Shares in furniture retailer Nick Scali Ltd (ASX: NCK) have copped a hiding since the company reported its first-half results last week. Has that created a buying opportunity, or are there fundamental issues with the business?
The shares fell sharply on the day of the profit announcement, closing at $18.48 on Friday, down from $23.79 the previous day.
The shares have slid another 3.4% to be changing hands for $17.85 on Monday.
But it's fair to say analysts are divided on the company's fortunes going forward.
Firstly, let's have a look at the results.
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Solid local result
Nick Scali last Friday reported a net profit after tax of $41 million, up 23.1% on the previous corresponding period, on revenue of $269.3 million, up 9.2%.
While the company's Australia and New Zealand division performed well, revenue in its much smaller UK division fell sharply by 38.5%.
Executive Chair Anthony Scali said regarding the results:
The first half delivered solid sales and profit growth in Australia/New Zealand with good progress made in the UK as the completion of store refurbishments and rebranding contributed to improvement in written sales orders. Statutory net profit after tax for the group was up 36% on the prior year, reflecting 13% growth in sales revenue in Australia/New Zealand and the improvement in gross profit margin in both the UK and Australia/New Zealand. We continue to grow our store network across ANZ with six new stores to be opened in FY26, and several new store opportunities currently under negotiation in the UK.
Analysts divided
Macquarie analysts have had a look at the result, and they like what they see, with an outperform rating on the stock and a price target of $21.60.
They said the first-half result was "strong, outperforming margin expectations and revenue in line".
Net profit, they said, was 9% up on consensus expectations.
Macquarie said the market was expecting a better outlook than that delivered by the company last week, which was behind its previous share price appreciation and explained the sharp falls on Friday.
Barrenjoey analysts are not so bullish on the stock, with a neutral rating and a $17 price target, indicating they think further falls are on the cards.
They said the company would be impacted by increasing interest rates, which they have factored into their valuation.
They added:
We think a major reason for Nick Scali's share price rally from less than $14 to more than $25 since April-24 is confidence around executing its UK expansion well. Longer term we think this will be a successful foray, but that there will be bumps along the way. If we assume our $200m valuation for the UK is fair (remember Nick Scali paid nothing for this business) it implies investors are paying 17.2x FY27 P/E for the Australia New Zealand business. Since listing over 20 years ago, Nick Scali has only once traded on more than 17x P/E (mid 2007), so while the quality of the business has improved over this period, we just don't think there is much margin of safety here, especially as rates move higher.
