The Nick Scali Limited (ASX: NCK) share price is currently down 3%, is it a buy?
Nick Scali is a furniture business that imports directly from manufacturers overseas, then sells the tables, sofas etc. in its national store network.
It has been a strong-performing business for shareholders, over the past five years its share price has risen by around 100% – this return doesn't even include the dividends paid.
In FY18 Nick Scali delivered revenue growth of 7.7% to $250.8 million, earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 12.7% to $62.8 million and earnings per share (EPS) growth of 10.1%.
However, the share price has actually fallen by 23% over the past year. Quite a lot of that fall occurred when the furniture retailer updated to the market at its AGM when it said "same store sales growth will be challenging in this volatile trading environment, particularly given the significant slow-down in residential sales, a key driver and catalyst for future furniture sales."
But, there is plenty still to be positive about. In FY19 Nick Scali plans to open six new stores, of which four are already open and trading, including a second store in New Zealand.
Nick Scali also plans to launch its bedroom and bedding range. Expanding the amount of items it sells can be a good tactic, it will give Nick Scali a good new source of earnings and challenge businesses like Adairs Ltd (ASX: ADH) in the mid-tier range.
However, Alex Shevelev from Forager Australian Shares Fund (ASX: FOR) recently wrote for Livewire that Nick Scali faces a triple whammy of problems, particularly with a weaker Australian dollar: lower sales, lower gross margins and higher staff & rent costs (as a percentage of sales).
Foolish takeaway
Nick Scali is trading at 10x FY18's earnings with a trailing grossed-up dividend yield of 11.1%. If Nick Scali can slightly increase its profit year on year then the dividend alone could beat the market over the short to medium-term.
Whilst Nick Scali is cheap, I think it's a bit of a gamble to invest at this stage – there is probably a lag between falling housing prices and Nick Scali's sales. I believe there are better ASX ideas out there at the moment.
