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Why this small cap star zoomed 13% higher today

One of the best performers on the Australian share market today was the Nick Scali Limited (ASX: NCK) share price.

The furniture retailer’s shares finished the day 13% higher at $6.78 following the release of its full-year results.

Here is a quick summary of what happened in FY 2018 versus a year earlier:

  • Revenue rose 7.7% to $250.8 million.
  • Earnings before interest, tax, depreciation, and amortisation increased 12.7% to $62.8 million.
  • Net margin widened 2 basis points to 62.7%.
  • Net profit after tax increased 10.1% to $41 million.
  • Earnings per share of 50.6 cents.
  • Final dividend of 24 cents per share, bringing full-year dividend to a fully franked 40 cents per share.
  • Store network increased from 50 to 55 stores.
  • Outlook: Trading since June has seen positive same store sales order growth, new product launches on the horizon.

Overall, I felt this was a strong result from Nick Scali, especially given the cooling housing market. As such, I can’t say I’m surprised to see its shares race higher today.

According to management, new store openings were the drivers of the company’s revenue growth in FY 2018. Same store sales were flat for the year.

Thanks to improvements in its margins as a result of efficiencies from supplier consolidation and volume growth, profit growth outpaced revenue growth.

Managing director Anthony Scali appeared to be pleased with the result. He said: “The result demonstrates that the continued store roll out provides significant leverage enabling us to improve our operating margins and also lower our cost ratios, which is essential for future profit growth. Our cash flow and balance sheet remain strong, allowing us to take advantage of opportunities that may arise.”

One of those opportunities is the introduction of a new product category of bedrooms and bedding in selected stores. This is expected to generate further sales growth over time and should roll out at the end of the first-half.

Should you invest?

The cooling housing market and a softer than expected performance have weighed heavily on its shares this year. As a result, even after today’s gain they still change hands at a reasonable 13x full-year earnings.

This could make it worth considering, especially given the strong start to the new financial year. Though, there is a risk that if the housing market continues to cool it could put further pressure on its sales and share price.

Retailers such as Baby Bunting Group Ltd (ASX: BBN) and Premier Investments Limited (ASX: PMV) may be safer options for investors.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. 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 Scott Phillips.

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