Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Nick Scali Limited 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.

Good morning, and welcome to the FY '24 Nick Scali results presentation. So turning to Page 2 of our slide, the highlights for the year. ANZ written sales orders at $447 million, up 2.4% on FY '23. The gross margin, ANZ gross margin 66%, up 2.5% on FY '23. Group underlying profit after tax, that's always excluding the acquisition cost, was $82.1 million. The U.K. acquisition of Fabb Furniture completed 8 of May. The group results include Fabb results from acquisition. Cash and bank deposits $111.3 million as of 30 of June. Final dividend of $0.33 per share, fully franked, bringing full year dividends to $0.68 per share, fully franked. We turn to Page 3. We can see group revenue was $468 million, down 7.8% on FY '23. The U.K. revenue of $8.3 million was included from the 8 of May. The ANZ FY '24 revenue $459.9 million is consistent with written sales order levels and typical delivery lead times. The ANZ FY '23 revenue of $507 million benefited from the increased deliveries as at the June 2022 order bank, which as lead times reduced, we gained the benefit of additional deliveries. The group written sales orders $454.2 million. That's plus 3.9% above FY '23. As mentioned, as U.K. written sales order, $8.1 million included in the group from 8 of May. The ANZ quarter 4 written sales orders of $121.2 million were up 4.8% in the prior corresponding year. The quarter 4 written sales order benefited from 5 weekends in June compared to 4 in the prior year. 65% to 70% of sales orders occur on weekends. The ANZ written sales orders for FY '24, as mentioned, was plus 2.4%, up on FY '23, and the like-to-like written orders was positive 1%. I'll now hand over to Sheila, our CFO, to take you through the next 3 slides.

Thank you, Anthony. On the left-hand side of Slide 4, what we've provided is the group underlying, including the U.K. for FY '24. There's one adjustment from statutory to underlying, and that is to exclude the $1.5 million non-recurring acquisition cost of furniture. There were no adjustments in the prior year. We've then provided you the impact of the U.K. on the group results from the 8 of May, and then the underlying ANZ results. The prior year group was just ANZ. So those are comparable. I'm moving to the right-hand side of the slide. As Anthony mentioned, ANZ gross margin of 66% was up 2.5% on the prior year. U.K. revenue is reported net of interest-free subsidy costs, and this reduces gross margin for the U.K. in FY '24, circa 4%. Interest free financing isn't offered the same way in ANZ. Moving to underlying operating expenses. ANZ underlying FY '24 operating expenses increased $3.1 million compared to the prior year, with marketing, property and other expenses increased, and logistics and employment expenses decreased. In the prior year, we had incurred additional logistics expenses related to those higher deliveries Anthony have mentioned. And the U.K. acquisition added $3.3 million for group operating expenses in the second half of FY '24. Due to changes in leases, including timing of renewals and higher notional interest rates, the impact of AASB16 was to decrease ANZ NPAT by $1.5 million compared to expenses -- compared to a $0.2 million reduction in FY '23. We have provided in Appendix C, a full reconciliation of AASB16 expense elements to help the investors look through that, but it certainly has been a negative on the statutory results of this year compared to prior year. Looking at FY '24 profit, it is lower than the prior year, primarily due to the '23 benefiting from the increased delivery revenue that Anthony mentioned that we achieved in the prior year due to those deliveries that they were resolving. Moving to Slide 5, on group cash flow. Property and other capital investments were higher this year at $28.1 million, and that was driven by the $16.6 million construction and fit-out costs for the new Queensland Distribution Centre, with other capital expenditure remaining reasonably consistent to the prior year. We repaid $20 million in August off the corporate acquisition debts we took out to partially fund Plush, and the current outstanding balance is now $28 million. In the second half, we raised $54.8 million, a net of $1.2 million of equity raise costs. Anthony has committed at the time of that raise to also contribute to that placement, variety of withholding, and that is subject to shareholder approval at the October '24 AGM. If approved, the total net proceeds from the equity raise will be $58.8 million. As at June, we had expended $14.2 million in total off the $1.5 million transaction costs, the acquisition payments for Fabb Furniture, the option to exit that distribution center, and the initial working capital injection. And those are the total amounts that we have paid in relation to the U.K. at the 30 of June. $56.7 million was returned to shareholders in dividend payments in the year, and closing cash and bank deposits at June is $111.3 million and net cash is $39.6 million. Moving to the balance sheet on Slide 6. The main changes are the completion of the Queensland Distribution Centre into property, the addition of the intangible goodwill for Fabb Furniture of $27 million, the increase in leases, liabilities and assets for the acquired leases with Fabb Furniture as we apply AASB 16, and the borrowing reduction on the corporate acquisition debt. Payables on the balance sheet at June this year include $16.9 million for the U.K. compared to the prior year. I'll hand back now to Anthony.

Turning to Page 7 of the presentation, the Nick Scali online brand, you can see the written sales orders were $34.8 million up, almost 18% with the enhancement in the e-commerce user experience continuing to drive growth, and particularly in the fact that we're selling sofas where people generally like to sit in has been a good result. We turn to Page 8, U.K. growth strategy. I'm not going to read every point there. I'll give you a summary. The first point is that we have appointed Rodney Orrock, who was previously the CEO of Best & Less and ran the main furniture for a number of years, will relocate to the U.K. to help execute the strategy. In point from the first -- in the U.K., the first point that is important to understand is that the stores all need to be refurbished to enable us to present the brand as we do in Australia. That's followed by then the product, the Nick Scali product range, into the stores, the rebadging to Nick Scali and then marketing. If we turn to Page 9, the store network. The store growth has been slow. This is a little bit particularly for Nick Scali stores. We're finding the opportunities are less given there haven't been many new bulky goods centers built since pre-COVID and being the size of 2,000 meters, there's been less available space. Whereas on Plush, we're seeing a lot more opportunity because of the smaller store size, which we'll talk about further with the number of stores we expect over next year. Page 10, the property. The change there is the new Brisbane Distribution Centre that is now operating. That was built and owned and funded by cash. Then we turn to Page 11, the outlook. If we look at the ANZ outlook, firstly, as mentioned, June 2024 benefited from 5 weekends of trading, whereas July was disadvantaged by one less weekend when compared to the 2023 calendar year. Written sales growth for June and combined was negative 1.2% compared to the prior year. We continue to expand the store network and expect to open 2 Nick Scali stores and 3 to 5 Plush stores in FY '25. If we turn to the U.K., written sales orders are affected by a combination at the moment of tough market conditions, long lead times due to supply chain disruptions and the commencement of store refurbishments. Trading in the short term is expected to deteriorate further in the first half of FY '24, as disruption increases due to store refurbishments and the change in the product range. That concludes our presentation and we'll now take -- we're happy to receive questions.

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

My first question is just on the ANZ gross margins. Obviously, they were very strong in the second half of FY '24. Could you just talk us through what the drivers were there? And then as you're looking to FY '25, how are you currently thinking about the impact of shipping costs on ANZ gross margins? And are there any other offsets that might come through to offset some of the shipping pressures that look like they're going to impact you?

Yes. I think the gross margin improvement has certainly been through the help of larger volumes through the Plush acquisition through our factories. I think we're getting better value. And much more efficiency for the factories means that they're providing better value and supporting us, wanting to support. The other addition -- sorry, the other benefit, rather, has been a lot of our China factories' volumes have dropped. So there's a lot of capacity there. So that helps in getting better value also. Look, when we talk about the shipping, yes. At the moment, shipping costs in Australia have been going up. They've been going up globally, in fact. A lot of that is seen being caused, we believe, by the tariffs coming on electric cars produced in China where they're shipping a lot of cars before the tariffs to Europe and the U.S. in containers before the tariff comes in. And that's absorbed a lot of the supply, and hence, we've got the pressure on rates at the moment. We believe this is short term. There's obviously -- once that additional supply at the moment is there -- is over, we expect the rates to settle a bit, come down. I've got to say, though, the freight rates to Europe and the U.K. are a lot higher and have increased substantially more than they have to the Australian market.

And Anthony, while I've got you, just any -- obviously early days still with the U.K. acquisition, but have there been any surprises for you or any changes to your thinking on that business so far?

No, I think nothing's changed. The strategy is the same. We know what we need to do and it's a matter of just executing what the plan is.

Your next question comes from Garth Francis with MST Marquee.

Congratulations on a great result. Just wanted to follow up just on that freight issue and you mentioning the European leg being more impacted. Does that change how you would go to market in the U.K.? Are you going to change your sourcing to accommodate for that or do you expect the freight rates to do the work for you going forward?

Look, the freight rates at the moment mean -- and I think to the U.K. means that if you look at the market what's actually happening, I was there 2 weeks ago, you have to put prices up and that's what the market is doing. So -- and then although there's a sense that those rates will -- as I mentioned before in the previous question, that will come off. But at the moment, we think everyone's got the freight issues. So it's just about adjusting prices. There's no other option really.

And then just in terms of the delays, do you see that as a risk to sales when you have competitors that have products in store and are you planning on doing anything to accommodate for that like maybe ordering some of your more popular SKUs and keeping those in stock?

Yes, I mean correct. So as part -- look -- the main thing is, as I mentioned before, refurbish those stores and get our product range in the stores and re-batch. So you're right, for better lead times -- our product, once it's in stores, will produce better lead times than with their current suppliers and that will be alleviated. It's already been alleviated, to be honest. We've managed to fix some of those issues. This was a business that wasn't paying suppliers and obviously shipments are getting delayed so that's all been corrected.

Your next question comes from Rachael Harwood with Macquarie.

First of all, just on gross margin again, look, Fabb Furniture looks like it's increased a little bit since acquisition at 41.5%. Do you expect this to continue to increase into FY '25 just as the Nick Scali product enters the stores?

Sorry, I missed part of that question, Rachel, about the lines.

Regarding the trajectory of Fabb Furniture gross margin.

Yes. Well, I think the Fabb gross margin is 41%. When we talk about trajectory, I think Fabb will become Nick Scali and we expect the margin over time to be not dissimilar to Australia, probably slightly less given the interest rate being included in the cost.

Just on the refurbishment of Fabb, any expectation how long the refurbishment of one store takes? And then any sense how many you can do in the first half '25?

Yes. Well, it takes about 3 to 4 weeks to refurbish a store. And we're trying clearly to refurbish as many stores as we can at once, rather than going from one to the other, and that's what we're working on right now. We've already commenced refurbishments in a few stores and we're trying to accelerate it. It's hard to give you an exact time frame on that. But our first -- as mentioned in the deck, we're focusing on the stores on the London fringe and refurbish all those, get the product in the -- full product range in those [ revision ] and start marketing those stores and then move on to the other areas in the U.K. where the current store network is.

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

Firstly, great result in a tough market. I wanted to talk a bit about the store rollout in more detail. Probably hasn't come through as we expected in the second half. I know you talked about there hasn't been many new bulky goods centers being built since pre-COVID, but just keen to explore what are the other drivers of this sort of rollout. And I guess in the past you were buying and building your own stores, but given the way interest rates are now and construction costs are, is this still a viable option? And then of the 25 rollout guidance you've given, how many of them would you be buying or building yourself?

Yes. The answer to that is if there's opportunities that the properties come to sell in the right locations and generally, they're standalone stores that have got to be in the right strip. So in terms of expanding the store network, whilst we've got that option, it's not always there. So the main issue for the Nick Scali store network has been -- because of the size of the store, has been more than 2,000 meters and we need to stick to that model. That space availability hasn't come in a lot of locations we want to be in. We're starting to see a bit more freeing up of some space in certain areas that we think we've got opportunities, whereas when you look at Plush being 1,000 to 1,300 meters being the ultimate, the right store size, we're seeing more opportunity because that's driven by other retailers leaving those centers and because typically most large format stores -- other than the bigger players there around that 1,200 meters. So there's going to be, I think, more opportunity for the Plush store network to grow at a quicker pace than Nick Scali.

Yes. But I guess if we rewind back to February, you were guiding to 2 Plush stores in the second half and 1 Nick Scali store in the second half, and none of them have come through. So just kind of keen to explore what's changed in the last 6 months?

Well, the Plush stores did come through.

We shut a couple. So there is the...

Yes. It was next store, okay. So whilst we opened new stores, we made decisions to optimize the networks and close those smaller stores that we thought needed to be resized or relocated. And we have done some of that. So on the Nick Scali side, yes, the opportunities there have been delayed really on just tenants moving out. So we expected it to happen and then it didn't happen, but it is happening. But yes, it has been slow. I'm not denying it. The store network, particularly on the Nick Scali side, has been slow of late.

Your next question comes from Mark Wade with CLSA.

Anthony, on the 2 brands, Plush and Scali in Australia and New Zealand, how do they perform relative to each other and is there much of a difference within the Plush network between the old and the new concept stores?

Yes, our Plush has been performing well. And yes, it was -- look, the stores have refurbished. We've seen uplifts in most cases. So we've been really happy with the Plush performance so far. If we look across Australia and New Zealand, what's hurting us is New Zealand in June and July. Store traffic has dropped 35%. So there was a significant decline recently in New Zealand over June and July. But whereas Australia has been a lot more -- is obviously stable, fairly stable.

I was curious on that on what really explains this kind of whipsawing we're seeing in order growth from quarter-to-quarter and then that obviously fell away a bit in July. So it sounds like it's more economic conditions despite tax cuts in Aus. And is there anything I should be thinking about in terms of what you're doing on the ground specifically that could be to offset those movements? What's driving that change?

Well, if we talk about July, there was one less weekend. And 70% of our business is on weekends. So June did benefit from that. But yes, if you combine the both together, it was negative 1.2%. But to be honest, Australia was flat. It was New Zealand and that caused, because it was significantly down, it caused a negative. So it's -- yes, it's stable-ish. It's just hard to read from month to month. It doesn't feel, certainly not, a buoyant market, but reasonably stable.

Your next question comes from Ed Woodgate with Jarden.

Yes. I think it's a really good result in a tough environment, as obviously said. Just wanted to talk about the June-July trading update. So I think that's caused a little bit of confusion. Can you just split out what the WSO was for June '24 this year, this year obviously in July '24, and then also in June '23?

Okay. Yes. Look, I think we've basically, in a nutshell, June was positive sales growth, as was the whole quarter 4. What helped that clearly was the additional weekend in June, as mentioned. In July, the change is really we lost a whole weekend, which is basically lost 65% of a week's sales in July. So that's the take, and it's hard to extract that apart and take out weekends and really give you an indication of what it is other than combining the 2 months together. And as I said, what really probably hurt the result, even though it's marginally down, like, the months combined was New Zealand.

And then just on GPs, so as has been mentioned, very strong in the second half. You've talked in the past about them coming down in Australia over time. Can you just talk about how sustainable you think those are and how we should be thinking about that into '25, just given the excess capacity in China and signs that the trade might be peaking? And then also given that you've got the product in store in the U.K. a bit quicker than I think we expected, does that bring forward some synergies there?

Yes. I think it's product synergies. But look, the margin is really extremely at its peak at 66%. And I think, to be honest, I think where we think probably more of the market is somewhere between 64% to 65% is achievable. The U.K. will always be below by the interest -- the cost of interest-free in sales. And we don't know where that will land. It could be somewhere between 2% to 4%. And the margin in Australia, if we look at it, unfortunately it's with the freight contracts not being honored at different times, that can have a temporary impact on margin side because that product's being sold and now the freight contract hasn't been honored. So there's a good loss there. But on the buying side, the U.K., additional volumes with the Plush acquisition is certainly helping us get much better value out of our factories, and particularly given that they've got a lot of excess capacity.

Your next question comes from Tom Camilleri with Wilsons Advisory.

I just wanted to touch base on the momentum you've got in the online business, the underlying Nick Scali brand in Australia. How much of the gross margin gain is driven by a stronger online momentum? And can you remind us of where the gross margins sit for the online business at the moment, and also when you expect to have the Plush online business up and running as well?

Well, the gross margin is the same as the stores. The mix is very similar. In the past, it might have been slightly higher because we were selling more case goods, which has got a bit better margin. But now the real growth has come in the lounge volumes growing on the online, so that's slightly lower margin. So all in all, the gross profit margin on online is the same when you just strip out the sales and the cost of the goods.

And then expectations for the Plush online business?

Yes. I think it's got a lot of potential there. And that will grow hopefully, I think, as the brand grows and the brand recognition is getting better slightly, because we're consistently marketing the brand. And as the store network grows, the brand gets stronger. And I think with that, obviously you get more traffic to your website and then you've got the opportunity for the online sales.

Your next question comes from Tony Mitchell with Shaw and Partners.

Can you just -- given that the much better performance of Australia compared to New Zealand in those months, how much can you attribute the improved performance in Australia to tax cuts and electricity rebates and so on?

Yes. I'm not sure the tax cuts seem to have done a lot. I do think we've got a cautious consumer because I haven't seen any interest rate cuts yet. And there remain talk about, although unjustified, that interest rates might go up, which has just been the media playing to that, and I don't think that's correct anyway. That's unlikely, I think. So, yes, that's how I see it at the moment.

Okay. Given, if we have rate cuts, let's say, first half of next year, would that be a net positive for Nick Scali?

Yes, you would like to think so. Yes, I think so, unless there's other factors. It's all about consumer sentiment. What drives a positive consumer sentiment. In the past, it's been lower interest rates, feeling more the wealth effect because our homes are going up in value. That's helped us in the past. So, yes, it all plays into that, but you would think lower tax -- lower interest rates would help consumer sentiment be a little bit more positive.

Thank you. That's all the time we have for our question-and-answer session. And that does conclude our conference for today. Thank you for participating. You may now disconnect.