We recently researched Nick Scali (ASX:NCK) in The Dynamic Investor. We took the view that the shares were at risk of a de-rating given its elevated multiple. Since our report, the shares have declined by ~10%. This is likely due to two factors: i) Market concerns about a potential delay in the UK business reaching profitability and ii) A recent shift in market bias towards higher interest rates.
Given the recent pullback, are current levels a more attractive entry point?
About Nick Scali
Nick Scali is an Australian retailer and importer of furniture. The Company specialises in quality leather and fabric lounges, dining rooms, bedrooms and occasional furniture. It has stores located across Australia under the core brand, Nick Scali and Plush, a brand acquired in October 2021. Plush is positioned as a mid-market, made-to-order sofa retailer with a focus on the aspirational customer.
The primary target market for both brands is 35- to 55-year-olds in the mid-to-upper income brackets, who are usually second-home buyers.
The Company expanded into the UK in May 2024 through the acquisition of Fabb Furniture, acquiring 21 stores that are in the process of being rebranded into Nick Scali stores.
Key Fundamental Drivers
UK Business Expected to Breakeven in FY26
The performance of the UK business was a key area of concern arising out of NCK’s result for the 12 months to 30 June 2025 (FY25). Sales were ~50% below consensus estimates, impacted by refurbishments.
Gross profit margin (GPM) for the UK business has improved significantly to 58.3% for the three months to 30 September 2025 (1Q26) compared to 2H25 and is already within the targeted UK targets. The improvement reflects a disciplined pricing strategy. In context, GPM was 41% at the time of the acquisition of the Fabb stores. This highlights that NCK’s UK strategy of acquiring & refurbishing the Fabb store portfolio into Nick Scali stores is showing signs of considerable progress.
A key swing factor to the UK reaching profitability at some point in FY26 is the extent to which marketing spend increases. By way of background, NCK held off on investing too much into marketing in the UK during FY25, as it was seen as a waste given that store refurbishments were still being done. At the FY25 results release, the Company indicated that it will be increasing marketing investment from August 2025. Marketing advertisements in the UK can be more-targeted than in Australia, due to more regional TV coverage. This should assist NCK in targeting areas around its current stores to grow brand awareness.
High Gross Profit Margin Can be Maintained
The Company remains confident that Gross Profit Margin in the ANZ business can be maintained at 65%. The key swing factors include freight costs and currency. In particular:
i. Lower freight rates as measured by the Freightos Baltic Index which remains lower than the prior corresponding period. This is a potential benefit to GPM in the near-term.
ii. Currency: a) A stronger A$/US$ exchange rate should be positive for sourcing for the Australian business. The spot rate (0.663 at the time of writing) is in line with the average 1H25 rate of 0.66. b) The A$/British Pound (£) has improved recently (to 0.494 at the time of writing), which should mean lower UK losses when converted to A$. c) A stronger £/US$ should be positive for the UK’s sourcing. The spot rate (1.34) is above the average 1H25 rate of 1.29.
Balance Sheet Support Store Rollout Plans
The Company’s store rollout plans are supported by a solid net cash balance ($29.3m as at 30 June 2025) and strong levels of cash conversion (>90% in the last three years). As of 30 June 2025, NCK had 65 Nick Scali stores. Over the longer term, NCK continues to target 86 Nick Scali stores and 90-100 Plush stores in ANZ (the rollout of Plush stores is easier due to the smaller format size.
The Company also noted it is currently reviewing a number of potential new stores in the UK. In particular, management is looking at a few retail parks to open stores in the UK, but noted the focus is to get the existing store network to profitability.
Fundamental View
The Company has a strong track record of execution in the ANZ business and in delivering results above guidance. Notwithstanding the recent pullback in the shares, its current 1-year forward P/E multiple (~22x) is at the top end of the range over the past~12 months (~17x to 22x). Further, the risk remains that increased marketing spend in the UK has the potential to further delay the path to profitability in the UK.
Charting View
NCK has been trending higher for the past two years, making higher highs and higher lows along the way. The stock peaked in October before easing back again. During the recent pullback, the share price has fallen under the October low. By making a “lower low”, NCK is at risk of falling back further. Investors can therefore be patient and try to pick up NCK at cheaper levels. We can see an area of support near $19 so that would be the first price point to reassess the chart.
Michael Gable is managing director of Fairmont Equities.
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