Nick Scali’s Margin & UK Opportunity Excites

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Despite some valuation concerns emerging, analysts are keeping their focus on the long-term opportunities domestically and in the UK for retailer Nick Scali.

-Consensus-beating first half profit and earnings from Nick Scali
-Significant store rollout opportunities
-Rebranding of Fabb stores to Nick Scali in the UK
-Valuation concerns emerge following firm rally

By Mark Woodruff

Furniture retailer Nick Scali’s ((NCK)) share price scaled new highs earlier this month, after first half earnings and the interim dividend beat consensus expectations.

In a tough operating environment with significantly higher freight rates, the first half gross margin still exceeded Macquarie’s forecast, while underlying profit beat the consensus estimate by 19% and the midpoint of management’s guidance by 14%.

Despite near-term difficulty sourcing locations, Macquarie also forecasts significant store rollout opportunities in the A&NZ region and the UK.

Selling a range of contemporary furniture products, Nick Scali and Plush (sofas and related accessories) largely target the 35 to 55-year demographic in the mid-to upper-income brackets, who are usually second-home buyers.

Not all were convinced by the interim result, with Ord Minnett noting lower orders domestically and in New Zealand, along with a disappointing performance at the fledgling UK division.

Management referred to the likelihood of even greater second half operating losses in the UK due to store refurbishments and rebranding, though Citi points out the UK business represents only a small part of Nick Scali’s overall operations.

Last May, management completed the acquisition of UK-based Fabb Furniture including 21 stores across the UK, all located in out-of-town retail parks.

Management aims to rebrand these stores under the Nick Scali name, refurbish them, and transition to its product range, leveraging its existing supply chain and buying power.

Ord Minnett now forecasts a -6% fall in second half revenue for the A&NZ region, down from the prior expectation for 6% growth, due to weakness in the Australasian order book during the December quarter and into January.

Citi believes the market will look through these softening revenue trends for A&NZ and focus on an improving broader medium-term macroeconomic outlook.

Partly explaining weakness in sales, management noted foot traffic declined by -18% on the Australia Day weekend, significantly impacting the outcome for January.

More positively for future sales, the economics team at Citi expects three interest rate cuts by the Reserve Bank over 2025, implying two more to come following last week’s cut.

An interim dividend of 30cps was announced, representing a payout ratio of 75% for the half, up from 66% in the previous corresponding period.

Store rollout

As of December 2024, the retailer was operating 65 Nick Scali stores, 44 Plush stores, and 20 UK stores, with management targeting 86 Nick Scali stores and 90-100 Plush stores in A&NZ longer-term.

Macquarie points out management is only 60% towards achieving its long-term target of 176-186 stores for the A&NZ region, noting Plush network optimisation also continues, with two smaller stores closed in the first half and relocated to larger, new concept stores to drive better conversion.

Lending further potential upside, the analyst is not currently factoring in a UK store rollout, yet several new UK stores “are currently being reviewed”, stated management.

Gross margin percentage

Overall, the first half gross margin of 62.2% came in 110bps ahead of Macquarie’s forecast, beating the consensus estimate by 180bps.

For the A&NZ region, the broker predicts gross margins will return to the 65-66% range from FY26, up from 64.4% in the first half.

While acknowledging January A&NZ sales were lower than the previous corresponding period, Macquarie still anticipates material upside for revenue and margins in the UK.

Management also expects the UK margin will eventually improve to between 57-59% from 45.1% currently.

Once Nick Scali products are delivered to stores in the UK, the analyst forecasts a gross margin percentage of 58% by the first half of FY27 for this segment.

Since acquisition of the Fabb stores, the UK margin has risen by 410bps to 45.1% and Macquarie is forecasting 49% for the second half.

Outlook

While raising its target to $18.50 from $15.88, Jarden has downgraded to Overweight from Buy on valuation and partly also due to near-term execution risk in the UK.

Regardless, this broker remains positive on the long-term opportunity (particularly in the UK) and considers Nick Scali one of the highest-quality ASX-listed retailers, citing its strong brand, high margin and capital light business model.

Ord Minnett has downgraded its EPS forecasts for Nick Scali across FY25-27 by -12%, -5%, and -11%, respectively, and pulled back its rating to Sell from Accumulate on valuation grounds following a 33% share price surge since late-November. Ord Minnett’s target has weakened to $14.50 from $15.00.

Outperform-rated Macquarie has raised its target to $19.90 from $15.60, and Citi (Buy) remains at $15.31. In sum, FNArena’s consensus target has risen to $16.57 from $15.30, only including brokers covered daily by FNArena. 

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