How Strategies Around Store Network Expansion Are Helping ASX Listed Nick Scali

A retail store or retailer is a business enterprise whose primary source of income comes from retailing. It comprises of all the activities which are involved in selling of goods and services to final consumer for personal or non-business use. As these retailers strive to expand their operations, they establish themselves in the business environment and focus on increasing sales. Business owners spend huge amount of time and effort looking at expansion opportunities before selecting the appropriate option.

There are generally three ways a retailer increases its business.

Open a New Location

  • The most common expansion method for retailers is by opening new locations;
  • Opening a new location is the most expensive option for expanding retail business;
  • Finding a new location, renovating the space to the business needs and hiring additional employees for the new store are just a few instances a business owner must consider.

Diversify Products

  • Retailers can diversify product lines in their portfolios;
  • This may take the format of a specialized retail store or a more general shopping experience for customers;
  • This allows retailers to introduce new profit lines and hedge their businesses against risks;

Create Online Presence

  • By increasing the use of technology, retail stores may create an online presence through a website for advertising and selling goods and services;
  • Using a retail website allows companies to target markets or demographic groups in different regions or in international markets;
  • Websites are usually inexpensive to set up and may not require significant capital investment from retail business owners.

Now let’s look at Nick Scali, an ASX listed company, which is expanding its operations through store network expansion

Nick Scali Limited (ASX: NCK)

About the Company

Nick Scali Limited, founded about 50 years ago, is among Australia’s largest retailers and importers of quality furniture and is engaged in the retailing and sourcing of household furniture and associated accessories.

The company offers various products, such as;

  • Lounges, including leather and fabric lounges;
  • Occasional chairs, including armchairs and barstools;
  • dining tables;
  • dining chairs;
  • buffets and cabinets;
  • coffee tables;
  • television and entertainment units, which are available in a range of timbers and veneers and styles.
Highlights of Nick Scali’s AGM For Year Ending June 2019

Nick Scali Limited reported excellent results for the financial year 2019. This was the seventh consecutive year of profit growth. The company achieved record sales of $268 million- an increase of 7% over the financial year 2018. Despite a challenging environment, the result was aided by continued store rollouts, resulting in a relatively low fixed cost base which led to improvements in gross margin.

  • The company paid a fully franked final dividend of 20 cents per share, making the total dividend for FY19 to 45 cents per share and dividend payout ratio for the year worked out to 87%;
  • The company is well paced to continue the expansion of the store network in the current financial year, with four stores expected to open in FY20;
  • Despite currency headwinds, the company’s gross profit margin strengthened by 20 bps to 62.9% driven by new product initiatives that resulted in underlying margin improvement;
  • During FY19 the store network expanded to 57 Nick Scali Furniture stores including two in New Zealand, and five Nick Scali Clearance stores;
  • During FY19, company launched bedroom and bedding range in 26 stores which has traded well and enabled it to better utilise floorspace in some of its bigger stores.
Difficult Trading Conditions

The company has advised its shareholders that the difficult trading conditions have continued into the first three months of the current financial year, with a similar pattern evident so far in October 2019.

  • Monthly store traffic has been down 10–15% in this period and has had a significant impact on like-for-like store sales, which are currently down 8% YTD compared with the previous year;
  • The company believes this is linked to lower general retail demand associated with the recent slowing in housing sales and renovations and a cautious consumer attitude;
  • With lower interest rates and signs of improvement in the number of housing transactions recently, Nick Scali believes this may translate to a lift in sales in the second half of the year;
  • The company currently expects that NPAT for the half-year ending 31 December 2019 will be in the range of $17 million-$19 million, compared to $25 million for the corresponding period in FY19;

Despite the slowdown in sales growth, the company continues to offer customers quality furniture at great value and believe that they are well positioned to take advantage of an improvement in trading conditions as and when this occurs.

Store Network of The Company

In addition to the new store in Hamilton, New Zealand, five new Nick Scali Furniture stores were opened in Australia during the year.

  • These stores are in Morayfield, Mackay, Skygate at Brisbane Airport, Prospect and Craigieburn;
  • These openings brought the total number of Nick Scali Furniture stores at 30 June 2019 to 57;
  • The company plans to open four new stores in the year to June 2020, including two further stores in New Zealand;
  • Alongside the Nick Scali Furniture stores, the company currently operates five clearance stores, which are selected and managed to best minimise inventory holdings in our distribution centres.
Store Network of The Company

Historical Performance Source: Company’s Annual Report

Stock Performance

The stock of NCK closed the day’s trading at $6.250 per share on 30th October 2019, down by 1.264% from its previous closing price, with a market capitalisation of $512.73 million. The total outstanding shares of the company stood at 81 million. The stock has given a return of 0.64% and 0.16% in the time period of 3 months and 6 months, respectively. Currently, the stock is trading at a price to earnings multiple of 12.170x as per ASX. The stock has an annual dividend yield of 7.11%.


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