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Nick Scali share price surges on double upgrade

From sinner to winner in the space of a day! The Nick Scali Limited (ASX: NCK) share price rebounded from yesterday’s share sell-off that was triggered by a profit warning.

But the gloom didn’t last long with the NCK share price surging 3.1% to $6.40 in after lunch trade after Citigroup upgraded the stock by two full notches.

The share price gain on Wednesday doesn’t quite wipe clean the 14% crash in the stock on Tuesday though after the furniture retailer issued a profit update that reported a 10% to 15% in monthly store traffic with like-for-like (LFL) sales falling 8% year-to-date compared to the same period last year.

Light at the end of the tunnel

Is Nick Scali a case of sell the rumour, buy the fact? According to Citigroup, the worst is over and the broker has lifted its recommendation on the stock to “buy” from “sell” as it also upgraded the price target to $6.90 from $5.97 a share.

“We upgrade our recommendation to Buy from Sell, given our Sell thesis revolving around disruption from the housing cycle has likely played out following today’s profit downgrade,” said Citi.

“Improving housing indicators are likely to lead to improving LFL sales momentum over the medium term, which should complement growth from store rollout.”

Picking the bottom is always fraught with risk but Citi is willing to stick its neck out as the property market shows signs of life.

Housing rebound to fuel sales

For instance, house prices in Sydney and Melbourne have jumped around 4% since the trough in May while auction clearance rates have soared in both cities in recent times.

Home sales are linked to new household formation and the latter is a key growth driver for the furniture industry. Those moving into new homes tend to need a lot of new furniture.

“Further, going forward house prices and churn should benefit from recent interest cuts. We see the improvement in housing as supportive for better Nick Scali LFL sales growth,” added Citi.

Not all good news

The only blind spot in the housing recovery is investment properties, in my view. Part of the recovery is supported by wealthier Australians looking to buy homes to rent out. These tend to be unfurnished and renters don’t usually invest much in new pieces of furniture when moving from one rental to another.

There’s also the issue of the weak Australian dollar crimping on margins. Retailers like Nick Scali buy their products overseas in US dollars and have limited ability to lift prices (not in this market).

On the other hand, Citi doesn’t think the exchange rate is a bit headwind as it believes Nick Scali can leverage its scale with suppliers to get a better price.

Nick Scali isn’t the only retailer doing well today. The Wesfarmers Ltd (ASX: WES) share price is rallying 2.2% to $40.40, the Premier Investments Limited (ASX: PMV) share price is jumping 2.5% to $19.26 and the JB Hi-Fi Limited (ASX: JBH) share price is improving by 1.3% to $33.48.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 1.2% at the time of writing.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Premier Investments Limited and Wesfarmers 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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