This ASX retailer could turn a £2 buy into a big earnings generator

Outside of the reporting seasons in August and February, the Auscap Asset Management investment team spend much of the year on the road visiting the operations of current and potential investments both within Australia and abroad. 

The last few months have been no different, with the team undertaking multiple trips across North America, the United Kingdom and around Australia. This is the second of 4 wires where we cover a few highlights from these recent trips. 

You can find the first wire on James Hardie here.

Nick Scali (ASX: NCK) – United Kingdom Acquisition

We have been long-term holders of Nick Scali. We are enthusiastic about Nick Scali’s dominant market position, track record of strong execution, market-leading financial metrics, growth outlook and valuation. 

In April 2024, after many years of analysing the United Kingdom (UK) furniture market, Nick Scali announced the acquisition of Fabb Furniture (Fabb), a loss-making furniture retailer with 21 stores, to gain a reasonable initial store network. Nick Scali has approached its UK expansion in what we perceive to be a low-risk manner. 

They paid just £2 for the equity of the Fabb Furniture business, raising $50 million from investors to pay down the business’ debt and fund the immediate working capital requirements and broader UK expansion plans, including store refurbishments, store rebrandings and marketing.

We are positively disposed to the transaction. The establishment of the Nick Scali brand in the UK through the acquisition of Fabb has some parallels with Nick Scali’s successful 2021 acquisition of Plush Furniture. Nick Scali has an opportunity in the UK to put forward a differentiated product offering, significantly increase gross margins and grow sales per store compared to Fabb’s historic metrics. The market has many similarities to Australia, such as the cultural characteristics, acceptance of made-to-order furniture and bricks and mortar retail environment for upholstery and case goods. 

However, the UK population is two and a half times larger than Australia, leading to the biggest furniture retailers in the UK achieving store productivity metrics well above Australia. Sector leader DFS achieves revenue per store more than triple Nick Scali in Australia, with Fabb currently achieving roughly half of Nick Scali’s revenue per store despite often being in the same retail parks as DFS. In addition, should Nick Scali gain confidence in their likelihood of success in the UK, we see a significant opportunity for potential expansion towards 50 to 100 stores. We think the acquisition was made on attractive terms at a sensible time in the cycle, with the business acquired after a period of difficult macroeconomic conditions in the UK which saw the Bank of England lift its “Bank Rate” to 5.25% to quell inflation. Since the acquisition the Bank of England has cut the Bank Rate by 0.25% to 5.0%, and with the UK Consumer Price Index now below the Bank of England’s 2% target at 1.7%, we expect further rate cuts going forward.

Ahead of rebranding the network to Nick Scali, management is currently in the process of extensive refurbishments to the Fabb store network and replacing Fabb products with products supplied by Nick Scali’s manufacturers. The Auscap investment team recently visited the majority of the Fabb store network across the United Kingdom and spent time with local management. Fabb is currently positioned as a mass market player competing with the likes of UK furniture giant DFS. 

However, the brand is only five years old and hence brand awareness is low. Further, similar products to the Fabb range are sold by competitors at lower prices, creating a challenging selling proposition for staff. The latest Fabb store fit-outs, executed under prior ownership, appear reasonable, however, the offering as a whole leaves a little to be desired. This is evident from the external and internal appearance of the stores, as shown below. It was not difficult to see why the Fabb stores were generating very little sales in comparison to their peers.

Nick Scali intends to completely reposition the business upon rebranding. Nick Scali offers design-led, modern, mid-market aspirational furniture at very competitive prices relative to the quality of the furniture. We observed that spending by this demographic has proven relatively resilient and has been less affected by high interest rates in the UK.

The first store management has chosen to refurbish is Thurrock, just outside of London. This refurbishment was ongoing at the time we visited. As shown below, the store appearance will be similar to Nick Scali’s Australian stores. Management has indicated that the speed of store refurbishment is expected to accelerate in the coming months. It is worth noting that none of the products featured in these photos are Nick Scali style products, but instead, are part of the current Fabb product range. 

The company confirmed that part of the Nick Scali sofa range has recently arrived in the UK with some of the dining range expected in November. The opportunity for Nick Scali in the UK is potentially significant and we will continue to watch the UK rebranding, the customer response to the range and the refurbishment of the stores with interest.

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