Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nick Scali Limited FY '25 results presentation. [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 '25 Scali results presentation. Turning to Page 2 of our slide, the FY '25 highlights ANZ Group, second half written sales orders up 7.3% with the full year up almost 3%. Second half revenue was $231 million, and the full year revenue was $454 million. The second half gross profit margin was 65.6%, up 1.2% on the first half gross margin and the following year was 65%. Underlying profit after tax of $732 million. We exclude the one-off freight forwarder in containers that we hold 1 month to a freight forwarder. That was taken into the first half. U.K. revenue was $42 million. The second half gross profit margin was 51.8%, up from the first half of $45.1 million, and pre-acquisition level of 41%. The margin for the full year was 47.1%. 12 stores have been refurbished and rebranded as next as of August '25, and the underlying loss after tax was s$11.2 million. For the group, the underlying profit after tax is $62 million. Cash and bank deposits, $101 million; a final dividend of $0.33 per share, fully franked, bringing the full year dividend to $0.63 fully franked. On Page 3, the slide, you can see the ANZ group written sales business or $459 as I mentioned, a growth of 2.8%, that slightly stronger in the second half. U.K. written orders is $33.9 million, which is down considerably due to the disruption and of the refurbs, which were stores are closed for up to 6 ways, clearance of that product. So there's enormous and of disruption as flagged in the first half this would occur. The group written sales orders is $493.8 million, up 8.4% from FY '24. Looking at revenue was $453.5 million, down 1.4%. The U.K. revenue was $41.8 million. That's for the full year, and you can see in the second half and really [indiscernible] falling off to the disruption caused. Turning to Page 4. The ANZ [indiscernible] the information. You can see 65% up on the second half. Underlying operating expenses increased $6.1 million compared to the prior year, given that was a majority of that was employment costs. In the U.K., it has a strong improved U.K. gross margin over the period with deliveries of Nick Scali range commencing in the second half and transition to the remodel. The second half gross margin mentioned 51.8% versus 45.1% first half. U.K. revenue is reported net of interest free subsidy costs, which reduces the gross margin 2.9% over the year. The U.K. underlying operating expenses were $20.4 million. I'll now ask Kylie Archer, our CFO, to take you through the group cash flow and balance sheet.

Thank you, Anthony. Going on the good cash flow slide, calling out Slide #5, calling out some of the key items. Net total group pretax operating cash generated after we deduct amounts due on the operating leases is $93.1 million for the year with ANZ contributing $118.8 million and the U.K. operational funding at $25.7 million, supporting our U.K. working capital requirements and capital investments, which for the U.K. relates to the refurbishment of 11 showroom. In addition, $3.5 million was paid in the period for remediation of the acquired U.K. [indiscernible]. Property and capital investments for ANZ include a fit-out costs for the new WA distribution center and renovation and fit-out cost for Australian showrooms. The equity raise for the U.K. acquisition was completed in FY '25 with $3.8 million of proceeds earlier this financial year, bringing total final proceeds from the equity raise to $58.6 million. $53.8 million was returned to shareholders in the period by way payment of the final FY '24 dividend and FY '25 interim dividend. And group closing net cash position was $29.3 million as of 30th of June. Moving on to the balance sheet on Slide 6. In cash as at $166.4 million increased from the prior year due to the finalization of the purchase price accounting on the U.K. acquisition and the rating exchange rate movement due to a deterioration bound to the ANZ. Borrowings remain unchanged in the period at $71.7 million with $43.7 million related to property loans secured at less than 30% loan-to-value ratio. And the reduction in group payables on the balance sheet from $24.4 million last year to $34.8 million this year reflects the year-on-year reduction in EBITDA. [indiscernible]. I will now hand back to Anthony.

Thanks, Kylie. On Page 7, you'll see the ANZ group online written orders for to online was $42.4 million, which is up 21.8% and continued to grow year after year. Turning to the U.K. summary. Firstly, in respect to written sales orders, there's been a considerable amount of disruption due to trading in the stores being refurbished are closed for a 4- to 5-week period. The Fabb brands stores have traded particularly poorly as old product ranges is cleared and have really operated the clearance stores whilst waiting for the refurbishment. The new Nick Scali branded store has seen mixed results during February and May when compared to the prior year. June written orders were up on the prior year and flat for July. Margin, second half margin, as we've mentioned, was 51.8% for both Nick Scali and Fabb stores. If we look at May and June, the gross margin for the rebranded stores, the rebranded Nick Scali stores is 58% net interest subsidy. So we [indiscernible] on revenue on orders. So we're starting to see the margin uplift as more stores are refurbished and operating with the Nick Scali product, the margin is improving dramatically, really. In terms of distribution, we've made progress in restructuring the customer delivery model to reduce margin leakage. We've moved to a 3PL furniture specialist. We've exited our warehouse, sold delivery vehicles and redundancies were implemented for distribution employees. Respected leadership, as you know, Rodney [indiscernible] was seconded for a 12- to 18-month period only on a temporary basis whilst we look for a suitable leader, which we appointed in May. who's experienced. He's local. U.K. retailer, and he acts as Chairman Manager of the U.K. business. The focus for the leadership on retail teams in stores, that needs improvement. That's very critical for our sales growth. And also, the other focus is on evaluating and seeking new store opportunities. With respect to the product, we have a continued belief that the product is right for the U.K. There are small adjustments to product range and are ongoing as was expected. So the pathway to profitability, we need to refurb the remaining stores by first half '26 when completing of all the store refurbishments and rebranding and based on 58% margin, which have been achieved now, the revenue target to breakeven is AUD 53 million or GBP 25.4 million. Based on the recent average sales for the Nick Scali store, each store would need to increase sales by AUD 10,000 a week or GBP 4,800. Based on average transaction value, this equates to 2.5 additional orders per week, which is not a lot, but also very critical if we're going to get on our way to profitability. Increased marketing spend focused on establishing the Nick Scali brand in the U.K. and quality sales team are critical to achieve this uplift in sales. Page 10, you can see the store network. There was 1 new Nick Scali showroom open and 1 Plush showroom open. 2 new Plush stores were opened in larger location in Newcastle on prospect. These were existing locations converted to clearance stores. The U.K. Peterborough store was closed as at the end of lease as it was not suitable to rebrand Nick Scali's part of the ongoing optimization of the U.K. store network. As at June, 11 U.K. stores have been converted. As of today, they are 12. Page 11 is the property. We made a commitment to buy our Campbelltown store. We have bought it contracts not yet settled, and we bought land in South Australia to build a new distribution center. In respect to the outlook, the sales for the month of July increased by 7.7%. Like-for-like was up 7.2%. Sales revenue for the first quarter is expected to be up on the prior year given the strong second half and the momentum continuing into July. We have a further 5 stores that are confirmed for opening during this year with additional opportunities currently being reviewed. Of the 5, 3 are Nick Scali, 2 are Plush. In respect to the U.K., losses are expected to continue until the remaining stores are refurbished and individual store sales improve. That's the -- that comes to the conclusion of our results presentation, so we can now take questions.

[Operator Instructions] Your first question comes from Rachael Harwood from Macquarie.

Firstly, just you talked to Nick Scali branded stores in the U.K. being a little bit mixed in terms of trading. How is Nick Scali product performing in the U.K.? I guess, June, July also a little bit mixed. So anything you can call out there?

Yes. It's the product is performing well. It's more about the mix because I guess the quality of the sales team in store that we have. And with the change, there are certain sales people which have left the business that are being replaced. So more the impact where the stores doing well, not so much the product about the sales in store.

Got it. That makes sense. And then I guess just the Aussie business, the fourth quarter really strong. That continued into July. Anything you're seeing there that drove this really strong performance?

Strong performance in quarter 4...

Sorry, I didn't understand -- I couldn't understand the last point a bit not so clear.

I guess strong sales in ANZ continuing into July. I guess anything you're seeing, particularly in ANZ that's driving this strong growth.

In particularly, no, but it's just our store traffic is up in most states, not all states, and we're converting to sales as a result.

That's great. And just quickly, I guess, New Zealand, you mentioned was improving. What are you seeing in the New Zealand market?

New Zealand has improved a lot, particularly in quarter 4. Off a low base last year in New Zealand around that May, June period was very -- was down, but it's coming back very strongly.

Your next question comes from Sean Xu from CLSA.

My first question is related to your supply chain. Given the U.S. tariff situation, if I look into the history as an indicator, I was expecting some significant excess manufacturing capacity in China and Southeast Asia with the disruption to the U.S. export business. My question is how Nick Scali positioned to renegotiate more favorable supply terms with some of your partners in Asia, especially with the one with established long-term relationship? And more specifically, are you seeing the opportunity to improve your gross margins through better sourcing costs?

Look, firstly, our gross margin are absolutely above the industry norms, as you know. There are many retailers in Australia at a gross margin of 50%, not 65%. So we have to be careful not to be too greedy on that. At the moment, we're passing through -- if we're getting better deals, which we are on product, we're certainly getting better value. We're passing that through to the consumer better pricing at the moment. And probably that's helping drive sales as well and conversion in store.

Yes. The reason why I'm asking this question is because based on a couple of suppliers in China and Southeast Asia are really expecting some excess manufacturing capacity coming through. And really, that will be a tailwind to you guys, I imagine, in terms of renegotiating better terms and improve your profitability. So that's where my initial question is coming from. If I...

No. It's quite opposite. It's opposite. The challenge is easy they've got excess capacity because they need volume. So it would be -- the challenge would be if there was not excess capacity, that's when you would have a challenge on pricing. But at the moment, and it's probably not going to change for quite a while. There is excess capacity because the factory -- a lot of our suppliers have factories in Vietnam supplying the U.S. So -- and that's been present for the last 3 years. That's happened 3 years ago. So there's been capacity in the China factories for quite a number of years now, to be honest. And even Europe, whilst the sales, Europe is not buy at all, it doesn't sell much. Is that more clear?

Yes. Maybe just a follow-up. If we just focus on ANZ business, could you please tell me what's the implied GP margin performance for your order bank compared to the same time last year? I appreciate there's a lot of moving parts in the past 3 months, but any idea would be really helpful.

Well, it's going to be in the 65% range, somewhere there. As you say, there's moving parts. But we've been very consistent with our margin over the years within last year was extraordinarily high at 66%. 65% is a very good margin even historically. And I'd say we're pretty confident our margin will be maintained at 65%.

Your next question comes from Sam Teeger from Citi.

It would be great if you can please give us an update around the U.K. marketing, given this is going to be key to getting the customer awareness up. How have the results been so far? What are you buying at compared to Australia? And to what extent are the marketing channels different to Australia, given the business over there right now has less scale at this point in time?

Yes. No, it's a good point. And the problem has been the second half that when you're shutting 8 stores down and trying to get more refurbished within a short period, there was actually not a lot of point to spend money on marketing. So our view was let's just wait until we get some more scale, Nick Scali stores open so we can start spending some marketing. And yes, and that's been a bit of the issue in terms of written orders because we're just not spending any money at the moment. But we're starting -- we're going to spend a bit more in August. We're just ramping up the marketing as more and more stores get completed, which is important because we do need the brand recall is weak at the moment. The marketing is there to address that and drive sales. But that's what's happened so far.

Right. And then with respect to the U.K. breakeven sales target, which is predicated on that 58% gross margin, is there any reason why you can't get the U.K. gross margin to 60% in FY '26? And that would mean the required sales uplift to breakeven would be less than 20% per store. And I'm wondering can you reduce the interest-free period or any other initiatives to get that margin above 58% in this financial year.

Yes. Look, we've got to be careful because we want to remain competitive. We're constantly watching the market there to make sure we're competitive. And yes, the problem with interest free, it's a cost. And it is really part and parcel of the business in the U.K. So look, the opportunity on the margin for us, there is -- we have leakage on delivery fees at the moment because we're subsidizing some of the deliveries to the outer areas given the distribution -- given the location of distribution center. So there's an opportunity there in the future by adding a second distribution center to -- which we've got plans to do. And it won't be additional cost because in 3PL, we just use less capacity in the existing DC and have a second one in an area closer to the group of stores. That means the delivery leakage is less. Sorry, it's a bit complicated, but that's -- there's an opportunity there. Look, as a brand, the other point, yes, maybe as the brand gets stronger and stronger, you will be less reliant on interest free and maybe shorter terms rather than 4 years, 36 months, 3 years, reducing that offer. And obviously, the margin leakage is less then. So yes. I think that there is potential -- in a nutshell, there's a potential to get it up further.

Okay. And then last one...

Sorry, I don't want to commit FY '26 on that, but certainly, the following years for sure, there's a chance you could get to 60.

Okay. And then lastly, just with respect to the U.K., how likely are further acquisitions or new store rollout in FY '26?

We are looking at a number of stores now in retail parks that -- yes, the thing about the U.K., I can say on the property side, things move very slowly. But we are looking at a few opportunities now. We aren't looking at any acquisitions right at the moment. There is a potential for that short buying a business with 3 or 4 stores. But really, our main focus right now is to get the rest of the stores rebranded and refurbished and look at a few -- 1 or 2 opportunities to open stores in a shorter period.

Your next question comes from Garth Francis from MST Marquee.

Just on the U.K. -- sorry, the gross margin, again, just to touch base on that, the savings that were achieved through sourcing and just the onflow and how promotional you've had to be. You mentioned there that you've won some business just through being slightly better on promo. Have you had to be any more promotional in the last 6 months than you have historically?

In the U.K., you're talking about?

In Australia, in the ANZ market.

Yes. So the question is, are we spending more on marketing? Is that the question?

Just are you having to be more promotional? And so you've obviously achieved some benefit from the sourcing out of Chinese factories, how much -- and you mentioned you were passing some of that on and that had helped drive sales domestically. Can you give us a sense of whether you're having to be additionally promotional at the moment or if the market is somewhat in line with where it's been historically?

Yes. No, I think the market -- look, the traffic is in most states is up, not all states. So marketing is about getting traffic, getting people to source, getting people on our website. So the traffic has improved in that respect. And likely, we've been able to convert and sales growth. So I don't think we need to do anything different than we've been doing at the moment. Just why is the traffic up is the marketing being better? Maybe? Or is it there's a bit more confidence with lower interest rates. That's the question. It's hard to tell. We haven't spent more marketing. We some different things in marketing in terms of our marketing, which we're doing. So my view is I think the consumer is a bit more confident maybe.