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Nick Scali share price bolstered by strong outlook and dividend upgrade

Nick Scali lounge

Who said recessions are bad for retailers? The Nick Scali Limited (ASX: NCK) share price could be set to jump after it posted a positive profit report and predicted better times ahead.

While the furniture retailer posted a 2.1% dip in FY20 revenue to $262.5 million, it managed to lift its earnings before interest and tax by 1.7% to $60.8 million as net profit was steady at $42.1 million.

That’s a good result in this COVID-19 stricken environment, although that’s not the most exciting pieces of news.

Profit and dividend upgrade

Management is forecasting first half FY21 profit “to be up by at least 50-60%” compared to the same time last year and it increased its final dividend by 12.5% to 22.5 cents per share.

The dividend lift is unusual for this reporting season. UBS described this period succinctly when it coined the term “dividend recession”. Many ASX stocks, such as big banks like Commonwealth Bank of Australia (ASX: CBA), will be slicing their payouts due to the pandemic.

COVID boost to sales

The COVID-19 lockdown probably helped Nick Scali. Demand for home furnishings got a boost with stuck-at-home consumers taking the opportunity to refresh their dwellings.

“During the temporary closure of the Company’s stores in April, the online store was launched across all product categories and achieved greater than $3m in sales orders for the quarter,” said the company in its ASX statement.

“The online store positively contributed to EBIT in the first quarter of operation.”

Cost control pads margins

But what’s also impressive is the group’s cost control. The weaker Australian dollar puts pressure on the retailer’s bottom line as it imports its goods from overseas and pays in US dollars.

The impact of the exchange rate can be seen on its skinnier gross margin, but management’s cost cutting in a difficult environment more than offset this.

This allowed its EBIT margin to expand by 90 basis points to 23.2% in FY20 over the previous financial year.

It’s operating cash flow also recorded an impressive 22.6% jump to $75.4 million and its order book is brimming.

Big order book

“Contrary to the decline in sales revenue, written orders grew by 9% with same store sales orders up 4%,” added Nick Scali.

“Following the temporary closure of Australian stores for most of April, and up until mid-May in New Zealand, May and June sales orders grew by 72% year on year.”

Around 65% of the company’s products, like sofas, are made to order and takes between 9 weeks and 13 weeks for delivery.

Nick Scali scaling the fiscal cliff

The big surge in orders before June 30 means Nick Scali will book the sales and profits in the current quarter – contributing to management’s bullish profit guidance for the current half.

The way profits are booked could help Nick Scali manage the so-called “fiscal cliff” facing the sector. This cliff refers to the gradual or full withdrawal of support measures from October.

Other retailers like Harvey Norman Holdings Limited (ASX: HVN) and Wesfarmers Ltd (ASX: WES) are also expected to post strong FY20 results. But their outlook could be more sombre.

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Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of 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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