Here’s why the Nick Scali Limited share price is soaring today

The Nick Scali Limited (ASX: NCK) share price has rocketed higher today after the furniture retailer released its half-year earnings results. The shares surged as much as 14.1% to $4.70, but have since retreated to $4.40, up 6.8%.

So What: Nick Scali is an Australian furniture retailer which operates predominantly on the east coast of Australia. When it released its annual report to investors late last year, it warned of challenging and increasingly competitive conditions in the market while a falling Australian dollar could also pinch earnings.

Indeed, that was a concern for a number of Australian retailers leading into the current reporting season, especially after jewellery retailer Lovisa Holdings Ltd (ASX: LOV) warned of declining margins due, in large part, to the weak Australian dollar.

Despite that pressure however, Nick Scali managed to hold its gross margins at 60% and grow sales by 32% to $102.5 million compared to the prior corresponding period (pcp). Of course, this was boosted by the opening of seven new stores in the time since (from 41 to 48), but same-store sales (ignoring the impact of new stores) rose a very impressive 11.6%.

While operating expenses as a percentage of sales also fell from 41.2% to 39.5%, Nick Scali was able to produce a record net profit after tax (NPAT) result, which rose 40.7% compared to the pcp to $14.1 million. It will pay shareholders a 9 cents per share (fully franked) dividend on 23 March 2016, which is a 28.6% improvement on last year’s 7 cents per share dividend, also fully franked.

The company also opened two new stores and refurbished another four during the latest six-month period, and expects another four to six to be opened over the next 12 months. It has growth plans beyond those stores, however, and is targeting a total of 75 across New Zealand and Australia following a recent review.

Now What: Nick Scali said January, which is typically its strongest trading month, had experienced 24% growth in total sales compared to the pcp, and guided for $22 million to $24 million in NPAT for financial year 2016. The mid-point of that range would represent growth of more than 34% compared to last year’s $17.1 million profit.

Indeed, the results are very encouraging for shareholders of Nick Scali, as reflected by the jump in share price today compared to the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) 2.3% decline.

While there could certainly be more growth to come for Nick Scali however, investors need to be aware that the furniture market is closely tied to Australia’s housing market and consumer confidence. If house prices suddenly come under pressure, or if the global economy receives a shock, Nick Scali’s operations could be hit hard.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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