in time to leave a little bit of additional cash.

Okay. Sorry, just for -- just on that then, is there a -- through the cycle or through this little period when we come out of it, is there some sort of a payout ratio you are aiming to deliver over time, given a rough bend?

Yes. Look, that's a matter for the Board. I think if you -- I mean, if you look back at the history of our payout ratio, you can see it's been relatively high. So in normal circumstances, yes, I think it could stay -- could be higher than it is, but it's really a -- it's an ongoing capital management matter.

Your next question comes from [ Peter Stora ], shareholder.

Congratulations on a great year, a very happy shareholder here. I'm very happy with that conservative approach that you just mentioned. My question relates to the Online growth and the Online penetration. Do you think the Online is existing loyal customers who are confident enough to buy from Nick Scali Online? Or to what extent do you think we're reaching new customers?

Yes. Look, I think the business, as a whole, is always reaching new customers because -- well, there are loyal customers, but people tend to buy furniture only once every 5 years or even up to 10 years. So we've always -- as the company has grown, we've obviously got new customers. So the majority of our sales are still new customers as we've grown and taken market share. At Online, I think, yes, certainly, these are -- we've seen the demographic. We've probably been able to attach a large -- a younger demographic online than we might have in the past due to that.

Your next question comes from Oliver Stevens, private investor.

Oh, it's okay. My question has been answered.

[Operator Instructions] Your next question comes from Tom [ Silo ] from Family Wealth Management.

My name's Tom. I just wanted to hear again your views on case goods and where do you see it -- the case goods heading in the next 12 months?

Case goods, yes. Well, it continues to be a very important part of our business. And I think it's just the -- as normal, we continue to improve our case goods range. And the Online has given us an opportunity to broaden that by adding more depth, as I said, to the ranges and also bring additional categories that may not be able to be displayed in stores.

Your next question comes from Ben Rodney from Morgans.

Just a question on your supply chains. You've called out that you do have concerns there. Do you think that you've reached peak lead or delivery time for your key range? Or do you think that's going to grow out further? And if you could dovetail into, I guess, your order bank at 97 days, do you see that normalizing back to historical norms? Or -- yes. If you can just give us a bit of color around that. And I guess also, does it start to affect consumer behavior when lead times grow out as much as they had?

Yes. I think the impact of the lead times is caused by the lockdown in other countries that we source from. And unfortunately, we can't control that. On -- for example, a customer lounge orders and the lead times will -- are dependent upon that. Case goods, we have been increasing our stock levels. I think we will continue to do that because of the issue of lockdown. So you need to be overstocked, I think, at this point because of current lockdown. Typically, as I said before about the lounges, they're custom-made orders, and customers will probably, depending on lockdowns, may have to wait longer. If the lockdowns improve, the lead times will shorten, go back to as they were.

[Operator Instructions] Thank you. That does conclude our questions for today, and that does conclude our conference. Thank you for participating. You may now disconnect.

Thank you.