The Nick Scali Limited (ASX: NCK) share price has risen 11% in early trading after reporting its half year result to 31 December 2018.
Nick Scali is one of Australia’s largest retailers and importers of furniture. It was founded over 50 years ago and still has Scali family as management. Each year Nick Scali imports over 5,000 containers of furniture.
Nick Scali reports
Despite like for like store sales growth of 0%, Nick Scali achieved revenue growth of 10.3% to $141.1 million. Even so, the furniture company managed to increase the gross margin to 62.8% from 62.6%.
Nick Scali EBITDA increased by 7.5% and net profit after tax (NPAT) grew by 8% to $25.4 million (click here to learn what EBITDA is). Bell Potter was expecting the business to report a profit of $26 million, so Nick Scali slightly missed expectations here.
Operating cash flow before interest and tax increased by 15.9% to $33.3 million and profit per share (EPS) increased by 8% to 31 cents.
How did Nick Scali achieve all of these growth figures if same store sales were flat? The furniture company has added four more stores compared to a year ago, bringing it up to a total of 55. It also benefited from full year contributions from six stores opened during FY18.
Nick Scali’s large dividend increase
You’d think an 8% increase in EPS would warrant a dividend increase of around 8% too.
Nick Scali has unveiled a dividend increase of 56.3% to 25 cents per share, which represents a payout ratio of 80%.
Explaining this dividend increase decision, Nick Scali Managing Director Anthony Scali said: “Having achieved a 17% increase in operating cash flow and with $38 million cash on hand at period end, the Board has decided to increase the dividend payout ratio.”
It seems management want to make up for the slowing growth and perk investors up with a big dividend.
Management comments
Mr Scali said of the result, “By following our store rollout strategy, our team has delivered growth in top line sales and a corresponding record profit in a difficult retail environment.
“The result demonstrates that even during periods of low, flat or marginally negative same store sales growth, our company is geared to deliver profit growth.”
Is Nick Scali a buy?
The decline in same store sales growth to nothing is clearly a worry. Another six months of poor retail conditions could mean negative sales growth – opening new stores can only do so much.
Falling house prices seem to be having a negative wealth effect on demand for higher-end furniture.
Nick Scali now has a fully franked dividend yield of 8.5%. If the dividend can be sustainably maintained then it could be an attractive income option, but that decision could essentially be a bet on Australia’s housing market.
I don’t like making those types of investment decisions. The quick rise in the share price probably accounts for the positive dividend news, I’d prefer going for reliable ASX shares, like the ones in the free report below, in this era of tough retail conditions.
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