UK Store Refurbishments to Weigh on Nick Scali’s Second-Half Profitability

Strong ANZ Performance Anchors Results

Nick Scali Limited (ASX: NCK) has released its half-year results for the period ending 31 December 2024, revealing a resilient performance in its core Australia and New Zealand (ANZ) markets. The ANZ Group delivered an underlying net profit after tax (NPAT) of $36.0 million, comfortably exceeding the $30-33 million guidance set at the company’s October 2024 AGM. This result was achieved despite a slight 1.8% decline in revenue to $222.5 million and a 120 basis point contraction in gross margin to 64.4%, primarily due to elevated freight costs.

However, the ANZ segment was not without its challenges. A notable one-off expense of $2.8 million arose from detention and demurrage fees linked to the liquidation of the company’s main freight forwarder, which temporarily restricted container access and disrupted supply chains. Additionally, operating expenses rose by $5.1 million, largely driven by higher employment costs, reflecting ongoing investments in staff and operations.

UK Operations Show Early Signs of Progress Amid Transition

The UK business, acquired in May 2024, reported an underlying net loss after tax of $2.8 million, which was better than the $3.3-3.8 million loss guidance provided previously. Statutory losses were $4.1 million, also below expectations. The application of accounting standard AASB 16 added $1.2 million to the reported loss but had no cash impact.

UK sales orders were significantly affected by store closures for refurbishment and the clearance of the legacy Fabb product range. Despite these headwinds, the gross margin improved markedly to 45.1% from 41.0% pre-acquisition, reflecting the higher-margin Nick Scali product mix. The company has rebranded four UK stores to Nick Scali, with these outlets becoming the top performers in January 2025, signaling early customer acceptance of the brand.

Looking ahead, the refurbishment and rebranding program will continue, with eight more stores scheduled for transformation by June 2025. Management warns this will cause further sales disruption and increased operating losses in the second half of FY25.

Cash Flow, Dividends, and Capital Investment

Nick Scali’s cash position remains robust, with closing cash and equivalents of $87.6 million. The ANZ Group generated $44.1 million in pre-tax operating cash flow after lease payments. The UK segment required $12.1 million in operational funding during the half, alongside $3 million invested in new product inventory and $3 million paid to remediate acquired creditors.

The company declared a fully franked interim dividend of 30 cents per share, representing a payout ratio of 75% of ANZ Group earnings and 86% of Group earnings, underscoring management’s confidence in ongoing cash generation.

Strategic Outlook and Market Dynamics

Trading conditions remain volatile. January sales orders in ANZ declined 8.5%, though the early February sales period showed a modest rebound. New store openings are planned but delayed, with only one Plush store expected to open in the second half of FY25. In the UK, the focus remains on completing the rebranding program, which is expected to weigh on near-term profitability but is critical for long-term growth.

CEO Anthony Scali highlighted the encouraging early UK sales performance of Nick Scali-branded stores and expressed confidence that the product range will resonate with UK consumers, mirroring success in ANZ markets.