We have some discretionary retail exposure in the portfolio through Premier Investments (PMV), however, we have had our eye on furniture retailer Nick Scali (NCK) since their ~30% decline from February highs. 1H numbers were largely in line with expectations with slightly weaker sales offset by higher margins. This did hide the underlying issue though with sales showing a significant slowdown late in the half and early in the new year, plus normalization of the order book placing the company ~$70m behind in 2H sales to start the half (order bank was $185m at the start of FY23 vs $112m at 31 Dec.
Sales for Nick Scali are intrinsically linked to housing turnover which has been a headwind lately, they noted November and December sales were down 16% vs the prior 4 months. Fixed costs make up a significant portion of the total for the company as well, so a change in sales has a leveraged impact on earnings. While this may weigh on performance near term, we expect this to be a tailwind over the medium term with the stock a great way to play a recovery in housing. For now, it is cheap on just 11x FY24 expected earnings, however, we suspect expectations may still be too high.
MM is neutral NCK for now
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