Nick Scali cuts losses over dragging brand

NICK_SCALI_FURNITURE_GENERICThe admission that custom-furniture brand Sofas2Go (S2G) has no future, ends over seven years of trying to make the model work for Nick Scali chief executive Anthony Scali.

In a call with analysts and shareholders after reporting a 15 per cent increase in HY18 net-profit on Wednesday morning, Scali revealed that plans are well progressed to close the struggling subsidiary business.

“We will close these stores,” he said, referencing the three, soon to be two, remaining S2G locations in NSW, Victoria and Canberra.

It’s a change in tune from 2011, when Scali was targeting as many as 125 S2G locations in Australia and New Zealand, confident that the brand would appeal to entry-level customers and first home-buyers in the middle-market.

Fast-forward to today and what remains of the network has driven company-wide like-for-like sales down around .6 per cent in the first-half of fiscal 18 in what was an otherwise positive result.

Last year management had declined to comment on the brand, citing forthcoming changes to the model, but it appears a turnaround plan did not eventuate.

There was no room for interpretation on the future of the brand today though, with Scali making his view clear as soon as S2G was mentioned.

“[There’s] no future for the remaining three [stores], they were a small drag on earnings and we’ll be shutting another one in Melbourne in the next month,” he said.

Nick Scali charts expansion

It comes as Nick Scali looks abroad, with a successful launch in New Zealand last year paving the way for additional stores that will likely open before the end of calendar 18.

Scali said that the Auckland flagship location was the best performing new store in the network during January and that his theory that the brand would fill a void in NZ’s furniture market was bearing fruit.

Minimal changes to the core Nick Scali model and range have been made for New Zealand, where as many as 8-9 stores could be opened in the coming years if performance holds up.

There’s also potential for Nick Scali to look towards other overseas markets in the coming years, with Scali confirming that the business is actively looking for opportunities.

The UK has been floated as a possibility in the past, but Scali stressed that there is significant work to be done across Australia and New Zealand in the immediate term.

“We’re certainly looking, but in the interim we’ve got a number of stores to open in Australia and New Zealand, but if opportunities came up offshore that we thought would work, we’d probably do it,” Scali said.

Category expansion is also imminent in the first-half of calendar 19, driven from surplus floor space associated with larger store openings in Home Consortium’s former Masters sites and in other places.

Scali did not go into specifics about any new category, but did say an expansion of the offer has been carefully planned to avoid cannibalising existing lines.

“Market is still pretty good”

While Scali was repeatedly quizzed about a flagged slow-down in sales during January, he clarified that a downturn in sales was concentrated in the first week of the year, and that trading had picked up again by the last week of the month.

The company’s high base has driven concern that same-store-sales growth could be negative in the second-half, which Scali said was a possibility, while remaining optimistic about the trading environment amid a flagged slowdown in the housing market in 2018.

“There’s a bit of volatility with the consumer, but it’s difficult because we’re coming off a really high [same-store-sales] base,” he said. “The market is still pretty good, the first week of February was positive again.”

Asked whether the accounting scandal that has engulfed Steinhoff has driven an influx of orders, Scali said he’d seen no change in the discounting activity of his competitors, but did note that he doesn’t believe Freedom’s move to everyday-low-pricing has paid off.

“I haven’t seen any of their brands increase discounting activity, there’s certain brands that are always discounting…Freedom moved to an EDLP strategy, my understanding is that hasn’t been successful,” he said.

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