Small Caps | Aug 12 2019
It's a tough year ahead for Nick Scali as conditions are subdued and the furniture retailing business is dependent on a turnaround in housing activity.
-Noticeable decline in the same-store sales trends
-Attractive dividend yield and undemanding P/E ratio
-Management reluctant to discount in order to drive sales
By Eva Brocklehurst
Furniture retailer Nick Scali ((NCK)) is facing a tough year ahead as sales momentum turned negative in FY19. Conditions for retailers do not appear to have improved since the federal election, Wilsons points out.
Foot traffic has eased and earnings growth is expected to be driven by new store openings, with management now targeting 85 in the long term. The company continues to adopt a measured approach to rolling out stores, while a move offshore is considered unlikely in the near term.
FY19 operating earnings (EBITDA) of $65m were in line with expectations. Still the quality of the result pleased Macquarie, as cash flow was strong and inventory was cleared. No FY20 guidance was provided. Same-store sales trends softened, with a noticeable decline in the fourth quarter amid weak housing turnover. A material improvement in trading is not expected until housing and renovation activity improve.
Wilsons was disappointed with like-for-like sales and customer deposit outcomes, particularly given elevated trading multiples heading into the result, and has a Hold rating and $6.56 target. Customer deposits declined -0.5% and based on the updated split of products this implies expenditure on lounges declined -3.3% year-on-year.
Citi acknowledges some investors, prepared to look through another potential downgrade, may be attracted to the undemanding FY20 price/earnings ratio of 12x, an 8% dividend yield and an improving housing outlook, yet retains a Sell rating and $5.97 target.
Management remains reluctant to discount in order to drive sales, Macquarie points out, but still plans to remain competitive and focus on marketing and improved conversion strategies. Market consolidation is also expected following recent competitor closures.
Citi envisages downside risk to earnings will increase in FY20 as the store roll-out is likely to be slower, and a higher store base means upside from the roll-out will be smaller. Downside pressures are also emerging from a weaker Australian dollar.
The broker expects first half sales to decline by -2.5% and the decline moderate to -1% in the second half, on the assumption that housing starts to improve and there is a pick up in consumer confidence from lower interest rates.
While the result may have been commendable, in the wake of challenging conditions, Macquarie accepts better conditions are required to drive a re-rating of the stock and maintains a Neutral rating with a $6.15 target.
Moreover, the broker suspects short covering may have played a part in the market reaction to the results as the stock had eased beforehand. A minor contraction in earnings is expected in FY20 but the healthy dividend yield and balance sheet should provide valuation support.
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