Firstly, let me state that I hold Nick Scali (NCK:ASX). Nick...

Firstly, let me state that I hold Nick Scali (NCK:ASX). Nick Scali is a furniture retailer that operates in Australia and New Zealand. It sells higher end quality merchandise and in my opinion, operationally, the best managed retailer in Australasia. Despite that, it was not immune to the impact of the Covid crisis and its share price suffered. After hitting a year to date share price high of 8.45 AUD on the 7/2/20 it collapsed to 2.65 on the 23/3/20 (a day that saw the ASX hit its year to date bottom). It closed on Friday at 6.88 per share.

On Friday, the companies share price surged almost 20% to that 6.88 close, prompted by a trading update (1). Many positive aspects operationally, were outlined in this update; including the earlier than expected opening of stores, the commencement of an online sales channel and sales up significantly (since reopening). From a profit perspective, CEO and MD Anthony Scali announced that despite all the headwinds, NCK would report a profit for the second half 15-20% higher than the prior corresponding period.

The contributing factors as outlined by Mr Scali were:

1. Cost reduction initiatives around marketing, employment and property.

2. Government assistance

3. Reallocation of discretionary consumer spending

Therein lies the rub (to misquote the bard!).

We do not have a breakdown yet of the relative impacts of JobKeeper (government payment of 1500 AUD a fortnight to eligible businesses to support them in retaining employees) on NCK. There is also the indirect benefit to NCK (applies equally to all retailers) of JobKeeper on consumer confidence and spending. JobKeeper is a finite program.

We do not have details on the impact and duration of any rent relief that NCK may have benefited and continues to benefit from.

Discretionary consumer spending is fickle. Nevertheless the latest available government data on average weekly Australian household costs (2016 data) tells a tale (2). Australians spend more on recreation than on their health and clothing. For a couple with young children, recreation makes up 13% of weekly costs. Monies previously spent on travel for instance is almost certainly being diverted, or as Mr Scali calls it, reallocated. Buy a sofa this year, travel next year...

All this is going to create a messy set of results for the next few years. Time your entry carefully, as always the best time to buy will be times when the market is pessimistic again about Nick Scali's future.

References

1. https://www.belldirect.com.au/file.type?src=lEih7mNYKUL5v51KZI%2bSskOjNL0dKOLt

2. https://moneysmart.gov.au/australian-spending-habits