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The good, bad and ugly of the Nick Scali profit results

Five business people asking questions

The Nick Scali Limited (ASX: NCK) share price will be under the spotlight this morning after the furniture retailer posted a drop in half-year earnings.

But it isn’t all bad news although it remains to be seen if this will be enough to keep the stock rallying from its November 2019 trough.

Management reported a better than expected net profit of $21.6 million for the six months to end 2019, which is a 15% slump over the same time last year but is above the $17 million to $19 million guidance given by the company.

The good news in the results

The bottom line benefited from the sale of a property but even if you stripped that out, underlying net profit was still ahead of guidance at $20.1 million.

The other good news is that gross margin was largely flat at 62.2%. Some may have been worried that the unfavourable exchange rate would put pressure on costs at a time when retailers are struggling to hold prices, let alone increase them.

Another flat outcome that can be taken as good news is the dividend. Nick Scali kept the final dividend payment at 25 cents a share despite the drop in profits.

Pick-up in business

But what may excite supporters the most is the notable improvement in trading conditions in the second quarter versus the first.

“During the second quarter we achieved 3.5% like-for-like written orders growth, which was a vast improvement compared to the first quarter,” said Nick Scali’s managing director Anthony Scali.

That stands in contrast to the 8.3% drop in comparable store sales for the three months ended September 30th last year.

Not time to celebrate

But it might be too early to say that the worst is over. Management declined to give a full year guidance even though things picked up in more recent months.

The company highlighted the coronavirus and other factors that are buffeting consumer confidence. It also noted that written orders fell 1.7% in the month of January, which is usually the busiest month of the year for the retailer.

Further, earnings before interest and tax (EBIT) margins are being squeezed. While gross margins are flat, EBIT margins tumbled to 20.9% in 1HFY20 from 25.4% in 1HFY19. This probably reflects aggressive discounting to generate sales.

Revenue for the group dipped 2.5% to $137.5 million, which is significantly better than the earnings contraction.

The top line was also probably protected by the opening of three new stores during the period. Retailers usually get a boost to sales and an even larger lift in earnings from store roll-outs. This is due to operating leverage, but as the Nick Scali results show, operating leverage cuts both ways.

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Motley Fool contributor Brendon Lau 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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