Nick Scali Limited (NCK) – Sales sink as cycle turns

Nick Scali (NCK) issued a trading update and gave guidance for first-half FY27 net profit after tax (NPAT) to be between $28–32 million. This is 21% below the consensus estimate at the midpoint. According to management, trading conditions in Australia and New Zealand (ANZ) “remained challenging” in the first quarter of FY27 (1Q27). Written sales orders were flat on the previous corresponding period (pcp) in the first five weeks of the fiscal year, but have since deteriorated to be down 15% in the 1Q27. Store traffic is around 10% lower, and ANZ revenue for the first-half is expected to be approximately 11–14% below the pcp.

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While a recent cyber incident caused the company’s enterprise resource planning system to be unavailable for around three weeks and likely affected operations as sales orders had to be processed manually, the decline in store traffic would suggest broader consumer weakness is the main driver of softer sales. The UK operations were also weaker-than-expected. 1Q27 written sales orders growth was 29%, while like-for-like written sales orders (excluding stores temporarily closed for refurbishment in the pcp) increased 14%. Although the business is growing, consensus is expecting 35% revenue growth from this segment in the first-half, and comparisons will become more difficult as the year progresses, likely leading to growth rates slowing.

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Our earnings forecasts are revised down to reflect weaker demand in ANZ, a more prolonged downturn, and softer UK growth. EPS is reduced by 21.5% and 14.8% in FY27 and FY28, respectively. The earnings changes and incorporating a higher risk-free rate of 5.0% (from 4.5%) into our valuation lowers the target price to $13 from $15. With the shares now below our revised target price, we lift the recommendation to Hold from Lighten. We view NCK as a high quality retailer, however, earnings pressure is expected to persist in the near-term given its exposure to a decline in discretionary spending and the housing cycle.

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