Nick Scali (NKC) – Not sitting comfortably

Nick Scali is a retailer of household furniture and related accessories in Australia, New Zealand, and the UK. Nick Scali was incorporated in 1962 and is based in North Ryde in Sydney. Ord Minnett reviewed its model for Nick Scali (NCK) given a challenging outlook for the furniture retailer, which, in turn, has driven steep downgrades to our earnings estimates past FY26.

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In its dominant Australian market, changes to negative gearing and the taxation of capital gains in the May federal budget drove a slump in auction clearance rates and caused housing prices to stumble. These factors point to reduced housing turnover, a key factor in discretionary purchases of goods such as furniture. Meanwhile, the company, whose business is inextricably linked to the broader economic situation, also faces a slump in consumer sentiment, which has sunk to levels even lower than those seen in the COVID-19 pandemic, as constrained households juggle rising prices for everyday goods and services and higher interest rates that are unlikely to move lower until at least next year.  

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In its nascent UK business, progress remains difficult as Britain faces its own macroeconomic challenges. We see achieving divisional break-even revenue of $51 million, as signalled by management, as being some way away. Expansion of the store network across Australia looks set to disappoint, with three new stores in offset by three store closures, leaving the number of locations at 60 stores, versus what we view as long-term potential for 73 sites.

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Post the review, we have upgraded our FY26 by 2.1%, but our forecasts for FY27 and FY28 have been cut by 17.5% and 15.9%, respectively. These earnings downgrades led us to reduce our target price on Nick Scali to $14.00 from $15.00, and to cut our recommendation to Lighten from Hold due to strengthening headwinds and valuation.