Furniture retailer Nick Scali Limited (ASX: NCK) has surged to within striking distance of its record high after the company announced a better-than-expected profit result.
Shares in Nick Scali rallied 8.5% to $3.70 and are just 2 cents shy of its all-time high that it hit on May 6 this year as investors cheered its 20% increase in net profit to a record $17.1 million on the back of a 10.1% increase in sales to $155.7 million for the year ended June 30, 2015.
The bottom line figure was about 7% above what analysts were expecting and the company declared a 1 cent increase in its final dividend from last year to 8 cents a share, which takes its full year distribution to 15 cents compared to 13 cents in 2013-14.
Operating expenses were up 8% due to start-up costs for new stores but this is growing at a rate below revenue growth, and that leaves the retailer in an enviable position to boast about expanding profit margins at a time when most retailers would be facing a margin squeeze.
The last 12 months have been a challenging environment for the sector but Nick Scali managed to generate same-store sales growth of 3.4% and added seven new stores in the latter part of 2014-15 to its network, which now stands at 46 stores.
The retailer said it will open a new store in New South Wales and Western Australia before December this year, but has not provided guidance on earnings or the total number of new stores it is rolling out for the current financial year.
Management only said that it is experiencing "good trading conditions in July" that are in-line with expectations, although it warned that increasing competition and the weakening Australian dollar are creating challenges for the group.
This is a solid result and I think it ranks up there with JB Hi-Fi Limited's (ASX: JBH) better-than-expected profit figures. I think investors will remember these stocks as the standouts for the retail sector during this reporting season.
However, I am not sure if we will see much more upside for Nick Scali's share price, which is up by a third in value over the past year.
I think the Australian housing market will slow and furniture sales are closely tied to new home sales. This means Nick Scali might struggle to deliver another 20% profit growth in 2015-16.
But even if it did, the stock will still trade on a forecast price-earnings multiple of around 15x. That's not expensive for a well-run retailer that can continue to deliver above market growth rates, but I think it leaves limited room for a further share price rally.
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