Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nick Scali Limited First Half FY '24 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Scali, Managing Director. Please go ahead.

Welcome to the half year results for FY '24 of Nick Scali. Turning to Page 2 of our results presentation. We have the FY '24 half year summary. Written sales orders of $212.7 million, up 1.1% on the -- on FY '23 half. Like-for-like written sales orders flat. Revenue of $226.6 million compared to $283.9 million in the previous half last year. The first half FY '23 benefited from increased deliveries due to the elevated order bank at June 2022. Profitability. Group gross profit margin of 65.6%, up 2.1% on FY '23. And consistent with the second half of FY '23, gross profit margin of 65.4%. Profit after tax of $43 million, above the $40 million to $42 million guidance provided at the October 2023 AGM. Cash and deposits of $68.3 million as at the end of December. $20 million was repaid on corporate acquisition debt and FY '23 dividend paid of $28.4 million in the first half FY '24. An interim dividend then of $0.35 per share fully franked. Turning to Page 3, revenue and written sales orders. The first half FY '24 revenue is consistent with written sales order levels and typical delivery lead times. The first half FY '23 did benefit from increased deliveries from the elevated order bank, which was reduced whilst lead times were returning to pre-COVID levels. Written sales orders, as I mentioned, were up 1.1% on the half. In particular, the second quarter where written sales orders were 8% higher in this corresponding quarter in FY '23 with both Nick Scali and Plush brands contributing to the increase. In quarter 1, written sales orders were 5.4% lower than the quarter 1 FY '23 as reported at the AGM. Therefore, overall, written sales order for the half was flat compared to that previous half. I'll hand over to Sheila Lines, our Chief Financial Officer, to carry on with Slide 4.

Thank you, Anthony. So turning to Slide 4, our financial performance. Anthony had just spoken about the sales revenue performance. And as he mentioned, our group gross profit margin for the first half of the financial year '24 was 65.6% compared to 62% for the first half of financial year '23 and was similar to the 65.4% in the second half of financial year '23. Operating costs were $4.8 million lower than the prior period. The first half of financial '23 included additional logistics expenses of $4 million to support the peak volumes delivered. Combined depreciation and interest expense on property leases was $24.2 million for the half, an increase of $1.7 million compared to the prior period. Other income includes interest income on cash and deposits. Excluding the AASB 16 interest expense on lease liabilities, net bank interest expense was $0.5 million, slightly lower than the net bank interest expense of $0.7 million in the prior period. And turning to Slide 5, cash flow. Cash of $43.6 million was generated from operating activities, and that is after deducting operating lease principal and interest payments. This operating cash generation of $43.6 million was increased from $35.1 million in the prior period. $8.5 million was utilized in the half for the build of our new Queensland distribution center, which we expect to complete in the third quarter for a total construction cost of $16.2 million in addition to the land purchased in FY '23 of $7.8 million. Other capital expenditure in the half totaled $5.5 million. And as Anthony mentioned earlier, $20 million was repaid in August on the corporate acquisition debt, reducing the amount outstanding to $28 million. Moving to Slide 6, balance sheet -- I'm sorry, included in borrowings are $43.7 million of loans against owned property at less than 50% loan to value, and the amount outstanding on property debt is unchanged for the period. $28.4 million was returned to shareholders via payment of the FY '23 final dividend and closing cash on hand at December, $68.3 million. Now moving to Slide 6, balance sheet. Included in property at net book value are the construction and progress costs and land purchase for the Queensland distribution center. The $20 million reduction in borrowings and corresponding reduction in cash and deposits reflects the August corporate acquisition loan repayment referred to in the prior slide. I'll now pass back to Anthony.

Thanks, Sheila. The Nick Scali brand online. For the first half FY '24, online written sales orders were $14.7 million, up 22.5%, driven by the enhancements in the e-commerce user experience, which was really driving the growth. Turning to the store network. Nick Scali opened a new and larger showroom in Payneham, South Australia, with the existing store converted to a clearance store. Two new Plush stores opened in Helensvale, Queensland and Payneham, South Australia. One Plush showroom was closed in the ongoing optimization of the acquired Plush network. And further 11 Plush showrooms were updated to the new concept of Plush launched in December 2022. Twenty Plush showrooms now reflect the new concept. And the net change in stores was only 1 additional store, which at the moment stands at the 108 with a long-term target of 176 to 186. We turn to Page 9, recent trading. January 2024 written sales orders were $58.9 million, up 3.6% on the corresponding -- in January 2023 with like-for-like up 2.6%, which is continuing the positive momentum of quarter 2 FY '24. So that's the completion of our results presentation, and we're now happy to take questions.

[Operator Instructions] Your first question comes from Peter Marks with Barrenjoey.

I just wanted to touch on any differences in performance across Plush and Nick Scali in the period. And I think you've now refurbed 20 Plush stores. So just wondering if you could comment on the difference in sales growth between the new Plush concept and the old Plush concept.

Yes. Look, as we mentioned, both brands grew in the period, particularly in the quarter 2 and in January. And look, both -- their growth was very similar. Probably in January, we saw Plush performing a little bit better than Nick Scali.

And the new concept in Plush?

Well, it's not a new concept, just -- well, it's a new store look with it, which allows us to merchandise the product better. And those stores, yes, performed well.

Okay. Great. And then maybe just on the changes you've made to the store operating model. It looks like you've taken some labor hours out of the stores in the half. How confident are you that that's sustainable and it hasn't impacted service levels? And then is there any more to do on, I guess, on that into FY '25?

Well, yes, the employment costs are down for twofold. Firstly, in the previous year, we -- given the revenue and -- elevated revenue due to the delayed shipments and there was a catch-up, so there's a lot of additional labor in warehouses is the main driver of that employment. Yes, stores, it's a little bit understaffed. But yes, it's not -- clearly, we prefer not to be understaffed, but that's been challenging recently, as for all businesses.

Your next question comes from Ed Woodgate with Jarden.

Great result. I guess evidence of the -- you being one of the high-quality retailers in the ASX. Market obviously likes it. I might ask a couple of quick questions on the results and then talk to freight, if that's okay. So you're just providing some color on the performance of Plush versus the Nick Scali brand. Can you talk to GP? Because I think you were up 20 bps half-on-half, did Plush improve more than Nick Scali? Was that coming in...

Yes. Look, the Plush gross profit is now aligned to Nick Scali.

Yes. Okay.

Yes, yes.

Right. And as far as during the period, so it sounds like you had some freight tailwinds, and you've talked to passing those on to consumers in the past. Can you give us a sense about what happened to average sale price and how much price decrease you put through during the period?

Yes. Look, the sales growth in the quarter 2 and January was really driven more -- was driven by more volume given that our freight prices -- freight rates drop, we pass it on with lower prices to enhance volume, which did happen. But prices across the board, average unit sale probably dropped about 6%, 7%.

6%, 7%, okay. That's very helpful. And then just some -- I mean [ cracking ] result. And so I guess the market is inherently forward-looking. With freight rates going up, and that's -- our research is that's going up to Australia as well from China. And Greenlit was in the press on Sunday saying similar things. I mean do you mind commenting on the freight rates you're seeing and what percentage of COGS that is and I guess your ability to manage that through passing on price increases to your brand -- strong brand, et cetera?

Well, I think the freight is a pretty complicated situation, which is now less complicated because we had DP World, which I think handles 40% of the incoming freight. The industrial action was not anywhere near its capacity cause delays. It also caused shipping lines to send less ships to Australia because why wouldn't they do that when they have to sit out the sea [ when it's ] unloaded. So it remains to be seen, but I think now that with the industrial action resolved, I don't think that freight will be such a big issue going forward. I could be wrong, but just my sense is that, that won't happen. [indiscernible] thought it was.

Yes. Have you seen any recent spikes due to the Suez -- the Red Sea crisis or that's less of an issue, you think?

Yes, not really. I think -- I mean we buy from Asia. So it's the Asian route that counts for us, not from Europe. So it's more about what's the shipping line supply, how many shipping lines are going to enter this Asian route. And we know with the DP World situation, of course, there were less ships, and that's what pushed price up because supply wasn't there. So yes, I think it will be -- it will stabilize. And I don't think it's going to be anywhere near COVID level. So in respect, it won't have a material impact.

Okay. Got it. And then can you just maybe talk to -- last question here, talk to how you feel about the 61%, 62% GP margin target, just given ongoing strength there. I guess you had tough consumer environment. Clearly performing well. It looks like you might have hit the bottom of that. Do you -- what's the kind of time line to come back towards at 61%, 62%?

Well, there's no time line. Well, look, I think the point is I think we -- the synergy, the buying synergies from the acquisition of Plush have definitely made a difference to the margin. By integrating Plush where we're buying product over the same factories, shipping the same containers is deriving a lot of benefit in the margin that you're seeing. How -- it is top. It's certainly top. It's pretty high compared historically. But we'll see how that -- how we -- that goes forward. Look out -- at the moment, I think our buying strategy has actually driven a lot of these better margins with the more volume that we've achieved through Plush. And hopefully -- we think it certainly should be above what it has been in prior years.

Your next question comes from Rachael Harwood with Macquarie.

First question is just on conversion rates. I know you previously noted conversion rates were tracking a bit higher despite some lower foot traffic. How did this look throughout the half? And are you still seeing elevated conversion rates into January?

Yes. Look, it varies a bit. Traffic was up in most of the states, not in all the states. So the conversion was in line with the traffic increase. But we are slightly understaffed in stores, and it possibly could have been better. That's what -- I mean if there's one thing we are working on is improving conversion in stores and being -- having rosters optimized and enough people to serve customers at the peak volumes. And that's been a bit challenging in this low unemployment environment.

Yes. Understood. And just in January, some good written sales growth there. You noted you pass on some of the benefits into price, but was there any kind of changes in terms of length or depth of discount versus previous years in January?

No. Pretty much similar, not more discounts.

Okay. That's great. And just a quick one on New Zealand. I mean how are you seeing this performing? Is there any differences between trading within Australia versus New Zealand?

No. New Zealand was positive. And that's -- I think that's a good result given, I think, their economies are a little bit tougher in Australia. We've got positive growth there as well like-for-like.

Your next question comes from Mark Wade with CLSA.

New orders returned to growth in that second quarter. Can we just drill into what might have drove some of that, Anthony? I mean is it merely just the economic conditions improved? Is it that weaker prior period that you're coming off? Or is it something more to do with the offer that led to that pickup in that second quarter?

Look, I think it's a combination of more factors. Look, it's hard to know whether that was market share we gained. I mean November was good for most retailers. It's growing year-on-year in November. But to our -- pleasing for us was December was -- still grew despite that and January. So I think what contributed that was I think our marketing was good. The offer was good. And I think a lot of new products have done very well with that, really done a good job on the product -- new product launches that have all sold very well. And that helps because clearly, if you're launching new product and it doesn't sell, that's not good. So yes, I think it's a combination of that.

Okay. And when you look out over the coming year, what do you think in terms of rollout and refurbs? Where could you get that to?

Yes. Look, we're not happy with the rollout. We need to accelerate more new stores. I think Plush is easier. We'll have a good rollout of Plush, particularly in the first half of the next financial year. And Nick Scali, we need to accelerate the store growth. And it's -- and we're working hard on that at the moment. Yes, I think on the consumer side, difficult to predict. But I guess with interest rates, people tend to think now interest rates won't increase any further, and that has stabilized. I think that consumer sentiments may be getting better.

Yes, we think so. I mean the sentiment has been lousy for years and years, and yet here we are with the prospect of some tax cuts and rate cuts down the track and immigration. I think there's a few things to get excited about the year ahead. So all of it for that time period.

Thanks, Mark.

Your next question comes from Tom Camilleri with Wilsons.

Maybe just a quick question on the online business. Just if we could get a bit more color on what's driving the growth there. Is that still predominantly flat product fueling the growth? Or do you still see signs -- or are you starting to see some signs from easing purchase anxiety from consumers at the higher price points that you have?

Look, the growth online has been attributable to more sofas being bought online. And so in the split between case goods and service, if we look back a year ago, with 70% case goods, 30% service, it's now 50% service, 50% case goods. And that's clearly where the uptick's come from, which is pleasing, and that's been driven by the enhancements on the website and people being able to configure more -- easier find the configuration that suits and the color. But look, there's still a percentage of people buying online that had been in the stores.

Yes. So I guess -- so that sofa that customers are buying online, is that the average selling price of that sofa still materially below your in-store purchase? Is there a big difference there still?

It is lower. You're right. The average unit sale still is lower. But we tend -- well, we do see online a lot of our lounges in our stock program are being bought. So there's just online biases. They're the person that wants quick delivery. That's a differential. But on the case goods side, we've seen the average unit sale increase, in fact, and a lot of large purchases. They're buying a combination of case goods and lounges. We've seen more of that.

Great. And then just a quick follow-up for me on CapEx going forward. So just given the comments on the Plush store rollout, like you've got quite a bit of runway there. Do you see these being predominantly lease deal? Or do we need to think about further land acquisitions and CapEx in terms of the Plush rollout?

Look, in terms of the Plush rollout, not much will be leased. And if we look in terms of acquiring retail sites, majority probably will be Nick Scali because they're big sites. And the reason we buy sites -- retail sites, we like to buy retail sites. There's 2 reasons. One, it allows us to expand in there or we might not be able to have in terms of leasing, just not available. And secondly, the long-term hedge against rents continuing to elevate. On the Plush side, look, if there are -- there may be opportunities to buy sites for the Plush stores as well. So it's a mix. It depends, the opportunity and the timing.

Your next question comes from Sam Teeger with Citi.

What's the current thinking around M&A? Are you close to doing anything? There's been a lot of talk previously about the U.K. and other opportunities.

Yes. I wouldn't say we're close to anything at the moment. We're certainly actively looking at opportunities continuously.

Got it. And when you talk about rollout being a bit softer than you would like, is the bigger constraint the lack of appropriate sites? Or is it the rents that landlords are asking? I know you're probably going to say both, but what's the bigger factor?

Look, on the Nick Scali side, it's more the site availability. On the Plush side, yes, it's more on the rent side that we may not be happy with. But I think the Plush one will accelerate pretty soon. There is -- the opportunities, particularly in the first half of next year that we're in progress with. So yes, on the Nick Scali side, just about being that size template. But yes, we need to -- we need a bigger rollout and we need to add more resources, which we're doing now to see -- because there's a number of areas where we might miss on opportunities because we were under-resourced.

Got it. And how should we think about net new stores for each banner in the second half?

I didn't understand that question. Can you repeat that?

Yes. Just on rollout in the first half, there was one net new Plush store net and there will be one Nick Scali store. When we're thinking about the second half, as it sits right now, what's a likely outcome?

Yes. Look, there's definitely going to be one Nick Scali store in the Sydney metropolitan area on the north side, and there's going to be probably 2 Plush stores for this half.

Are you done with the Plush closures or...

Yes, yes.

Got it.

Sorry, just on the Plush stores, there's some time there will be a position where we might have to close a store and wait a period in the same similar location for the bigger store, might be being built or the tenancy we've managed to lease like the existing tenant might be moving in a few months. That's been happening. Like we're repositioning some of the stores because we want -- some of the stock in the Plush network had stores vary too much in size. Some are way too small. And that's on an optimal outcome for when you're in a particular location where the range is not big enough. So that's really where that -- where we're closing stores. We'll probably go back and reopen. That happened in Perth recently. We will -- we've closed the store because it was 300 square meters, not 1,000 meters, but we've got an opportunity in 8 months to reopen in that area with the bigger store, for example.

Got it. And just last question. Can you confirm whether the January sale went for an additional week or around that this year against the last year?

No, same number of weeks.

Your next question comes from Shaun Cousins with UBS.

Just a question on competitive intensity. Can you just talk a little bit about any sort of changes in competitors, sort of going out of business? Just conscious of when that happens, that can generate irrational pricing. And maybe just sort of -- I think you made some earlier comments just around promotions, just around the depth of discounting. Any players sort of being aggressive? Or was competition quite sort of rational?

Yes, there's always a mixed answer to that. That's always a mixed bag. It's very highly fragmented furniture, so yes, the small operators, when it gets tough, they will discount more. And we've seen -- look, I've seen even -- seen a number of competitors, particularly prior to Christmas, really discount. And they were discounting because they are overstocked and only wanting to cash in their stock. So yes, we've seen that, but it's always there.

And maybe then where -- again, the fragmented nature of the industry, but where would you see sort of industry stock levels? Are they in reasonable shape? Or are there still players out there -- and a meaningful number of players out there that have got too much stock?

Look, it's hard for me to give you that -- to answer that, to be honest with you. I can't see the inventory that will -- only -- so I don't know is the answer to that.

Thank you. That's all the time we have for questions at this moment. And that does conclude our conference for today. Thank you for participating. You may now disconnect.