Nick Scali's drop in half-year profits cushioned by growing revenue

Nick Scali's drop in half-year profits cushioned by growing revenue

Nick Scali’s (ASX: NCK) profit for the half-year ending December 31 declined as the business was forced to close 55 per cent of its stores due to COVID-19 restrictions and was also caught up in wide-scale supply chain issues.

After acquiring the sofa specialists Plush in November 2021 for $101.4 million, the furniture store’s underlying earnings before interest and tax decreased by 3.7 per cent to $55.1 million, resulting in no immediate bounce in profit from the purchase.

Net profit after tax was $35.6 million, 6.6 per cent lower than the same period last year, although the business could take some comfort from the revenue growth, up 5.4 per cent from $171.1 million to $180.3 million.  

“Despite over half of our stores being closed between July and October and the impact of international lockdowns on our key suppliers, we were still able to deliver a strong earnings result, which was 75 per cent up on H1FY20,” Nick Scali managing director Anthony Scali said.

“We are very excited about the recent Plush acquisition, which is on track to provide significant sales and profit growth for the company as we expand the store network and benefit from synergies of a fully integrated business.”

The business can take comfort from the continued growth of its online sales channels, with over $19 million of written down sales orders in the half-year to December 2021. In addition, total written sales grew by 6.4 per cent to $203.4 million.

Aside from the temporary store closures between July and November in Australia and New Zealand, Scali, speaking at the H1 FY22 results conference, pointed to two factors related to COVID, which caused the reduction in profit.

A three-month lockdown in Vietnam, where 40 per cent of products are manufactured, impacted the supply chain. The business is also caught in the scarcity of shipping containers related to the broader global supply chain crises.

Inventory in transit jumped from $11.7 million in June 2021 to $17.7 million in December 2021, outlining the supply chain issues, and there is an order bank of $42.1 million outstanding orders acquired.

Scali is not concerned by the backlogs or cancellation rates and believes consumers understand the global issues.

“Cancellation rates are very, very minimal – people are waiting,” Scali said.

“The lead times are improving; we are quoting shorter lead times. Let’s go back to when we re-opened in October and November, we were quoting lead times of four to five weeks longer than we are now, and people were still buying.

“The issue is, no matter where you go, if you want specially made pieces, you have to wait, and people are accepting of that.”

According to Scali, despite the supply chain issues, there is no appetite for Nick Scali to switch to local manufacturing as local factories are considered too small, and they would have the same supply chain issues bringing in raw materials.

Scali mentioned that overall trading during January was down by roughly 6 per cent, dropping off dramatically during the middle of January as people became concerned with the spread of Omicron but saw a remarkable improvement towards the end of the month.

The outstanding back-orders at the end of January were 70 per cent higher than last year, which Scali believes should help facilitate revenue growth over the coming months. However, he prefaces this comment by outlining the variability of shipping and container costs that may impact profitability.

After purchasing Plush, which led to increased borrowings from $33.7 million to $96.2 million, Nick Scali now has 108 stores across New Zealand and Australia but targets at least another 68 stores.

The company declared a fully franked interim dividend of 35 cents per share, representing a payout ratio of 84.5 per cent.

The Nick Scali (ASX: NCK) share price was up 1.46 per cent as of 11.30 AEST.

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