Nick Scali hits all-time highs on FY25 margin and dividend surprise

Nick Scali (ASX: NCK) has always been a quiet achiever, rallying an average 10.2% on results day across the last four reporting seasons (FY24 to 1H25).

The narrative may vary each time. Sometimes it's a clean sweep of better-than-expected numbers, other times it's delivering an outcome that was better-than-feared. But regardless of the circumstances, the furniture retailer has consistently proven its tenacity over the past two years.

And today's FY25 result was no different.

While the headline numbers looked relatively weak, with net profit falling sharply due to UK restructuring costs, the underlying story was more compelling: margins remained resilient, the dividend came in stronger-than-expected, and ANZ business conditions showed robust momentum in July.

The market quickly picked up on these positives. After opening slightly higher, Nick Scali V-shaped to a 9% gain and crossed the $21.00 level for the first time on record.

To dig deeper into what drove this strong market reaction, I spoke to Ben Rundle from Hayborough Investment Partners for his insights on the result and where to from here.

Nick Scali FY25 highlights

• Group revenue up 5.8% to $495.3 million vs. $507 million ests (2.3% miss)
• Gross margin down 200 bps to 63.5% vs. Macquarie ests of 63% (0.5 pp beat)
• ANZ Group gross margin improved to 65.6% in the second half, up from 64.4% in 1H25 and 65% in FY24
• UK gross margins hit 51.8% in the second half, up from 45.1% in 1H25
• Underlying NPAT down 24.4% to $62 million vs. $63.4 million ests (2.2% miss)
• Total dividend down 11.8% to 60 cents vs. Macquarie ests of 54 cents (11.1% beat)

What was the key takeaway from the result?

The main focus of this result is Nick Scali’s progress in the UK after they acquired Fabb Furniture last year. Naturally, there is a level of disruption as stores as refurbished to the Nick Scali brand, but we are seeing improvement in gross margins and a restructuring of the distribution model. Gross margins were also stronger towards the back end of the second half which should provide investors with some confidence going forward if they can be maintained at that level.

Were there any surprises in this result that you think investors need to be aware of?

The result was a bit of a mixed bag. Overall revenue was softer than we expected, but profitability was ok. The revenue softness was driven by the UK, which is probably to be expected as the business tries to turn around the Fabb Furniture acquisition. There are some positive signs of success here though. When Nick Scali acquired Fabb, the latter had a gross margin of 41%. Nick Scali have announced significant improvements to this, noting that the margin for May and June in the converted stores was sitting at 58%. If this level can be maintained, it should be seen positively by investors.

A similar scenario is playing out at anther business they acquired in Australia, called Plush. When Nick Scali acquired Plush, they were doing gross margins of ~50%. Whilst they haven’t specifically disclosed the margin in this result, they have said they are on track for a “post integration margin” of greater than 60%.

Would you buy, hold or sell Nick Scali off the back of this result?

We are happy holders of Nick Scali post this result, after having first bought the stock in 2022. Whilst the timing of a purchase in consumer discretionary can be difficult, given the high-quality nature of Nick Scali, we think it is a business that you can hold through the cycle.

Are there any risks investors need to be aware of?

Consumer discretionary stocks always carry a level of risk given customer spend can be volatile. Nick Scali have proven themselves through numerous economic cycles as very shrewd retailers, so we think this is a risk that can be well managed. The main risk is their success in the UK. 

The company stated that “based on recent average sales per Nick Scali store, each store would need to increase sales by A$10k (£4.8k) per week. Based on average transaction values this equates to 2.5 additional orders per week.” The conversion of Fabb stores to the Nick Scali brand has seen mixed trading so far, so it is not a foregone conclusion this will turn out to be a success.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

Rating: 4

Equities markets have had a strong run recently. Despite the overall market looking expensive, we are still finding well priced opportunities that often sit outside of the main indices. Some of these stocks have been left behind as the rise of passive investment has favoured stocks within a certain index, driving them to a higher valuation.