NCK FY26 result--Cautiously forward but forward Nonetheless

 

NCK FY26

My Thoughts

The FY result was a little worse on sales but a little better on NPAT, due to better margin performance. So sales being a bit weaker were completely covered by better margin management. U/l NPAT was +22%, with group gross margins up 210bp to 65.6%. Revenues were 4% higher. ANZ revenues were 5% higher, GM 66% (65% pcp). Management appeared to target GM of 65-66% as sustainable, which is a great result.

In the UK, there were mixed messages. Sales were down a little as stores were refurbished. GMs were up a lot from 47.1% to 60.3%, and 60-61% was targeted as sustainable. NCK are masters of margin maintenance. The UK reported a 2H profit, and a loss overall. Apparently, the best-selling lines in the UK are the same as in Australia, which helps product alignment, sourcing and marketing. Traffic was down, but conversions were higher, a positive indication that investments in staff quality are paying off. Like Australia, the operating environment continues to be tough, with leader DFS disclosing a 4% fall in revenues. Despite that, management stated that break-even revenues for the UK are being lowered, a good sign of cost control. Management was also quite candid about the issues in the UK: the ability to scale advertising is prohibitively expensive at the current scale, and another 10 stores are required to finance large scale adverting. Brand recognition was identified as an issue in the UK. NCK is paying higher rents in retail parks and using some promotional activity to gain traffic. In terms of store openings, one is about to open, and several are under negotiation. Management appears to be progressing well but cautiously in the UK, and the progress in store openings will be critical to accelerate profitability.

In terms of the operating environment, management said the following, “Well, the macro is not good at all. No, this is one of the worst macros for furniture for sure. We've got house prices going down. So there's a negative wealth effect. We've had interest rate increases. We've got inflation. We've got cost of living. It's -- and transaction -- housing transactions have been slow for 6 months. So it's a tough macro, very tough”. There is a focus on conversion and maintaining margins.

Store openings in ANZ have slowed significantly since the Plush acquisition, as the chart below shows. Management stated that two stores are opening and another four are expected this year. That is more in line with my expectations; slower store growth does undermine profit growth. Of course, as with all retailers, getting the right position and terms are crucial to ongoing profitability.

The first 5 weeks of trading were flat, and management stated several times that lower interest rates will drive sales higher.

VALUATION and SUMMARY

NCK is a well-run retailer but battles the same macro conditions and difficulties growing store count as others. The charts below show that EPS growth and ROE appear to have finally turned following the UK acquisition and volatile trading conditions. Maybe we are not out of the woods with volatility. In terms of the controllables, NCK is progressing in its path with operational efficiency and cautious growth. I would like to see more solid store growth in the UK and ANZ, and they are in my profit forecasts.

At $17.11, assuming 15% 5y eps growth and a 15X exit multiple, it generates 14% returns, which are attractive. The eps growth assumes a successful UK business and new store growth in ANZ. Profitability and revenue per store metrics are expected to grow, but there are no heroic assumptions. An exit of 15X would be conservative if the UK does replicate the success of the ANZ business. Short-term economic volatility is a risk.

 





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