The S&P/ASX 300 Index (ASX: XKO) share Nick Scali Limited (ASX: NCK) is a high-quality business, in my opinion.
The company recently reported its FY24 result. The headline numbers weren't exciting, as the ASX retail share operated in challenging retail conditions, and plenty of households reduced their discretionary spending.
Nick Scali reported its revenue declined 7.8% to $468.2 million, while net profit after tax (NPAT) sank 20.3%.
The company advised that written sales orders for Australia and New Zealand were up 2.4%. Revenue in FY23 (the comparative period) benefited from increased deliveries as the June 2022 order bank reduced with lead times returning to pre-COVID levels.
Despite the weaker result, I think there are four key reasons to love this business.
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ANZ and UK store rollout potential
One of the easiest ways for a brick-and-mortar retailer to increase profit is by expanding its store network.
At June 2024, the ASX 300 share had 64 Nick Scali stores, 44 Plush stores and 20 Fabb Furniture UK stores.
Management thinks the company can grow the number of Nick Scali branded stores in Australia and New Zealand to 86 over the long term, which would represent a 34% increase.
The number of Plush stores could grow to between 90 and 100. Reaching 90 Plush stores in Australia and New Zealand would represent a rise of 104% over the long term.
In May 2024, Nick Scali expanded to the United Kingdom by buying Fabb Furniture. The ASX 300 share hasn't advised its growth plans for the UK. But, considering its population of more than 67 million compared to 27 million in Australia, I think reaching 90 Fabb Furniture stores would be a reasonable longer-term goal.
This is why I think the ASX company can more than double its store network size in the long term, giving it a long growth runway ahead.
Higher margins
Over the years, Nick Scali has shown an ability to grow its profit margins thanks to scale benefits and operational improvements.
The company reported its ANZ gross profit margin improved to 66% in FY24, up 2.5% from FY23.
As Nick Scali grows, I think its underlying margins can increase, particularly if it implements various initiatives at Plush and Fabb Furniture. An advantage of becoming larger, I'll point out, is better buying power from suppliers.
Excellent return on equity
A good metric to compare any business is the return on equity (ROE), which tells us how much profit a company makes compared to how much shareholder money is retained.
In FY23, the company demonstrated how much money it made with a ROE of more than 50%.
The FY24, ROE reduced to close to 30% due to the company's capital raising for the UK acquisition and profit reduction amid challenging retail conditions.
I think the FY23 ROE is a sign of how strong the ASX 300 share's ROE could be in the future once the UK business plans are enacted and trading conditions improve.
Dividends
Nick Scali typically offers investors a solid dividend, which means pleasing cash returns while they wait for the growth plans to play out.
In FY24, the ASX 300 share paid an annual dividend per share of 68 cents. At the current Nick Scali share price, that translates to a grossed-up dividend yield of 6.5%, which I think is a solid yield.
