Thursday, July 19th, 2018
One of the most consistent small-caps of the last decade has been high-end furniture retailer, Nick Scali (ASX:NCK). Though a booming property market provided a favourable backdrop, management also executed well in significantly growing the store network over this period.
Now trading at 12 times our estimate of FY19 earnings and generating a yield of 6.2 per cent (fully franked), we believe NCK offers a sound mix of capital growth and income.
As a bricks and mortar retailer, NCK’s main sources of revenue growth are the store rollouts and like-for-like sales growth, which is affected by retail trading conditions and the competitiveness of the Nick Scali brand.
Beyond FY18, NCK aims to grow its network by more than 40 per cent, from 53 to 75 stores. It appears this target is not priced in, given (perpetual) growth of 2 per cent could theoretically justify the current price-to-earnings multiple.
Arguably, the share price weakness reflects doubts around the company’s ability to execute further expansion against a turning property market. However, we are quietly confident NCK will exceed expectations over the long-term.
Despite being one the one of Australia’s largest importers of high-end furniture, NCK is still a relatively small retailer by network size. This means it not only has strong buying power within its niche, but also plenty of scope to grow into areas where it currently has low or no presence, such as New Zealand and regional Australia.
Against a prospective opportunity set over recent years, the team led by Anthony Scali has demonstrated impressive capital management with a clear preference for self-funded growth. For example, over the previous five years NCK’s balance was kept in a net cash position even as management oversaw a 50 per cent increase in store numbers (from 34 to 53 stores). Meanwhile, the company’s share count was unchanged at 81 million shares over the same period.
With incremental network additions NCK should realise further scale benefits via increased buying power and falling costs of doing business. This was evident in 1H18 with earnings growth of 15 per cent, nearly twice the rate of revenue growth. Gross margins were again very strong at 62.6 per cent (up 90 basis points), and same-store-sales growth was sound at 2.6 per cent.
Overall NCK continues to have a bright future, however risks relating to Australian consumer and broader housing market remain.
Clime Group owns shares in NCK.