Nick Scali: the UK grass IS greener

Welcome to Ascern Advisers: Ascernment - Analysis to stimulate you to find the Growth Potential in your business.

“Mainstay” is originally a nautical term, being the strong ropes or cables that support the main mast to stay upright and stable.

We use it now to also describe something (or someone) that provides essential stability in an environment, like businesses that are so ubiquitous that when thinking about a particular industry, you think of them.

Today we’re taking a look at one of the mainstays of Australia’s retail furniture industry: Nick Scali.

An Immigrant Success Story

Italian immigrant Nick Scali opened his first store in the inner-western suburb of Ashfield in 1962. He identified a gap in the Australian market for quality, stylish furniture imported from Italy. Over time this set the store’s brand apart from local competitors and established its reputation for quality and style.

The company remained a family business, with Nick's son, Anthony Scali, taking over as Managing Director in the 1980s. Anthony's leadership saw the company expand nationwide, leveraging his father's foundational principles while modernising the business approach.

What sets a Nick Scali store apart from its competitors

Big chain furniture stores often position themselves as being very different from their competitors, because both perceived and real qualities such as quality & durability really do influence buyers. This is why you could be led blindfolded into a store and instantly know whether you’re in an Ikea, Harvey Norman, Freedom Furniture, or Nick Scali store.

Nick Scali’s reputation and brand is known for its impressive showrooms, which provide customers with a tactile and immersive shopping experience. This focus on creating a unique in-store experience has been a critical factor in the brand's success.

And successful it has definitely been.

2004: Public Listing

In 2004 the company was listed on the Australian stock exchange. Here are some of it’s impressive highlights since then:

• By the end of 2023 store numbers had grown from 10 to 107.
• Sales have increased almost 1,100%.
• Net Profit has increased over 1,400%.
• Dividends have increased over 1,200%.
• Share price has grown from $1 to $14 today (slightly down from its $15+ peak).

And all this without once raising additional shareholder capital in 20 years!

The Covid Boost

We all know that retailers selling pretty much anything to do with homes did very well out of Covid shutdowns, and Nick Scali was no different.

During this period the company became a cash machine – generating over $100m in free cashflows in FY21 and hitting $125m for the FY23 year.

So what do you do if you’re a successful furniture retailer in Australia and need to do something with your cash?

Well you could just invest in selling more furniture to the locals – the market is set to grow by a CAGR of 5% annually for the next five years. That’s not a bad growth, although Boomers with large stashes of cash capacity for discretionary spend have drawn in a plethora of high end retailers from overseas, plus substantial competition in the mid-range space from the established competition.

The grass is greener overseas

What are the two things a retailer like Nick Scali would look for in an overseas expansion?

Size: You’d want somewhere that either has a big market, or higher growth, or ideally both.

Accessibility: You’d also want somewhere where people buy products that are pretty similar to the ones you’re already selling.

Nick Scali has settled on the United Kingdom, because it has (almost) everything it wants:

• Customer preferences for furniture that are fairly similar to Australia’s.
• A big market – USD23b versus Australia’s USD10b.
• The market’s growth is lower, at CAGR of around 3%, but let’s be honest – if you could gain a foothold in the market that gives you instant access to clients and save you spending a lot more to enter from a standing start, the 3% will compound nicely.

And that’s exactly what Nick Scali did.

The rise and fall of Fabb Furniture, & the Nick Scali takeover

Fabb Furniture appointed PWC as Administrators in June 2018, just before reaching its second year anniversary of opening.

It had grown swiftly to £50m–£60 million over that time but had apparently grown too quickly and couldn’t pay its debts.

In April 2024 Nick Scali announced its offer:

• Acquisition cost £2.
• Secured debt assumed of £3.5m.
• Payment of £0.5m to exit Fabb’s Distribution Centre arrangements.
• £6m working capital injection.
• All financed via Nick Scali’s first external capital raising since listing – AUD$46m to institutional investors, $4m to Anthony Scali, and $10m to other existing shareholders.

Chance of Success? Solid

What Nick Scali correctly identified is hat by entering a market that’s similar to its home market in terms of customer preference, it can leverage its existing buying power and expand its existing supply chain and logistics arrangements. This makes the transition into the UK quicker, and more of a known quantity.

They’re also able to capitalise on Fabb’s existing 21-store profile, giving it more than 39,000 square metres of retail space in a large-scale format similar to its own.

The kicker, or upside for Nick Scali is that Fabb traded at Gross Margins around 10% lower than its competitors (which no doubt contributed to its failure), but this is expected to be clawed back fairly quickly through Nick Scali’s larger buying power and supply chain.

Overall

It’s great to see a well-performing Australian company expanding internationally via a well-planned, well-funded takeover with large potential upside in a market that it should/will understand pretty well. I’m really looking forward to see them succeed!

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👋 Hi, I'm the founder of Ascern Advisers. We do Strategic & CFO advisory for businesses with Growth Potential. DM me or email me at david@ascern.com.au if you want to chat.