@Gralynchett
First of all, thank you for the quality reply that you gave me. My only reason for taking the time to write down my investment thesis for NCK in the original post is precisely so that it can be challenged and proven wrong.
Quality wise, I accept your point that NCK is probably not in the same leaque as ARB, CSL & RHC, whose long term track records have been very well and truly established.
In terms of complexities of the business, NCK is a much simpler business compared to those three. While ARB & CSL have to innovate all the time to stay in front of the competition and RHC has to keep acquiring companies overseas to maintain its growth record, NCK only has to secure customers orders, ship the goods from overseas and deliver to the customers.
I accept that negative same stores sales growth is generally not welcomed for a retailer. But what if the negative same stores sales growth is accompanied with:
1. strong overall sales growth
2. strong overall net profit growth, which is matched with point 3
3. strong operating cash flow generation
4. positive net cash balance throughout the period
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
| 1 |
Year |
Same stores sales growth |
Overall sales growth |
Number of stores |
Net Profit |
Operating Cash Flows |
| 2 |
2004 |
14.10% |
20.14% |
10 |
$6.7m |
$6.8m |
| 3 |
2005 |
-2.90% |
24.95% |
17 |
$8.1m |
$7.8m |
| 4 |
2006 |
-9.70% |
19.03% |
21 |
$8.1m |
$7.2m |
| 5 |
2007 |
0.50% |
19.63% |
24 |
$8.6m |
$9.3m |
| 6 |
2008 |
-8.10% |
2.12% |
26 |
$6.6m |
$6.6m |
| 7 |
2009 |
-4.60% |
-1.69% |
28 |
$4.8m |
$8.6m |
| 8 |
2010 |
18.00% |
24.33% |
27 |
$11.2m |
$15.5m |
| 9 |
2011 |
-1.60% |
3.79% |
32 |
$11.6m |
$14.2m |
| 10 |
2012 |
-1.90% |
9.37% |
36 |
$9.0m |
$12.8m |
| 11 |
2013 |
5.90% |
16.49% |
38 |
$16.0m |
$19.7m |
| 12 |
2014 |
6.30% |
10.99% |
39 |
$14.2m |
$22.4m |
| 13 |
2015 |
3.40% |
10.11% |
46 |
$17.1m |
$18.8m |
In the past 10 years, NCK has been growing relatively fast on the east coast. It is inevitable to have some degree of store cannibalisation when a new store is opened a few suburbs away from an existing store.
If this is indeed the reason why the same stores sales growth were negative in 2005, 2006, 2011 and 2012, then I can tolerate it because NCK was still growing its overall market catchment area. In 2008 and 2009, I believe the negative same stores sales growth rate were mainly due to the GFC and less due to store cannibalisation.
A typical retailer usually has to order merchandise in advance, maintain stocks in a warehouse as well as in the stores, and only then can they make a sale to a customer.
When a typical retailer experiences negative same stores sales growth, problems quickly accumulate:
1. Unsold stocks in stores and warehouse quickly pile up
2. The retailer is then forced to mark down the goods and clear the goods before the shipment of new merchandise arrives
3. The forced clearance sale hits the retailer's margins
4. The retailer posts a big loss
NCK is however not your typical retailer. Its showroom doesn't hold any stocks, only display furniture. Typically, NCK accepts customers orders first, receive the deposits, before ordering the furniture to be manufactured and shipped to Australia.
Because NCK accepts cash from customers first before paying its suppliers, if you exclude its significant cash holdings, NCK actually has a negative working capital.
During difficult trading period, NCK doesn't experience any unwanted stocks piling up in its warehouse, therefore it doesn't have to do any clearance sale. If you see NCK having a 50% off EOFY sale of furniture, they are not really clearing any old stocks, they are just selling their normal furniture that haven't been manufactured at 50% off RRP.
This is also why even during negative same stores sales growth period, NCK's operating cash flows are still healthy and they can still fund their dividends and stores opening without the need to use any kind of debt.
In terms of the peak of the current housing cycle, I have absolutely no idea. To be honest, I seriously thought that the peak should have happened back in 2009. But year after year, as house prices around my area rose and rose, I was proven wrong again and again.
If and when the housing market finally turns, I have no doubt that NCK will be affected and that its sales and profit will drop. I am however confident that NCK will be able to weather the storm and come out stronger than ever.
In the mean time, I'm expecting the final dividend to be $0.10, $0.02 higher than last year's final dividend of $0.08.
If there is any mistake in my understanding about NCK, please do not hesitate to tell me. I genuinely welcome any kind of criticism.
Regards
(20min delay)