Daily notes – Nick Scali, CBA

Nick Scali (NCK) – like-for-like sales flat and margins under pressure…
CBA (CBA) – Not growing, some pockets of stress, but overall okay…

Nick Scali (NCK) – like-for-like sales flat and margins under pressure

Nick Scali announced that despite flat like-for-like sales growth, total sales had grown by 10.3% due to new store openings. Gross margin was ever so slightly up from 62.6% to 62.8%. Operating expenses increased as a percentage of sales to 36.1% (HY18: 35.2%) due to inflationary cost increases in stores, coupled with flat sales growth.

The company did not provide much in the way of guidance other than to say that recent trading has been unpredictable, with same-store sales growth being positive in December, but negative in January. The company anticipates that in the current year, total sales growth will continue to be underwritten by store network expansion and that they are confident of achieving profit growth in spite of flat comparable sales.

With flat or negative comp sales, margins and returns on invested capital will come down. Moreover, with 55 stores of the current roll-out plan for 80 stores already operational, presumably, the final 30% of sites will be of lower quality than the places already in operation.

Lower quality new sites coupled with a current network that’s showing flat comps is not an altogether pleasant place for a retailer to find itself.   

CBA (CBA) – Not growing, some pockets of stress, but overall okay

Lots of information in the latest CBA HY results release. Cash NPAT for the HY was up 1.7%, but this was due mainly to one-off remediation costs in prior periods. Operating income was actually down 1.9%.

Volume growth in home lending kept pace with system growth in the HY of 3.5%; however, housing credit growth has slowed, and it looks like this trend will continue. With that said, housing system growth in Australia is supported in no small extent by population growth and population growth is a spigot that can probably be turned up or down at will.

While arrears are trending up, losses have so far remained low. The most significant uptick in arrears can be seen in the consumer book (which is a relatively small exposure for CBA), especially credit card and personal loan 30+ days, particularly in November and December 2018:

I’ll leave this here for future reference as this might have some relevance down the track for the point-of-sale lenders such as APT and ZIP, whose books are far more exposed to consumer lending.

Overall CBA painted a picture of a bank and economy that’s in reasonable shape overall. Strong total employment, GDP growth at trend, muted inflation and wage growth that seems to have bottomed and it starting to lift slowly.

By Danny Sandler

Founder of Ocean Asset Management.