Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nick Scali Limited First Half '26 Results. [Operator Instructions] I would now like to turn the conference over to Mr. Anthony Scali, Managing Director. Please go ahead.

Good morning. Welcome to the results presentation for the first half FY '26. Looking on Page 2 of the summary for the ANZ Group, written sales were up 10.5% versus prior year. Revenue was $251.7 million, up 13% on the prior year. The gross profit margin was 65.9%, up 1.5 basis points on the first half and 0.9% than FY '25. Net profit after tax was $46.6 million, up $10.6 million or 29% on the first half FY '25 underlying, and up $12.5 million or 37% on the first half FY '25 statutory profit. For the U.K., revenue was $17.6 million, impacted by store closures due to the rebranding program. Written orders for the first half were $21.7 million, with January written orders $6.7 million. Nick Scali brand stores like-for-like in January are up 32%. Gross profit margin in the first half '26 was 59.2% compared to 45.1% first half FY '25. 16 stores refurbished and rebranded as Nick Scali by December '25. Net loss after tax of $5.6 million as per forecast. For the group, group net profit after tax was $41 million. Cash and bank deposits was $91.7 million as at December and the interim dividend of 39% per share fully franked. Turning to Page 3, written sales orders and group revenue. As mentioned, the written sales were up 10.5% on the prior year across Australia and New Zealand, with like-for-like written sales orders of 10.1%. The U.K. written sales orders of $21.7 million, that was 12.8% on the prior comparable half. Year-on-year comparatives are not representative of trading due to the numerous store closures for lengthy periods for store refurbishments. The group written sales of total was $251.6 million, 10.7% up. On the revenue side, ANZ Group revenue was $251.7 million, up 13%. This reflected in the high written sales in May and June FY '25, which is up 16% on the prior year and a strong first quarter FY '26 contributing to the revenue growth. ANZ like-for-like revenue for the first half was positive 12.7%. For the U.K., the revenue was $17.6 million. That's down 38.5%. This clearly reflects the low written sales over the quarter for FY '25 and first half FY '26, caused by closures of numerous stores for lengthy periods for store refurbishments and rebranding. Group revenue for the half was $269.3 million, up 7%. Turning to Page 4, group financial performance. As mentioned, the gross profit margin was 65.9% compared to the first half FY '24 of 64.4%. The ANZ underlying operating expenses increased by $5 million compared to the prior year, mainly attributable to employment bonuses and additional marketing in line with sales growth. The U.K. gross margin continues to improve with Nick Scali product in place and the legacy Fabb product now cleared. First half FY '26 gross margin was 59.2% compared to the first half FY '25 at 45.1%. The U.K. revenue is reported net of interest rate subsidy costs impacting margin. For the first half '26, operating expenses in the U.K. were $10.8 million. In local currency terms, expenses were in line with prior year with savings in employment and property costs offset by additional marketing spend. I'll now hand over to Kylie Archer, who will deal with the cash flow and balance sheet.

Thank you, Anthony. So looking at the cash flow Slide #5 here. Total group pretax operating cash generated after deducting amounts due on operating leases was $51.5 million for the half compared to $29 million last year, with ANZ contributing $53.4 million. For the U.K., we see operational funding requirements for the period decrease as the sales orders increase and capital requirements reduce as the refurbishments are completed, with net operating cash flows for the U.K. -- cash outflows for the U.K. of $1.9 million. Property and capital investments for the group of $17.1 million include 2 property purchases in the period, the first being $3.8 million for land acquired in South Australia to be used for our new distribution center, with construction due to commence this calendar year and the second being $7.9 million for the Nick Scali retail store in Campbelltown. In addition, bid-out costs were incurred for a number of showrooms across Australia and the U.K. $28.2 million was returned to shareholders in the period by way of payment of the final dividend final FY '25 dividend. And finally, the closing net cash position for the group was $20 million as at end December versus $15.9 million last year. We move on to the balance sheet on Slide 6. Inventory levels overall remained broadly consistent during the half, as you can see from the table on the right-hand side of the page, with inventory on hand at $42.2 million, slightly down on June '25 levels of $44.6 million. We see an increase in property and net book value from $120 million to $132 million due to the SA land and Campbelltown purchases, as mentioned on the previous slide. Borrowings remain unchanged in the period at $71.7 million. with $43.7 million relating to property loans secured at less than a 30% loan-to-value ratio. The balance of the borrowings relates to the $28 million corporate debt facility unchanged in the reporting period. I will now hand back to Anthony.

Thanks, Kylie. So turning to Page 8, U.K. summary. Sales orders continued to improve during the half as more stores were rebranded. The 4 rebrands Nick Scali stores trading like-for-like in January 2025 showed growth of 32%. The margin was 59%. This is net of interest-free subsidy. The margin is expected to improve over the medium term. Distribution progress has been made in restructuring the customer delivery model to reduce margin leakage. Leadership, further consolidation of U.K. head office roles as Australia and operational processes are adopted in the U.K., driving greater efficiency across the group. Focus remains on retail teams in stores and evaluating and seeking new store opportunities. Looking at product, the best sellers in the U.K. are now in line with the best sellers in Australia. New product introductions based on Australian performance will be the norm going forward. Pathway to profitability. The breakeven position is $51 million of sales revenue. New stores are critical for our profit growth as is increased brand awareness. Looking now on Page 9 of the store network. A new Plush showroom was opened in November '25 in Bendigo. A further 5 new stores for FY '26 are being planned to open, which will bring the total to 6 new locations. In the U.K., the Lincoln store was closed at the end of lease as we believe that's not suitable to rebrand to Nick Scali as part of the ongoing optimization of the U.K. store network. The U.K. refurbishment program is mostly complete with 16 stores converted to the Nick Scali store design, branding and product range. A number of new store locations in the U.K. are under negotiation. Now turning to Page 10 and the outlook. For ANZ, the written sales for the month of January '26 increased by 3%. Like-for-like written sales increased 3.2%. During the half -- second half, a further 5 stores are planned for opening with additional opportunities currently being reviewed. In the U.K., with store refurbishment now mostly complete, material improvements are being seen in written sales compared to the prior period. Total January written sales were $6.7 million for the 4 like-for-like written sales were up 32% compared to last year. A number of potential new U.K. stores are currently in negotiation. Well, that now concludes our presentation, and we're happy to take questions.

[Operator Instructions] Your first question comes from Tom Kierath with Barrenjoey.

Just the first one on January. I thought it might have been a bit stronger than 3% in ANZ, just given you're lapping negative 8.5%, I think it was. Is there anything like in the promotional timing or the calendar or anything? Or is that just, I guess, a reflection of -- a true reflection of how you're tracking at the moment?

Well, I think the -- what's happening now in November, the month is getting stronger and stronger every year. So we had a very strong November being very close to the Boxing Day sales, but just seems a bit of a shift now because of that. So you're getting quite a lot of, I guess, orders you might have got in January. We did see traffic was down in January by 7% and sales were still up 3%, so conversion did improve. That's one thought. The other thought is maybe interest rates may be having an impact on the consumer. We're not sure yet. I think March and over will tell that story.

Yes. That makes sense. And then just the second one is just on your order bank. So you did obviously more profit than you guided to in December, which is more profit than you guided to at the AGM. What's the shape of the order bank like at the moment? Like based on my math, the order bank reduced by about $22 million in the half. I know you don't actually report that number anymore, but just be good to get some color on the order bank and kind of logistics and just how quickly you're getting product to customers?

Yes. Look, I think our lead times have probably increased by 3 to 4 days. So yes, we're delivering a little bit quicker, but not materially quicker. Yes, we don't call out the order bank because it can create some confusion sometimes. I mean, at the end of the day, we -- our revenue is based on FY '26, it's really about May to March sales orders written gives you the revenue number, if you like.

Is it fair to assume the order bank has reduced in the half?

No.

Our next question is from Garth Francis with MST Marquee.

The gross margin performance was good. It does feel like it's been a fairly promotional environment. Have you had to engage or has that impacted your promotional activity in the market? And then if you could just touch on FX and currency impacts looking and when you expect those benefits to wash through? Should we expect some to come through in this half? Or is that more of an FY '27 story?

Yes. I would say, first, the margin did not impact our promotional activity. On the FX side, yes, obviously, we take forward cover. And that won't -- the benefit of the currency, if there is any, will be it won't be until the first half next year, next financial year. And clearly, being in a competitive environment, not necessarily we will bank the currency. We might pass it on with further promotion.

Terrific. And if I may, one more, just the tax rate that was -- the effective tax rate in the half was up quite a bit. Can you just maybe -- was there anything in there that resulted in that? Were you not allowed to deduct U.K. losses or had something else? Was there another impact that we should be aware of?

No, nothing out of the ordinary.

So is the 30% tax rate going forward more likely or something.

Yes. Traditionally, that has been the rate.

Yes.

Yes.

Your next question comes from James Ferrier with Canaccord Genuity.

Can I ask you, first of all, about the store sales team in the U.K. You've been on a bit of a journey there to improve the quality capability of that team. Where are you at, at this point in time?

Well, looking at the January results, say a lot better at the moment. So yes, I think the leadership -- we've got good leadership in the U.K. and they -- I mean, it's always something that you continually work on better sales teams. It's -- there's never any point you say it's as good as I can get and it's never as bad. So I think we're making good progress in the U.K., and we can see that from the January results.

And would you -- like if you use a benchmark like foot traffic conversion to sales orders, would you say it's now comparable to Australia?

It's improving, yes, not quite yet at Australian level, Nick Scali Australia anyway, but it's improved a lot.

Yes. Yes. Understood. Second thing I want to ask about was marketing spend. Just in your earlier remarks and maybe Kylie's as well, you mentioned that marketing spend in ANZ increased in line with sales. So if my math is right, that would imply that you spend about AUD 0.5 million on marketing in the U.K. Does that sound about right?

It's -- yes, yes, it could be -- yes, maybe marginally more in fact. You're converting Australian dollars, yes.

Yes. That's right. So just based on that, when you look forward now, Anthony, and you sort of see the landscape as it is, sales trends, things like that, what are your plans with marketing spend in the ANZ business through the rest of the year? Do you sort of see it sort of pretty stable? Or do you see an opportunity to lift it up, maybe reinvest some of that stronger gross margin. What are your plans on that marketing spend?

Yes. Look -- it's something we continually manage on a month-to-month basis, to be honest. So depending on the strength and the traffic into stores, we may in certain promotions where we think we've got a strong offer may increase the spend. It's something we manage. But if we do increase, it's managed. We're trying to ensure we don't waste money on advertising. We need to get the result. And we continue to invest -- able to invest more as we open more stores. So that's beneficial for the whole brand.

Yes. And then just lastly, same topic, but for the U.K., how quickly do you see the trajectory for marketing spend as a percentage of sales to move up towards maybe not to 10%, but towards 10%?

Yes. I think -- well, yes, 10% is a lot. I'm not sure we want to get to that. I mean, well, it depends -- the marketing gets more efficient with more stores. And clearly, at the moment, we have quite a bit of waste in our spend in the U.K. because we've only got 16 stores, and they're spread across the U.K. So there's not a lot of opportunity for localized advertising. It's mainly national. And hence, we are aggressively pursuing more stores to open in the short term, so we can then increase the spend in marketing, which increases the brand awareness, which does 2 things, helps the same-store sales improve, we would expect from that and a larger store network.

Your next question comes from Chami Ratnapala with Bell Potter Securities.

Just the first question is on the U.K. like-for-likes, I mean, with those 4 rebranded stores that were trading last year as well, the 32% up figure, what sort of confidence does it give you on, firstly, the breakeven position and sort of where some of these stores still hit revenue per store versus some of the Australian stores?

Yes. Well, yes, it certainly gives us that is -- that's not the January number on the like-for-like stores was a great uplift. The whole January result was very good in the U.K. Clearly, we need to continue that momentum, particularly in this half, which will get us sooner to the breakeven point in the short term. But look, I'm not so focused in the short term, whether it's a small loss or a small profit is what's really relevant is that we open new stores and continue with the strategy and have a conviction to continue to open stores and improve every aspect of the business is which we are doing. But yes, on the whole, really encouraging result for January.

Perfect. And the second question, you talked a bit about earlier, it came up that pretty intense promo environment here in Australia, but margins have been very solid. Turning to U.K., 59%. I mean, how did that track? And into the rest of the second half, how will that balancing act of margins versus driving sales work as the brand awareness increases?

Yes. Well, look, our -- look, the first thing is, obviously, our buying strength is helping us have prices even on promotion that are very, very competitive and yet be able to deliver that margin. And that's particularly because of our lounge volumes across Australia and now the U.K. So we are very confident that we're going to be more than competitive in our pricing yet maintain this margin. And as I said earlier, look, we expect in the medium term that margin will improve in the U.K. One thing to also point out with that margin is there's an interest rate subsidy cost that does -- is included as a cost in the margin, which is necessarily not here in Australia.

Your next question comes from Sean Xu with CLSA.

Can you hear me?

Yes. Can hear you, Sean.

Just hoping to do a follow-up question on the order banking within 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?

The implied margin on the order bank. Well, it's going to be slightly higher, I guess, given what our margin has been delivering. We don't expect our margin to -- it will be consistent with the first half for the second half is what our expectation is subject to external factors that may potentially impact it like a shipping issue. But at the moment, that's -- the order bank is in line with the first half margin.

Got it. Got it. Can I just do another follow-up? So this is the same question I asked you 6 months ago. I'd love to have an update on this -- because of the U.S. tariff situation, my understanding is the access manufacturing capacity in China from your supplier with their manufacturing plant moving to Vietnam to catering for the U.S. export business. I guess, I just want to hoping to get an update how Nick Scali is positioned to negotiate or renegotiate a more favorable supply term with some of your partners in Asia, please?

Well, that has been occurring already. Yes. I mean the factories, a lot of the production for the U.S. -- well, all the production in the U.S. has moved to Vietnam from many of the China factories. And yes, you've got more capacity in China, but that's been for some time now. So I think yes, we've been getting better value, and we've had good support from the factories, but I don't see any more change now in respect of that.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mr. Scali for closing remarks.

Thank you, everyone, for attending the results presentation. And we plan to provide a good result for the first half and look forward to good results for the full year. Thank you.

That does conclude our conference for today.