I think S&P/ASX 300 Index (ASX: XKO) stock Nick Scali Limited (ASX: NCK) is one of the more exciting ASX retail shares around. It could be the sort of business that legendary investor Warren Buffett may want to buy.
During his stewardship of Berkshire Hathaway, Buffett has demonstrated an incredible ability to invest in the right businesses at the right time. He has led the investment house to become one of the biggest companies in the United States and, indeed, the world.
The first question is whether Buffett would consider a furniture retailing business like Nick Scali. Berkshire actually owns a few furniture businesses, including Star Furniture, RC Willey Home Furnishings, and Jordan's Furniture.
But there are a few things that make Nick Scali more interesting than an average furniture retailer.
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Large store rollout planned
Nick Scali already has a sizeable national network of stores across Australia and New Zealand. The company aims to grow its Nick Scali store network from 64 stores in December 2023 to 86 stores over the long term.
The ASX 300 stock also owns the furniture retailer Plush, which had 44 stores in December 2023. In the long term, the company aims to grow to 90 to 100 stores.
Nick Scali has a long domestic growth runway, which is a big positive.
The stock also recently completed the acquisition of a company in the United Kingdom that trades under the name Fabb Furniture. Nick Scali paid just $3.82 for the business, which came with $6.7 million of secured debt. The furniture retailer also paid $1 million to exercise its option to exit the existing distribution centre arrangement. This will provide a net working capital injection of up to $11.5 million.
Nick Scali intends to invest further in the existing Fabb Furniture network and establish the Nick Scali brand in the UK. Its strategy will include store refurbishments, rebranding, establishing a new distribution centre, and new store openings. There will be a transition to the Nick Scali product range, and it will leverage its buying power and supply chain.
Considering the UK's population is more than double Australia's, I think this ASX 300 stock has plenty of growth potential there.
Excellent return on equity
One of the best profit measures is a company's return on equity (ROE). This tells the market how much profit the business is making on retained shareholder money.
A high ROE can suggest it's an appealing business, and it can earn good returns on additional generated profit, which is retained in the company.
Nick Scali's ROE of more than 50% in FY23 suggests it's very profitable for shareholders. I believe that expanding the store network in Australia and, hopefully, the UK can unlock significant additional profit.
Appealing metrics
ASX retail shares usually trade on a relatively appealing earnings multiple compared to other sectors. This can lead to a cheap price/earnings (P/E) ratio and a good dividend yield if the company pays a dividend.
According to the estimates on Commsec, Nick Scali shares are trading at 15x FY25's estimated earnings and 12x FY26's estimated earnings.
Nick Scali is projected to pay a grossed-up dividend yield of 6.7% in FY25 and 7.8% in FY26.
Whilst the ASX 300 stock is not as cheap as it could be, I think Nick Scali shares would appeal to Warren Buffett because of its quality, growth plans and lower share price – it's down 16% since April 2024.
