Updated: 17:00 AEST
Big box furniture retailer Nick Scali has kicked off earnings season for the retail sector with a record net profit result, but has warned that FY18 will be “challenging”.
Net profit increased 42.4 per cent to the year ended 30 June to $37.2 million, driven by cost savings and a 15 per cent increase in sales revenue to $232.9m on four new stores in Victoria, Western Australia and Tasmania.
Like for like sales growth slowed slightly from 11.1 per cent to 10 per cent, but earnings before interest, tax, depreciation and amortisation (EBITDA) was up 38.7 per cent, underpinned by a 1.7 per cent increase in net margin and a 2.4 per cent decrease in operating expenses measured against sales.
Gross margins strengthened to 62.5 per cent from 60.8 per cent, driven by “significant volume” growth in certain product categories.
Operating expenses decreased as a percentage of sales from 41.3 per cent in FY16 to 38.9 per cent for FY17.
Volume growth and “leveraging increased revenue” from existing infrastructure were singled out as the key factors behind the improved operational performance.
However, signalling a projected slowdown in the housing market in FY18, managing director Anthony Scali told shareholders on Thursday morning that cycling double-digit comp growth in FY18 will be “difficult”, and that the company’s growth prospects primarily lied with increasing the size of its portfolio.
“The biggest opportunity is more stores leveraging off the distribution centre in each state, there’s a massive lever there,” Scali said. “Of the ten stores we’re opening nine are in existing markets – that’s where we can really leverage off costs.”
The company intends to open at least 10 stores in FY18, more than twice the pace of FY16, including at least one site in New Zealand that’s slated to open in December.
Seven of those stores will occupy former Masters sites as part of a deal with landlord Home Consortium, which purchased much of the failed hardware chain’s portfolio from Woolworths last year.
Five-to-seven of the ten planned openings will occur in the first half, confirmation that several of the Master’s sites are slated to begin trading in the coming months.
“Masters gave a great opportunity for us in terms of opening stores but also in terms of rental costs,” Scali said, adding that the company will anchor six of the seven Masters sites it occupies.
Nick Scali currently has 51 stores, four of which are part of the Sofas2Go venture, which is still sitting under a cloud of uncertainty with a final decision on its future yet to be reached.
While Scali has only secured one site in New Zealand and says efforts to secure appropriate property across the pond has been difficult, he hopes to open more than one store in the market during FY18 with an initial target of four to generate a profitable operation.
“There’s way less competition than we have in Australia…it’s totally dominated by low-end retailers,” Scali said. “I’m very confident in New Zealand in terms of margins and sales because I think we’ll bring to the market something that they haven’t seen – a large store in the upper-middle market with a lot on offer.”
Scali also said he’s interested in taking the brand to the UK and will look at any opportunities to enter that market very closely.
The expansion will be accompanied by a multi-million-dollar price tag, which Scali said will have a material impact on expenses measured against sales in FY18, as the full year trading value of the new sites wouldn’t be realised until FY19.
Each new store costs the company around $300,000 in fit-outs, subject to landlord contributions, and a further $250,000 in additional inventory.
Investors did not react well to the result in early Thursday trading, with Nick Scali’s share price down 7.36 per cent to $6.17.
Nick Scali’s Board has declared a fully franked final dividend of 20 cents per share, bringing total yearly dividends to 34 cents per share, up 11 cents on FY16.
Access exclusive analysis, locked news and reports with Inside Retail Weekly. Subscribe today and get our premium print publication delivered to your door every week.
