Nick Scali shows improvement, Harvey Norman stutters forward

In the Nick Scali (ASX: NCK) annual report, both revenue and profit were up, 16.4% and 77.3% respectively. The furniture retailer is continuing its steady growth despite the somber economic climate thanks to the relatively high Aussie dollar helping it import furniture at good prices. However, the recent dollar devaluation has made expanding product range and price point management more important.

Four new stores were added, bringing the total number to 33 Nick Scali stores and 5 Sofas2Go stores  Separate from store sales, a one-off cash inflow of $5.37 million resulted from compensation for the required ending of a leasing agreement due to the NSW government resuming the land where the store was in Bella Vista.

The furniture and home decoration industry is closely linked with the housing market, so the recent series of interest rate cuts have helped Nick Scali along the way, although the report said that its main concerns are the potential rise of unemployment and a further devaluation of the Aussie dollar, making cost management difficult.

Since 2009, when Nick Scali hit a low of $0.38 a share, it has rebounded 563% to about $2.50, returning roughly to its 2007 highs.  Although the next housing boom hasn’t taken off yet, shrewd investors have taken advantage of the lower cost, and now with the expectation of housing to eventually grow, the PE ratio is 22.  That is approximately in line with analyst forecasts of about 20%-25% earnings growth annually over the next two years.

Share volume is sometimes light, so the price can move in choppy fashion, gapping up and down. It is very close to breaking through its all-time high of $2.70 since its 2004 ASX listing. It touched in July, but quickly retreated. It has a strong support level at $2.00, so if it pulls back to that lower end of a trading range, the time may be better to buy. That could mean about a 20% profit if it then returns to $2.70, and up from there if it can actually break through the old high. Let it test that lower range, and be ready to buy on the pull-back.

Another company in the same industry and economic climate is Harvey Norman (ASX: HVN), known for furniture, bedding and electronics stores. It will be releasing its annual report in September, but the third quarter sales report gives a hint of things to come by showing us that over the nine months covered, global sales were down 5%, and like for like sales were down 3.2%.

Its share price, around $2.80, is up about 25% since January, but still far off from its 2007 high of $7.10. It has broken its downward price trend, and starting its way upward. Should a nascent housing recovery take root and grow, Harvey Norman will benefit greatly.

Foolish takeaway

Since Harvey Norman trades through overseas stores and deals in more than just furniture, it is not an exact 100% match to Nick Scali, but they do benefit from the same market forces — interest rates, housing and employment rates. For cyclical stocks, look for the ones that can ride out the hard times with a deep cash box, and can mobilise their forces faster when the upturn begins.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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