Is it too late to buy Nick Scali shares?

Could a downturn in the housing market impact Nick Scali Limited (ASX: NCK) share price?

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The Nick Scali Limited (ASX: NCK) share price has been on an impressive run, gaining more than 45% since January.  This dramatic rise, however, only returns NCK shares to the same price range they were in 12 months ago.  For investors in Nick Scali, I'm sure this share price turnaround was a great relief.  It was also likely a good lesson on how quickly and significantly the market's opinion can change.

It is not possible to say definitively what caused the initial decline or subsequent rise in NCK shares.  That being said, it's highly probable that some of the movement was tied to expected and realised changes in the Australian housing market.  As a furniture retailer, a link between the housing market and Nick Scali seems logical.  It's therefore understandable, why some investors might have predicted that as the housing market worsened, so too would the results of Nick Scali.

Nick Scali's recent performance

In its latest half-year results, Nick Scali was able to show overall growth in sales.  However, as the report stated, when ignoring new stores, sales growth was flat.  This was also the case for the previous financial year.  This lack of growth is a concern and suggests that the worsened housing market conditions have had an impact on Nick Scali.  If this negative impact continues, it might also indicate that the dramatic turnaround in the NCK share price was premature. The next set of results released by Nick Scali will be a good guide to see if this is true. 

Over the past decade, Nick Scali has been able to consistently deliver strong returns to shareholders, despite competition from the likes of Harvey Norman Holdings Limited (ASX: HVN) and Myer Holdings Ltd (ASX: MYR).  Return on equity, for example, has averaged over 40%, which is an impressive achievement.  However, being able to repeat these results in a weak housing market seems unlikely.

Foolish Takeaway

Based on the current Nick Scali share price, I don't believe making an investment is justified.  I would also prefer to see the next set of results before determining an acceptable price to pay for NCK shares.  This will help give a greater understanding of how a downturn in the Australian housing market impacts this company.  I view the long-term future of both the Australian housing market and Nick Scali as very strong and as such will be monitoring this stock for investment opportunities into the future.

Motley Fool contributor Mitchell Perry 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.

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