Brokers Comfortable With Nick Scali

This story features NICK SCALI LIMITED. For more info SHARE ANALYSIS: NCK

Brokers agree furniture retailer Nick Scali is well-positioned, given its scale in a fragmented market and a clear growth strategy.

-Comparable sales growth for four months to April at double-digit rates
-First store to open in New Zealand in December
-Expansion of stores should drive earnings as tailwinds from housing cycle ease
 

By Eva Brocklehurst

Brokers agree furniture retailer Nick Scali ((NCK)) is well-positioned, given its scale in a fragmented market, while there is a clear growth strategy based on the rolling out of new stores.

The company has advised that amidst the continuation of positive trading conditions to the end of April, FY17 net profit is likely to be $36-37m. Comparable sales growth for the four months to April was at double-digit rates and management expects new store openings to assist the results into FY18.

Macquarie remains conservative in its estimates for longer-term comparable sales growth, forecasting 2.5% from FY19. The broker notes the company's FY17 guidance range is set with a high degree of confidence, as a majority of sales that will be recognised within the remainder of FY17 have already been placed as orders. Macquarie maintains a Outperform rating and $7.75 target.

Shaw and Partners considers the company's investment case seriously compelling, given operating strength, ability to defend margins and a net cash position. The stock is also calculated to be trading below the retail sector peer average and the broker, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $8.00 target.

Shaw and Partners notes the company is going from strength to strength in its niche market, maintaining good sales growth and containing costs. This comes despite small cap retailers having a difficult 12-18 months.

While there is further upside value in the stock as new stores are being opened, growth is also organic, with like-for-like sales up 10% in the period, underpinning the broker's belief that this is the one of the best managed listed retailers of any size in Australia. Shaw and Partners points out that few retailers can enjoy four-year compound growth rates of 35% in operating earnings (EBITDA) amid some of the toughest retail conditions in decades.

Store Roll Out

Seven stores are expected to open in FY18 to bring the total Nick Scali branded store count to 54, against the long-run target of 75 stores across Australasia. Macquarie currently forecasts a modest roll-out schedule from FY19 of two stores per annum, given the difficulty in finding incrementally favourable sites.

The company expects to open its first store in New Zealand in December ahead of the usual strong January trading period. Citi's analysis suggests there is potential for the company to open 10 stores in New Zealand although there might be a number of challenges with respect to the expansion.

NZ consumers tend to be more value conscious, which may be an obstacle to the brand's premium positioning. The brand name will be relatively unknown in New Zealand and securing sites at appropriate lease terms may be difficult.

Also, there are logistics challenges which suggest it may not be feasible to have a South Island operation, and that could mean the opportunity is less than the 10 stores that are forecast. Still, the broker acknowledges more stores and expansion to New Zealand should drive earnings, as tailwinds from the housing cycle in Australia peter out.

The company's strong balance sheet also provide scope for further acquisitions or capital management and Citi reiterates a Buy rating and $8.41 target. Macquarie notes management did not provide detail on acquisition opportunities but highlighted they were open to potential in either categories or geographies.

The new NSW distribution centre is is on track to open in June and the current centre continues to operate well above capacity. Macquarie observes the new centre should provide savings from July 1, predominantly across employment costs and through a reduction in spoilage.
 

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