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Nick Scali Limited: Profits down, but riding out the retailing storm

Nick Scali Limited (ASX: NCK) has reported lower profits, but strong trading in January, and immunity from the online threat makes this no ordinary retailer.

Furniture retailer Nick Scali Limited today reported an 11% fall in net profits from $5.9m to $5.3m for the half year ending 31 December 2011, despite an increase in sales revenue to $53.8m. The increase in sales was wholly due to the opening of new stores. Same stores sales growth was flat for the half.

The company has opened two Nick Scali stores and three Sofas2Go stores since June 2011. Despite the tough market conditions, Nick Scali is aiming to open more stores in calendar year 2012 for all three of its brands (Nick Scali, Sofas2Go and Chateau d’Ax).

It also reported that consumer buying patterns continue to be volatile month to month, although January (2012) trading has been strong. The company also stated that the new stores opened will make a much greater contribution to profitability during the remainder of the year.

Nick Scali declared a dividend of 4.5 cents, fully franked.

Nick Scali the company

Nick Scali is engaged in sourcing and retailing household furniture and related accessories. The company operates under three brands, Nick Scali, Sofas2Go and Chateau d’Ax.

Flat same stores sales are an improvement over 2011 full year results, when same store sales fell 1.6%.

EBIT margins have fallen dramatically from 16.1% for FY 2011 to 12.8% for the first half of 2012, reflecting discounting, price deflation and the costs of opening new stores.

Nick Scali has long term plans to open as many as 125 Sofas2Go stores, 21 Chateau d’Ax and 75 Nick Scali stores, so there’s still plenty of growth available, once ‘normal’ trading conditions resume.

Furniture retailing has a level of protection from direct online (and overseas) competition due to the size and shape of the products, and this is partly reflected in the relatively small falls in profits for Nick Scali compared to other retailers such as David Jones Limited (ASX: DJS), Myer Holdings Limited (ASX: MYR), JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN).

Nick Scali has stated that given the current volatility in the market, it was unable to provide a forecast for the 2012 financial year. I expect flat sales growth to continue, although the company should increase its profits thanks to the new stores it has opened in the last six months.

The Foolish bottom line

Trading on a forecast PE of around 12.6, a fully franked dividend yield of 5.8%, net cash of $14m in the bank and the stock trading near its 52 week low of $1.45, Nick Scali is one of the better situated retailers to ride out the storm.

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Motley Fool contributor Mike King does not own shares in any of the companies mentioned.  The Motley Fool ’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  Click here  to be enlightened by The Motley Fool’s disclosure policy

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