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Scali numbers lacking that certain polish

Sydney-based furniture retailer Nick Scali (ASX:NCK) produced a mixed interim report on Monday – one from which some investors and commentators mistakenly construed that the retail slowdown had not impacted it.

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On the numbers, that’s a reasonable analysis, but the company revealed it hadn’t escaped the weakness in online retailing with a drop in revenue from that channel, and it also said its order book was lighter a little lighter heading into the back half of the financial year.

Nick Scali’s results will be typical of reports from peers in retailing and some other sectors where household spending is vital – they will show revenues that may look solid on the surface but are patchy when you dig into the data, weaknesses in outlook, rising cost pressures and a tendency to rewarding shareholders ahead of an expected weaker second half.

Online sales performance and forward order books will be key signs of an emerging weakness.

Still the performance by Nick Scali in the six months to December 31 was good enough to justify the board agreeing on a record fully franked 40 cents per share interim payout to shareholders (35 cents a year ago).

But the records were not enough to assure sceptical investors and the shares lost more than 13% on Monday to close at $10.80. That’s the lowest they have been since just before Christmas.

The higher dividend represents a payout ratio of 53.5% down sharply from the generous 85% a year earlier because the 70% leap in interim earnings to $60.6 million after tax in the six months.

Earnings Before Interest and Tax was a record $91.2 million as the company’s gross profit margin rose 2 and a half percentage points to 62%.

This was off the back of a 57% jump in revenue for the half year to $283.9 million, which included six months of contributions from most recent acquisition – the Plush sofas chain bought in late 2021.

Directors said the jump in revenue in the half was due to record deliveries from the order book at June 30, 2022 across the group (including Plush).

“Cost of doing business as a percentage of revenue improved 2.9% to 32.3%,” the directors said.

“Total expenses reflect the inclusion of Plush for the full current period, and additional temporary local distribution costs to support the increased delivery volumes in the period. The Plush integration is complete with IT & distribution now fully integrated. Synergy savings of $20m annualised have now been realised compared to pre-acquisition Plush cost of doing business,” Nick Scali directors said in Monday’s statement.

And while the performance in the December half was very strong, there’s a slowdown ahead as the company revealed that group written sales orders for the period were $210.3 million, representing just a 3.4% lift on the prior corresponding period. Last July, the company said group written orders were up 64% on a year earlier (that was due to the impact of the lockdowns in mid-2022).

Nick Scali brand written sales orders were down 3%, after the strong surge in orders as the 2021 lockdowns eased.

And the slowdown in online orders and sales was quite clear as well.

“Nick Scali brand online written sales orders were $12.0 million for the half, compared to $16.6 million in the December, 2021 half “which benefitted from temporary store closures due to Covid 19 lockdowns,” according to directors.

“January 2023 Nick Scali brand online written sales orders were 13% above January 2022.” directors added.

All this means a weak outlook for the rest of 2022-23, and why the shares slumped yesterday.

“The Group had anticipated a slowdown compared to the Covid 19 boom yet trading remains better than pre Covid 19 despite rising interest rates. Nick Scali brand written sales orders were 12.1% below January 2022 and 22.9% above pre Covid 19 January 2020.”

Commenting on the result, CEO Anthony Scali said, “Record revenue in the half has been a tremendous achievement by our distribution teams which demonstrates the operational capacity in the business to support future volume growth.”

“The integration of Plush is now complete with IT and distribution operations integrated during the half and we are well placed to grow our store network under both brands.

“In 2H FY23 we are commencing a twelve-month programme of refurbishment of over 40 Plush stores with new and improved product, image and store appeal to customers. We are excited about the potential to improve foot traffic and conversion in the current Plush store network. “

There were no reassuring comments on the outlook and the weaker order position either to help convince investors yesterday.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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