Nick Scali is the latest retailer hit by the consumer pull-back

On first blush, the much-anticipated consumer slowdown does not appear to have impacted Nick Scali (ASX:NCK), which reported half-year 2023 results earlier this week. But delving more deeply into the trading update reveals a different story.

Nick Scali’s 1H23 sales revenue of $283.9 million was up 57.4 per cent on H1 FY22. Net profit after tax (NPAT) was $60.6 million, which was ahead of the company’s own November market guidance of $56-59 million and also ahead of consensus of $56.6 million. The half-year NPAT was up 70.2 per cent on the corresponding half last year.

Importantly, improvements in the buying and ranging at newly-acquired Plush and lower freight costs (supply chain scale / synergy benefits) have meant an improvement in Nick Scali Group margins. The company reported group gross profit margins for the first half of FY23 of 62.0 per cent, up one per cent on FY22, and up 2.5 per cent compared to the second half of FY22. In November and December gross margin is estimated at 63.4 per cent from just over 61 per cent in the July-October period. As mentioned, this was driven by Plush where the 1H FY23 margin improved to 60.5 per cent from 54.8 per cent for FY22.

Additionally, synergies have reduced the cost of doing business for the Plush business, falling from $58 million annualised prior to the acquisition to $38 million. This means Plush CODB synergies are now annualising at $20 million up from prior expectations for $18 million.

Towards the end of the half, conditions appear to have deteriorated.

While year-on-year group sales orders between July and October rose 55 per cent, as Nick Scali cycled lockdowns, the period November to December revealed a decline of approximately 41 per cent year-on-year (cycling a reopening-related boom in the prior corresponding period). At Plush, monthly average orders are estimated to have halved from nearly $16 million to just over $7 million.

But these numbers are all backward-looking. 

Importantly the company provided a trading update to the end of January 2023 – the first month of the second half. Providing something of a positive spin (read carefully) on the most recent month, the company noted (emphasis added):

“January is our strongest trading month and was better than our expectations

  • We 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 January written sales orders were 1 per cent below January 2022 and 22.9 per cent above pre-COVID-19 January 2020
  • The 2H FY23 result will depend upon trading from February to April and at this point it is difficult to provide further guidance”

In other words, the strongest trading month for the year was weaker than last year. This suggests the consumer pull-back is underway and arguably does not bode well for the rest of the half. 

1H23 written orders were also below consensus. Keeping in mind prices are estimated to have increased circa 20-25 per cent compared to pre-COVID prices, Nick Scali’s comment implies volumes are now in line with or flat on pre-COVID levels. 

Additionally, Plush experiences high cancellation rates, which implies the true capacity of the business is lower than might be estimated from orders alone. Nick Scali now believes the like-for-like sales capacity of Plush, which excludes new stores is circa $90-100 million compared to the $111 million revenue reported in FY20. 

Meanwhile, the outstanding order book of $112 million is down considerably from $139 million at the end of October, again reflecting the softening consumer backdrop.

Nick Scali can be counted among a select number of well-managed high-quality businesses listed on the ASX enjoying high margins, and high returns on equity. In the short run, however, investors will be asking if the first half of FY23 represents conditions that are as good as they get before high rates and increasing cost of living pressures weigh on the consumer. 

Digging into the results reveals a deterioration late in the first half and extending into January.  The order book has eased as product lead times normalize, and this means sustaining past sales revenue demands new orders and a higher conversion of ‘just-looking’.  These will be harder to generate amid a more cautious consumer backdrop, which of course will eventually pass.


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