The share of price of Nick Scali Limited (ASX: NCK) is down 3.5% after providing a trading update at the furniture retailer’s annual general meeting.
FY18 was a fairly solid year with sales growing by 8% to $250 million and profit grew by 10% to $41 million. However, during the year same store sales were flat – all revenue growth was produced by new stores opening.
In the first quarter of FY19 written sales orders grew by 12% and comparable sales orders are up 2%.
However, it was a few comments about the current trading conditions for the rest of the year that may signal deteriorating conditions. Managing Director Anthony Scali said that same store sales growth would be challenging in a volatile trading environment due to a slow-down in residential sales, which is a key driver and catalyst of furniture sales.
In addition to the fall in housing sales, a lower Australian dollar “may cause a reduction in our gross margin in the short term as market forces generally take time to make the price adjustments in line with a lower dollar.
However, it’s not all bad news for Nick Scali shareholders. The business plans to open six new stores during this year, with four now already open and trading. There are 55 stores currently open and it has a long-term target of 80 stores for Australia and New Zealand. Management also hinted at “the possibility of further off-shore expansion”.
Nick Scali is currently trading at 11x FY18’s earnings with a trailing grossed-up dividend yield of 10%. On the face of it these numbers seem attractive, but a fall in earnings in FY19 could make the above numbers appear better than reality in a year from now.
I also think that retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) could face tougher times in the year ahead.
Whilst every business has a price that it’s attractive, it would be like making a bet about how far house prices will fall at the moment. I’d rather invest in other growth shares that are not so cyclical.
I’d much rather invest in this top share which can keep growing profit no matter what the Australian economy is doing.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Scott Phillips.