Nick Scali Limited (NCK) Earnings Call Transcript & Summary

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

Good morning, everyone. Welcome to the Nick Scali results presentation. The FY '26 summary is -- group net profit after tax was $75.7 million, up 22% on FY '25 underlying NPAT and up 31% on statutory. Revenue was $516.7 million, up 4.3%. Gross margin was 65.6%, up 210 basis points. Cash on hand, $106.6 million, final dividend, $0.39 per share fully franked. For the ANZ Group, written orders are up 2.7%, reflecting a challenging second half. Net profit after tax was $80.5 million, up 10% on FY '25 underlying and 13% up on the statutory NPAT. Revenue in the ANZ was $476.7 million, up 5% on prior year. Turning to the U.K. Written orders for FY '26 were $45 million, with second half orders of $23 million, up 50%. Clearly, the year before, many stores were closed for refurbishment and rebranding. Nick Scali branded stores like-for-like were up 19% in the second half. Revenue was $40 million, $1.8 million less than last year with the interrupted trading in first half with store closures due to the rebranding program. Gross profit margin for FY '26 was 60.3% compared to 47.1% in FY '25. 16 stores refurbished and rebranded Nick Scali by December 2025. Net loss after tax of $4.8 million, with second half statutory profit of $800,000. As mentioned, on Page 3 of our results presentation, group written sales orders were up 4.7%. ANZ was 2.7%. And we can -- as pointing out in the second half, written sales orders were down 3.6%. This is compared to a prior year second half where like-for-like growth was 7.3%. The U.K. written orders, up 31%. A lot of this, of course, is based on stores being closed, but pleasing to see that the brand stores like-for-like was up 19% in the second half. Revenue, as mentioned, was 4.3% up. ANZ was up 5%. U.K. was down 4% due to the store closures. And then we can note that written sales orders exceeded sales revenue in the U.K. by $5 million. For the group financial performance, the ANZ margin was 66% versus 65% in FY '25. The operating expenses increased by $5 million compared to the prior year. This is mainly in the first half, and that was attributable to employment and bonuses and the additional advertising. Second half was flat, including start-up costs of $600,000 for four new stores. Just to note, the impact of AASB16 was $1.7 million after tax compared to the previous year. The U.K. gross margin has continued to improve, which is 60.3%, [ FY '26 ]. Other income included interest earned lower than the estimated final acquisition payment and early surrender of leases on stores, which included trading losses during the negotiation stage of the stores. I'll turn now -- hand it over to Keith.

Thanks, Anthony. So on Page -- Slide 5, the group generated operating cash flow of $117.9 million, up from $89.6 million last year. In the U.K., operating cash flows reduced significantly to $2.1 million compared to $10.2 million last year, reflecting improved sale activity, improved margins and lower refurbishment spend as that major refurbishment program completed. The group invested $23 million in property and other capital investments during the year, including the Campbelltown property acquisition, land for the South Australian distribution center and showroom upgrades across both the ANZ and the U.K. We will also complete the purchase of the Richmond showroom property in August, continuing the strategy of selectively investing in strategic freehold locations. Following $61.6 million of dividend payments and the capital investments during the year, the group closed with cash of $106.6 million, up from $101 million in the prior year. With debt unchanged, net cash closed at $34.9 million. We now move to Slide 6 and the balance sheet. The group's balance sheet remains very strong, with net assets increasing to $279.8 million from $266 million a year ago. Inventory on hand reduced to $41.6 million from $44.6 million, reflecting the continued discipline around inventory management. Property book increased to $131 million, primarily due to the Campbelltown acquisition and the land purchase for the South Australian distribution center. Borrowings remained unchanged at $71.7 million, comprising the $43.7 million of property debt secured at a less than 22% LVR, together with $28 million of corporate acquisition debt. Overall, the group finished with increased cash, higher net assets and conservative level of debt while continuing to invest in property and providing flexibility as we enter '27.

Thanks, Keith. Okay. Just on the U.K. summary, as mentioned, the gross margin was 60.3%. And to note, the second half margin actually improved to 61.2%. We -- up to recently, we've been -- in terms of distribution, we've been using a third party. We've now leased our own warehouse, a brand-new building that allows us a lot of capacity for growth. In terms of our leadership in the U.K., the focus remains on retail teams in stores and looking for new store opportunities. In terms of product, the best sellers in the U.K. are in line with best sellers in Australia, that we -- introduction of a new product is first tested in Australia, which has been an advantage and being successful to date, that strategy. We expect now to open one new store in October, and we have a number of other locations under negotiations. We can see from the store network, whilst we did close two stores, one was in Brisbane Airport, which is the landlords now -- it will no longer be large-format retail. So we had to exit that, and another one was in Toowoomba. But in replace of that, we've opened three new Plush showrooms and a new Nick Scali store in Ballarat and two Nick Scali stores that were due to open in the prior year, in FY '26, opened in July in Bendigo and Bunbury. The U.K. Lincoln store closed in October and Nottingham in April as these were shared concessionary stores with another retailer, and they did not suit our long-term strategy. As mentioned, the new store in the U.K. is expected to open in October, and a number of store locations under review. We're looking at our property, which is growing and obviously, the portfolio of property, which are most of these retail stores as part of our long-term strategy. The historical cost is $145 million. Current book value, which is, obviously, acquisition costs less depreciation, is $130 million. But based on independent valuation, that property value sits at $208 million. As mentioned, we -- during the last year, we bought the Campbelltown property. We've also bought land and we're currently building a new distribution center in South Australia. And we've exchanged contracts on a new -- on a Richmond property that will be refurbished and won't be operated for approximately 18 months as we're waiting for the current tenant lease to end. The outlook. For the first 5 weeks of trading, written sales orders were flat when compared to the same period the previous year, cycling off high single-digit growth. The group opened four new stores during FY '26 and a further two in July, which are expected to contribute positively to FY '27 earnings. A further four stores are expected to be opened during FY '27, supporting the group's continued growth strategy. In the U.K., the positive momentum in the U.K. continued. We've written sales orders for the first 5 weeks, up 35% on the prior period, but taking into account a number of stores were closed for refurb last year. The group expects to have a new store in October and other stores. I think that completes our presentation, and we're happy now to take questions.

[Operator Instructions] Your first question comes from Naveed Fazal Bawa with Jefferies.

Gross margin was obviously very solid in the U.K. and ANZ. Just wanted to understand how we should think about it going forward, given there's been a bit of movement in FX and freight in the second half and in the context that you might have some hedging arrangements in place that might roll off? And maybe on the U.K., how much higher can that margin go, given it's a very solid outcome in the second half?

To answer your question, I think the U.K. margin is probably where it -- will sit at where it is in somewhere between 60% and 61%. When we look at ANZ, yes, we're rolling off hedges that were at lower rates, lower dollar rates. And we've got a bit of the benefit coming through now, but that's getting offset by, at the moment, freight. It is up because of the oil issue, with an increase in the bunker, the BAF. So my view -- the Australian ANZ margin was very high. I'm not committing that, that's always going to be at that level, but somewhere in the range of 65%, 66% is where I think it can remain.

And maybe just on like-for-like written order sales trends. It looks like from the second half into FY '27, you all have opened new stores in the second half. And in July, it looks like it might have improved slightly from down mid-single digit in Feb to June to maybe down low single digits in the first 5 weeks. Does that sound about right? And maybe if you can give some color on how bad the macro is post...

Yes. Well, the macro is not good at all. No, this is one of the worst macro for furniture for sure. We've got house prices going down. So there's a negative wealth effect. We've had interest rate increases. We've got inflation. We've got cost of living. It's -- and transaction -- housing transactions have been slow for 6 months. So it's a tough macro, very tough. And it's been a very volatile -- the quarter 4 was volatile, some months up, some months down, but we were off high comps of prior year, in fairness, yes. So the first 5 weeks doesn't mean it's going to be that for sure. It's just very difficult to predict. You've got a bad consumer, I think, at the moment. So hopefully, my hope, obviously, that the -- if the war stops and oil comes back down and maybe inflation is controlled, but it would certainly be helpful if interest rates are dropping.

Your next question comes from James Wilson with Macquarie.

Just a couple from me. So just to clarify there on Naveed's question around written sales orders on a like-for-like basis. We're right to still be thinking that over the trading update, when adjusted for those new stores, we were sort of modestly down negative single-digit declines. Is that right?

Well, very marginal, very marginal. Yes, very -- it might be almost negligible, to be honest with you, on a like-for-like because we actually have two stores that we closed, and then new stores that were opened.

Okay. So broadly flat then even on a like-for-like basis, maybe modestly.

Yes. Yes, but that's only the first 5 weeks. So we've got a long way to go.

And it looks like in the second half, in terms of advertising spend, it was sort of roughly flat after a bit of a bump in the first half. Obviously, given the weaker consumer in Australia, can you talk to us maybe about how you're thinking in terms of the marketing and advertising piece over FY '27? Will there be any change in how you promote or...

No, I think we're sticking to the strategy, which is -- we're not doing anything different. The main thing is we're trying to have our dollar go further because it's a tough market for the media. So we're just trying to get better value, is how we're looking at it.

Right. And just one final one from me. I mean we would have just had the U.K. bank holiday weekend over these first 5 weeks. Can you talk to us a little bit about how...

The bank holidays in August. There was one in Wales and Ireland, I think. Scotland, sorry, it's Scotland. Scotland and Wales had the bank holiday, not the U.K.

Okay. Sorry, not England then.

Yes, the bank holiday is at the end of August in the U.K.

Okay. All right. Okay. Can you just talk to us, though, a little bit about how sort of promotional activity amongst the competitors was in the U.K. then?

Yes. Look, the U.K. has got tougher because as you know, the DFS Group, which is more than 25% of the market, reported negative 4% written sales order growth. So it's a tougher environment. Traffic is down, but our conversion has improved a lot. So U.K. is not easy at the moment as well on the macro.

Your next question comes from Thomas Kierath with Barrenjoey.

I've just got a couple on the U.K. That 35% increase in July, I think you're saying that, that was affected by some closures or some remodeling. Like should we expect 35%, you can do that for the rest of the year? Or is that kind of...

No, no, that's what I'm qualifying. I mean, look at the -- it's better to look at the like-for-like, the stores that were opened in the prior year is a better indication. No, we don't expect that.

Yes. Okay. And I think before you've said AUD 51 million is the kind of breakeven point for the U.K. But I think you did AUD 40 million in the year. And just going like how confident are you getting to that AUD 51 million in '27? Or is it maybe going to be breakeven in '28, not '27?

I think we're lowering the breakeven at the moment. We think it's going to be lower than AUD 51 million. Look, I'm becoming more confident, but -- and the sales teams are definitely better. They're converting better. It's going to depend a bit about the macro there. I think product is doing well, and we keep introducing proven winners in Australia that seem to be working, and the range is just improving as well. I'm feeling confident in our strategy and what we're offering the customer. The thing holding us back is not enough stores and not enough brand awareness.

And sorry, last one. I think you got two Fabb stores, like Fabb branded stores still operating there. Like what's the kind of plan for them? I assume they're not going to get converted, but will they close? I'm just trying to work out the modeling, I suppose, behind that.

Yes, yes. Look, one of them -- okay, one of them is in a place Canterbury, we inherited the store, and it's in an industrial area. It's not in the retail park. We're just running the lease out there because it's not very high rent, but it hardly makes any sales. So we're always going to quit that. The other one is a smaller store that we're using as a clearance outlet, and we'll continue to do that, clearance outlet in Australia.

Your next question comes from Sam Teeger with Citi.

Sorry to dwell on it, but there's a couple of questions I'm getting from clients on it. Just wanting to confirm the earlier questions around like-for-like in the Australian trading update. You mentioned it was broadly flat because you closed two stores, but the only closures I can see in the pack are in the U.K., Lincoln and Nottingham. Which closures were you referring to?

In Australia, we've got one around Brisbane Airport.

Okay. Great. And then is it reasonable to conclude that the stronger-than-expected final dividend is a function of M&A being less likely over the next 6 months or so? Remember at the February result, the company seemed pretty keen to buy something in Australia, but the drums don't seem to be beating as loud on this topic anymore.

No, the dividend -- no, we've got a big -- we've got a stronger balance sheet than we've ever had and a lot of cash. So that's not going to impact that at all. No relation to M&A. As you can see, even our properties now, that $200 million, and we've got property debt of $43 million. So a lot of capacity in our balance sheet, a lot of capacity.

Are there things you're looking at right now in ANZ?

Are there what?

Are there potential acquisition targets you're looking at right now in ANZ?