In my view, S&P/ASX 300 Index (ASX: XKO) stock Nick Scali Limited (ASX: NCK) is one of the best operators in the retail space. And the company's FY25 first-half results released on Friday reinforced its attractiveness.
The furniture retailer may not seem like the most exciting pick, but there are plenty of reasons to like it, which I'll get into shortly.
Investors sent the Nick Scali share price up by as much as 15% after the results were released, though it partially retreated to finish the session up by 10.5%.
With the dust now settling, some investors may be wondering whether Nick Scali shares are a buy or not. I suggested it was a buy in January, and it's up 20% since then.
Let's look at why investors could still consider this business, and then I'll give my view on the ASX 300 stock's valuation.
UK potential
Nick Scali recently bought a business in the UK called Fabb Furniture. The UK is an exciting market because of how much larger the UK population is compared to Australia.
The ASX 300 share is starting with a relatively small, unprofitable business in the UK, but it plans to become much larger and more profitable.
Even so, the UK operations were better expected. The UK's underlying net loss after tax was $2.8 million, lower than the $3.3 million to $3.8 million loss guided.
During the half, four stores were refurbished and re-branded as Nick Scali, displaying an entirely Nick Scali product range.
The expected gross profit margin on the Nick Scali product (when delivered) is 57% to 59%, net of consumer finance costs, compared to the gross profit margin of 41% at the time of the acquisition. The Nick Scali online offering in the UK launched in mid-January 2025, with UK radio and TV marketing also commencing in January 2025.
It revealed that the top-selling sofa in ANZ is now the top-selling sofa in the UK, giving management confidence that the Nick Scali product range will appeal to UK customers.
A number of new potential stores in the UK are currently being reviewed.
Further ANZ progress
The management of the ASX 300 stock believes there are still plenty of store opportunities in Australia and New Zealand, giving the company a pleasing growth runway and delivering strong profit margins.
The ASX 300 share's management believes it could reach 86 Nick Scali stores in the long term. It had 65 at the end of December 2024. During the half, a new Nick Scali store was opened in Artarmon, NSW.
Management also believes the company can reach between 90 and 100 Plush stores, up from the 44 it has right now. Two Plush stores in Newcastle and Prospect, NSW, were relocated to a larger format store. One Plush store will be opened in the second half in Melton, Victoria.
Solid dividend option
The ASX 300 stock has shown a desire to pay investors a good dividend over time. While the HY25 dividend was cut by 14.3%, I think the payout can grow in the coming years.
If it were to pay the same dividend per share of 30 cents in six months, that would translate into a grossed-up dividend yield of 4.8%, including franking credits. That's not the biggest dividend yield, but I think it will end up being the low point, and the dividend could grow from here.
My view on the ASX 300 stock
Nick Scali is a great business with a solid underlying return on equity (ROE).
However, I'll also note that furniture retailing is not exactly the most resilient industry, so there could be a sizeable decline in the medium term. As the chart below shows, it comfortably hit an all-time high last week.
Despite this, I am excited by the potential of the UK side of the business, and I believe Nick Scali could double its store count over time. I'll be keeping a close eye on this one.
