The Nick Scali Limited (ASX: NCK) share price is up over 173% since its March lows. Were COVID-19 lockdowns a one-off boost or is there more upside potential for NCK shares?
What does Nick Scali do?
Nick Scali is a retailer of household furniture and related accessories that operates in Australia and New Zealand. The business has 58 furniture showrooms and multiple distribution centres.
Rather than selling off the showroom floor, orders are imported from multiple suppliers around the world and then delivered to the customer from its distribution centres.
Recent performance
In response to the COVID-19 pandemic, Nick Scali introduced a hybrid offering by launching an online sales channel during April 2020, averaging $1 million of sales since its launch. The group received $3.9 million in wage subsidies from the JobKeeper scheme, and secured rent concessions from 85% of its landlords.
As you can see, significant cost-cutting and an increase in discretionary spending have been the driving factors behind the recent movement in the Nick Scali share price.
Despite this, the question I ask myself now is regardless of what’s happened, how is Nick Scali going to continue to grow its earnings into the future?
Nick Scali earnings analysis
Something important to note is that Nick Scali has struggled to grow its earnings for the last 3 years on a per-share basis.
Net income has stalled at around $42 million per year and the Nick Scali share price has unsurprisingly gone sideways (until COVID) during this period, as shown in the graph below. However, Nick Scali does pay an attractive dividend, so earnings growth isn’t the only thing to consider.
NCK share price chart
The recent influx of orders has been made with a typical delivery lead time of 9-13 weeks. As a result, these revenues will be recognised in next year’s financial statements, which explains why there was flat revenue growth in FY20.
Something that might require some further research would be why the company has struggled to grow its earnings despite opening new stores. Based on this answer, how likely is it that opening more stores in the future will translate to future earnings growth?
Final thoughts
Nick Scali is a strong business that is likely to continue to perform well into the future. Management seems well aligned, with directors able to exercise share options dependent on future earnings growth. There will most likely be further upside, with plans to open many more stores over the coming years.
I compare Nick Scali to Temple & Webster Group Ltd (ASX: TPW), which I recently wrote an article on. Both of these companies would’ve attracted many new customers as a result of COVID-19. They now both have the opportunity to expand their current product offerings to retain these new customers. This is a long-term tailwind that could help sustain these high levels of revenue growth.
The Nick Scali share price has had a really strong run this year, so I wouldn’t be surprised to see it pull-back at some stage. Obviously, the big gains would’ve been if you had picked up shares in March. It’s a hold for me at the moment but I would happily pick up some shares if they pulled-back slightly from current levels.
