When I thought margins couldn't get any better, somehow NCK managed to squeeze a little bit more out of the business. Gross margins is probably as high as it gets. However, I believe there is still a further scope for operating expense to come down even more as a percentage of sales. As a result, I believe it's still possible for net margins to increase further in the future.
The reasons for this is:
- As more stores open in NZ, the warehouse cost over there will be fractionalised further.
- Some of the newer stores are being opened in ex-Masters sites which I understand have quite a competitive rental rates.
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The new bedding range is going to stimulate same store sales growth in the 28 stores that will have them. I'm assuming that the bedding range is going to generate approximately 10-15% extra sales.
I get this range from this rough calculation:
Smaller NCK store has an area of 2,000 - 2,200 sqm. The larger NCK store has an area of 2,500 sqm.
If I assume that 2,200 sqm is the minimum area for displaying the complete range of existing product range, then 300 sqm is going to be dedicated to the bedding range.
Assuming that the new bedding range is going to be well accepted by customers and that it will generate extra sales in proportion to the area size that is dedicated to it, then the extra sales growth is 300/2,200 or approx. 13.6%, or somewhere between 10-15%.
Let's be conservative and assume that it's 10%, generating an extra 10% sales in approximately half of the stores (28/55), will generate an overall increase in sales of 5% in the full year or the equivalent of opening approx. 2-3 new stores.
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Moving on to something else, based on my analysis, each NCK store is currently generating approx. $1.1 million EBIT.
The 6 new stores opened in FY2018 and the further 6 stores to be opened in FY2019, should allow NCK to generate an incremental increase in EBIT of anywhere between $5m - $7m. Considering that in FY2018, NCK achieved EBIT of $59m, this means that even with a flat same store sales growth, generating a profit growth in the region of ~10% in FY2019 is still quite realistic and achievable.
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The partnership with Kuka is starting to generate some benefits for NCK in the form of quicker lead time, better quality and better price/value. In fact, NCK has been working with all suppliers to improve the lead time for custom made lounge orders, which traditionally has been the main source of customer dissatisfaction.
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Personally, I hope that the Steinhoff deal doesn't go anywhere. NCK has failed twice in introducing a second brand, therefore I believe they should just stick with Nick Scali brand and don't bother with things such as Fantastic Furniture and Freedom. These businesses have different business models from NCK. They need to carry a lot more inventory than NCK.
By buying them, NCK is just going to decrease the quality of its business.
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My next complaint is about the super high dividend yield. I've mentioned this in the past and will continue to repeat it.
I believe NCK should have moderated its dividend growth rate. Instead of paying out almost 80% of profit as dividend, they should have used the money to repay the property loan and keep the balance sheet even more pristine, ala REH.
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Even after 13% increase in the share price today, NCK is still trading at approx. PE of 13.4 and EV/EBITDA of 8.7.
I do acknowledge that the "E" (Earnings) is possibly at a cyclical high. However, when other quality companies such as CSL, REH, ARB, RWC, BRG, etc. are all trading at ridiculous valuation, if I have to choose between NCK and these high quality but very expensive stocks, I will probably still choose NCK.
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My last point tonight is going to annoy someone (you know who you are), but I'm still going to include it. Hahahaha
If one were to buy NCK now, over the next 13 months, he/she could receive approximately $0.64 dividends ($0.24 FY18 final + $0.16 FY19 interim + $0.24 FY19 final) or possibly more if NCK increases next year's dividends, at the current price of $6.78, this is a forward 13-month yield of 9.4% fully franked.
I include this point because this is exactly the way I think about making extra investment. If I believe in the company and intend to hold for the long term (which are all of my purchases as I don't trade), by buying just before ex-dividend date, I'm getting a one-off extra yield. Usually when my analysis is correct, the temporary drop in the share price after ex-dividend date is quickly recovered.
Now it's time for me to brace for a dressing down!
NCK Price at posting:
$6.78 Sentiment: Buy Disclosure: Held
(20min delay)