On 11 August furniture retailer Nick Scali Limited (NCK) released its FY 2016 Full Year Results, which were stellar enough to drive the share price approximately 14% higher to a new 52 week high of $5.48 by the close of trading the following day. The shares have continued higher reaching another 52 week closing high of $5.79 on 16 August and again on 18 August, closing at $5.82.  Along the way the share price hit $6.15 intraday. 
The company posted a 53.1% increase in NPAT (net profit after tax). The reported result of $26.2 million exceeded Scali’s earlier guidance for net profit coming in between $24 and $26 million.  Revenue rose 30.4% and to the delight of Scali investors, dividends increased 73.3% over FY 2015.  
The falling AUD should have hurt retailers like Scali that import much of what they sell, but it hasn’t. According to the company website Scali Furniture imports “in excess of 4,000 containers of quality leather and fabric lounges as well as dining room, bedroom and occasional furniture”, annually.  The company’s five year share price performance has been outstanding, despite the fall of the Aussie dollar that began in early 2013.   Here is a price movement chart comparing NCK to one of its competitors, Fantastic Holdings Limited (FAN).

Obviously Scali is benefiting from the continuing residential property boom in both apartment and home dwellings. Despite the recent highs the stock has a trailing twelve month (TTM) Price to Earnings Ratio of 18.02, below the average P/E for the retail sector of 19.13.  The five year expected Price to Earnings Growth Ratio (PEG) is an impressive 0.64.  
Five years is an eternity in share markets and despite its impressive performance, Nick Scali Furniture is a small niche player in a market dependent on the continued health of the property market.  Other successful retailers in the space, including Harvey Norman (HVN) and JB HiFi (JBH), are more diversified with both offering consumer electronics, whitegoods, and appliances.  These two companies have also had outstanding stock price performances over five years.  Here is a comparison chart.

While these two retailers might fare better if consumers have diminished needs for the things one buys to fill a new home or apartment, there still will be some pain for shareholders.  For all four of these retailers, the future comes down, whole or in part, to the health of our property market.
Investors who have roamed the financial news over the past several years have read time and time again of the prospect of a housing bubble in Australia.  In some the bubble is coming; in others it’s here and it’s growing; and there have been and continue to be many predicting the imminent bursting.  Yet the boom continues.  Much of the bubble debate comes from comparisons of our property market against that of the United States, where a massive bubble did in fact burst and almost took the entire financial world down with it.
Some comparisons such as our outsized Household Debt to Income Ratios are cause for concern as is the reliance of our big four banks on residential mortgages.  But at the core, comparing Australia to the US is questionable.
Lending standards in the US were shockingly lax and our standards simply do not compare.  Comparing the populations of the two countries and where they live is also suspect. We are a huge country where, according to the experts, only 10% of our land is fit for human habitation.  Our property market could be characterized as having multiple personalities – there’s Sydney and Melbourne; add in the other capital cities; and then there is everybody else.  Somewhere around 67% of Australians live in the five capital cities and that is expected to increase to 89% living in the four largest cities by 2053.
People need a place to live and population growth supports property markets.  That may sound simplistic, but in essence that is the first ingredient needed to sustain a property market.  The second is income and the third is availability of loans. 
In 2015 US population increased by 0.71%, compared to 1.4% here in Australia.  The following chart from The Australian looks at population growth here in the coming decades.

There are basically three camps on the future of the property market:
1. Those who feel all will be well2. Those who see a correction3. Those who see a catastrophe
One thing all camps agree on is the threat of lower income stemming from a recession and higher unemployment. Some also point to higher interest rates as a cause for concern while others remind us interest rates are more likely to go down again this year.  The retailers we are highlighting have already weathered the declining dollar scenario.  They are handsome dividend payers.  If you believe the property market will correct but not crash, they are worth a look.  If you believe we are in for a recession, rising unemployment, and higher interest rates, stay away.
Now let’s look at some current and historical measures for the four retailers we introduced earlier.

All four pay fully franked dividends.  Based strictly on the numbers in our table, Nick Scali looks like the best play. If you are a believer in looking for companies with solid management with a deep interest in growing the company, NCK is worth a look.  The company is family run and the family remains the majority shareholder.  Nick Scali grows organically, not by spending money acquiring competitive stores.  Their footprint in Australia is relatively small, with only 48 stores, most of them along the East Coast.  Scali has moved into Western Australia and has plans to add four stores in New Zealand in 2018.  The majority of the stores are branded Nick Scali stores with five stores operating under the brand Sofas2Go.
The company sells furniture and accessories.  Although it has an online site for smaller items, Scali bears little risk from major online retailers.  Few people are willing to purchase large items such as dining room and bedroom sets without physically touching the product.
Fantastic Holdings appears to be the weakest of the bunch.  However, it has the best analyst forecasts for earnings per share growth, with an expected rise of 32% over the next two years.  The company operates multiple brands with 126 stores.  The flagship brand is Fantastic Furniture with 72 stores and the expectation of increasing the number to 90. The company also operates Plush, Le Cornu, and Original Mattress Factory brands. The Le Cornu brand dragged down the company’s results and the company will be phasing out the store in Adelaide over the next six months while keeping the store in Darwin open. Investors were not happy with the one-offs that will follow the move but some analysts thought it was a good long term move, freeing capital for expansion of the profitable brands.
The company’s Half Year Results reported in February showed record revenues of $272 million, an increase of 11.7%.  Profit rose from $110 million to $119.5 million.
The company’s stock was hurt by the unexpected resignation of both its CEO and CFO back in January.  At the end of March a new CEO was announced, a 30 year retail veteran. The stock price has been gradually rising ever since. Here is the price movement chart.

JB Hi Fi has defied the opinion of many experts and put together an impressive string of solid performances. Regular followers of share market news are well aware this company has spent arguably more time on and off and back on the ASX Top Ten Short List than any other stock on the ASX. The negative views began when JBH, the recognized discount king in the Aussie electronics space, began to face cut-throat pricing competition from foreign online sellers.  JBH margins would collapse, ran the argument.  When the company expanded into whitegoods and appliances, skeptics snorted in derision and continued to short the stock.  The historical performance record listed in our table speaks for itself.
A few days ago the company reported sales of $3.95 billion, an 8.3% increase.  NPAT was up 11.5%.  The share price hit a new all-time high, and yet some analysts still pointed to the expense associated with operating the company’s approximately 200 stores and the continued threat of online competition.  JBH is also operating online and the company’s online sales for FY 2016 rose 35.8%, accounting for 3% of total revenues.
Harvey Norman is another company with its founder still involved and still the majority shareholder of the business.  The company’s Australian stores operating under the Harvey Norman banner are franchises. Harvey Norman stores in New Zealand, Ireland, Singapore, Malaysia, and Slovenia are company owned. Clive Peeters and Rick Hart branded stores in Australia are also company owned.   In addition, the company owns retail property complexes housing some of its stores.
Earnings per share for HVN are forecasted to grow 11.6% over the next two years with dividends expected to grow 10.7% over the same period. Half Year Results released in February showed a 31% increase in NPAT, rising to $185.5 million.   Gerry Harvey, the Chairman and founder of HVN, began the business in 1982.  He is a recognized authority on the retail trade.  Here is what he had to say about the future of his business.
‘Australian macroeconomic conditions have had an upward trend for three years and have been favourable for consumption in the homemaker and lifestyle categories. We anticipate robust construction and housing activity to continue this year, in response to pent-up demand and, particularly in New South Wales, Victoria and the ACT, dwelling starts that are materially above long term averages.’

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