Discretionary retail thrives as we spend up big at home

Dominic Rose

Montgomery Lucent Investment Management

For more evidence that discretionary retail is absolutely booming right now, particularly the furniture and homewares category, look no further than Nick Scali’s (ASX:NCK) strong FY20 result and near-term outlook. NCK’s result follows hot on the heels of strong updates by key homewares peers, Temple & Webster (ASX:TPW) and Beacon Lighting (ASX:BLX), and reinforces our conviction in Adairs (ASX:ADH) heading into results season.

These buoyant conditions reflect an economy flooded with liquidity, as well as consumption shifting away from international travel while the borders are closed and towards the home where people are spending much more time (working, cooking, exercising and shopping online). Overseas holidays look off the agenda for the foreseeable future, suggesting it may be some time before homeware sales normalise.

Here’s a quick look at the key details.

  • Nick Scali (ASX:NCK) (6 August 2020 result) – FY20 NPAT of $42 million came in above recent guidance of $39-40 million. Since reopening all its stores (which were closed for 2-4 weeks), sales orders have been very strong with May and June up 70 per cent and July accelerating to 75 per cent growth (on the prior period). Management attribute this strength to consumers spending more time at home, reallocating discretionary spend from overseas holidays towards homewares and furnishings. Online was launched in April and has performed very well, delivering more than $3 million in 4Q20 at 50 per cent contribution margins. Despite the Melbourne lockdown, NCK expects 1H21 profit to be up at least 50-60 per cent.
  • Temple & Webster (ASX:TPW) (28 July 2020 result) – FY20 EBITDA of $8.5 million (vs $1.5 million in FY19) generated on 74 per cent revenue growth to $176 million. As e-commerce and working from home trends gathered pace, 4Q20 revenue growth accelerated to 130 per cent and July sales have reportedly held consistent with these very strong 4Q20 growth rates. To best capitalise on the accelerating structural shift towards online, the company strengthened its balance sheet with a $40 million equity raise.
  • Beacon Lighting (ASX:BLX) (16 July 2020 trading update) – FY20 NPAT guidance of $19 million (16.7 per cent growth) with underlying sales of $252 million (up 8 per cent) and comparable sales growth of 7.2 per cent. Online sales grew 50.6 per cent in FY20. The FY20 results reflect significant growth in 2H20 as customers spend more time working, educating and completing projects at home.
  • Adairs (ASX:ADH) (19 June 2020 trading update) – FY20 Sales guidance of $385-390 million, comprising $358-362 million contribution from Adairs and $27-28 million from Mocka (30 weeks). Since reopening all stores in May, ADH has seen strong sales across both its physical store network and online platform as customers spend significantly more time at home. Over the 24 weeks to 14 June 2020 (2H20), comparable sales growth for Adairs stores accelerated to 5.3 per cent with Adairs online surging to 92.6 per cent (equating to total Adairs LFL sales growth of 27.4 per cent in 2H20 to 14 June). Mocka (100 per cent online) grew 52.1 per cent over the same period. Strong results delivered by both NCK and TPW suggest ADH has also performed strongly over July and into August (FY20 result is due 26 August).

Retail Peer Sector Comparison

Source: Montgomery, Facset

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Dominic  Rose
Portfolio Manager
Montgomery Lucent Investment Management

Dominic is Portfolio Manager of the Montgomery Small Companies Fund – a small-cap Australian equity fund investing in 30 to 50 high quality, undervalued small and emerging companies with strong growth potential. The fund invests outside the ASX100.

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