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Edited Transcript of NCK.AX earnings conference call or presentation 3-Feb-21 11:30pm GMT

·27 min read

Half Year 2021 Nick Scali Ltd Earnings Call Feb 4, 2021 (Thomson StreetEvents) -- Edited Transcript of Nick Scali Ltd earnings conference call or presentation Wednesday, February 3, 2021 at 11:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anthony J. Scali Nick Scali Limited - MD & Executive Director * Christopher Malley Nick Scali Limited - CFO & Company Secretary ================================================================================ Conference Call Participants ================================================================================ * Callum Sinclair Macquarie Research - Analyst * John Hynd Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst * Mark Wade CLSA Limited, Research Division - Research Analyst * Sam Teeger Citigroup Inc., Research Division - Head of the Australian Small Caps Team & Director ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Nick Scali Limited Half year H1 '21 Results Announcement. (Operator Instructions) I'd now like to hand the conference over to Mr. Anthony Scali, Managing Director. Please go ahead. -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [2] -------------------------------------------------------------------------------- Good morning. We are now going to present to you the half year '21 results on Page -- starting with Page 1 on the document as lodged on the ASX. The first half highlights, written sales orders and revenue at record levels with 58% growth in like-for-like sales orders and 24% sales revenue growth. Sales orders we're totaling $191.1 million, with sales revenue at $171 million. The gross profit margin improved by 180 basis points due to reduced discounting. Operating leverage saw sales growth lift net profit after tax by 100%. Increase in profitability led to improved cash flows due to the negative working capital model. 34 -- $32.4 million to be paid to shareholders through a $0.40 interim dividend. Two new stores successfully opened during the half bringing the Nick Scali Furniture store network to 60. Trading and sales orders. Sales momentum maintained through the first half of the financial with comparable store sales orders up 58% on the first half compared to the first half for FY '20. As mentioned, total sales were up 52% to $191 million. The growth rates were across all geographies and categories. Total sales orders in New Zealand, up 85%, particularly strong. Online represents 9% of our total written sales order in non-lounge categories, and 4.5% of total written sales across all categories. Sales revenue is up $24 million, is supported by -- 24%, rather, to $171 million, supported by an order bank reaching all-time record high at 31st of December 2020. As you can see, the sales orders -- sales are behind sales order growth, and that's basically due to the aging of the order bank, which increase from 63 days to 92 days. This has been driven by delays in the supply chain, in particular, shipping delays where there's a shortage of container equipment availability. Turning to the profit and loss. The underlying net profit after tax was $40.5 million. You can see there was an improvement in the group's gross margin. As I mentioned, reduced SKU discounting. The operating expenses through wage subsidies, marketing expense and headcount rationalization further support a reduction in general and administrative expansion. Cash flow, I'll let Chris Malley, our CFO, run through the cash flow and balance sheet. -------------------------------------------------------------------------------- Christopher Malley, Nick Scali Limited - CFO & Company Secretary [3] -------------------------------------------------------------------------------- Thank you, Anthony. Just briefly looking at the cash flow, as expected, with the operating leverage and negative working capital that we have in the business, the strong profit has led to a very strong operating cash flow. And in fact, we've had a threefold increase in operating cash flow, and operating cash flow for the period was $53.5 million. Key items of capital expenditure in the half related to the purchase of our new flagship showroom in Keswick in South Australia, which is due to open later this month. And just noting that in the prior period, we sold a property we're on, our Manly Vale property. So that's the difference between the 2 halves. The dividend payments in the half were $18 million. And so after those items, the net movement was a net increase of cash of almost $25 million for the half. Moving on to the balance sheet. Just rolling down the key items there. The cash balance, as just mentioned, is up nearly $25 million at $87.6 million at the 31st of December. Our inventory in transit has increased by $4.8 million, and this is a reflection of the level of trading and the high order bank that we had at the end of December. Our inventory on hand in our stores and in our DC has remained stable through the period with no -- with a slight decrease, but generally, no real change in the level of inventory on hand. Property balances increased by $6 million as a reflection of the purchase of the Keswick property, as just mentioned. But there's been no change to the level of borrowings. That purchase was fully funded through cash. And so there's been no change to the borrowings, which remain at $33.7 million at the balance date. I think the other key item in the balance sheet is the deferred revenue. This represents our customer deposits. And naturally, with an increase in the order bank at the end of December, there's been an increase in that deferred revenue balance, which now sits at about $50 million. Overall, and before we sort of account for AASB 16, there's been an increase in the net adds position of $24.9 million. I think that's the cash flow and balance sheet. I'll let -- I'll hand you back to Anthony. -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [4] -------------------------------------------------------------------------------- On Page 7 of the presentation is our property slide. And a key strategy of this company is to continue to expand the retail property -- owned retail property network. And we've continued to do that recently by the purchase of Keswick on Adelaide, which will become our flagship store. We moved out of a center, homemaker center nearby and purchased this property, which we will occupy come March. The cash flow this company generates allows -- has allowed -- is allowing us to continue to increase our property portfolio, which, in turn, lowers our occupancy costs and increases profitability. So that strategy is continuing and will continue. The online and digital offering continued growth in the company's online offering with $8.8 million of written sales orders. Case goods continue to represent the majority of our sales orders, and the average transaction value is $1,900. We've got a very attractive online gross margin of 66%, given that's in the high category mix. EBIT contribution is in excess of the $3.5 million for the first half '21, materially ahead of previous guidance of $4 million for the full year. Launch of a refresh Nick Scali transactional online offering will occur in the second half, of this half. Additional categories will be launched online in the future. And importantly, we will be implementing an online configuration module that will launch in September to try and boost some land sale online. New Zealand is becoming an important market for us, and we're seeing extremely good growth. And during the half, we opened our flagship showroom Wairau Park during the half. As you can see, the average transaction value is $3,000 in New Zealand showrooms compared to $2,500 in Australia. New Zealand's written orders were up 79% against the same comparable period. Same sales order growth increased 42%. Sales revenue increased despite the impact of deliveries resulting from the various government lockdowns, which we experienced during the half in New Zealand. The total store network opportunity is 14 stores across the North and South Ireland, which will be supported by our centralized distribution model. Scale benefits will begin to be realized in the second half FY '21, a sales orders convert to delivered sales, particularly from the Wairau Park store and can contribute positive EBIT for the group. January written sales orders were up 130% when compared to January 2020. Future growth. Nick Scali has several levers to drive sustained revenue and earnings growth; organic growth initiatives as we utilize our direct-to-consumer model to expand into adjacent product categories and increased overall value proposition to customers; leverage successful expansion into bedrooms and drive additional category expansion; expand the store network across Australia and New Zealand, targeting at least 85 showrooms across both markets; development of Nick Scali digital channels to complement the existing in-store offerings; connect our in-store and online experiences, allowing consumers to shop via the channel of their choice. Capital-led growth initiatives. This is a disciplined growth by our acquisitions focused on business where Nick Scali can add considerable value. And increase -- the other point on the capital side is to improve the mix of company-owned versus leased properties, particularly in key growth corridors and the continued expansion of already existing company-owned properties to build the asset base and reduce fixed costs for the company. Turning to Page 11, the store network. We currently have 60 stores. We opened 2 stores during the half. One in Bennetts Green in New South Wales and one in Wairau Park. We relocated our Castle Hill store during the half. And you can see a total below of the estimated future showroom growth, bringing our total opportunity to 85. And we've divided by growth by region. Turning to the outlook. January continues to be strong as comparable to -- as the same as the first half. In terms of the store network, the company expects to open 2 new showrooms in the second half of the financial year, taking new store openings for FY '21 to 4 stores. Sales order growth for the group in January 2021 was up 47% compared to the same period last year, representing the largest month of written sales orders in the company's history. January is traditionally the company's largest trading month and the sales order bank at the end of January was at an all-time high. New Zealand performed particularly well in January, with total sales orders up 130% when compared to the prior period. The rate of sales revenue growth has been lower than sales orders due to the extended lead times caused by delays in raw materials to our suppliers and shipping issues, which continue to be challenging. These supply chain delays make it difficult to accurately predict sales revenue growth for the second half. That ends my presentation, and we're now open to any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Mark Wade of CLSA. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- A cracking result. Well done. Just a high-level question to start with. I mean, COVID has changed customer behavior or values as well as challenged a lot of business models. In your view, I mean, what eventually goes back to normal, and what changes for good in the mindset of the customer plus the way you run your own business? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [3] -------------------------------------------------------------------------------- So what... -------------------------------------------------------------------------------- Christopher Malley, Nick Scali Limited - CFO & Company Secretary [4] -------------------------------------------------------------------------------- What changes will we be retaining that was made for COVID. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- Yes. So essentially, just trying to understand, I mean, what goes back to normal? What changes for good in the eyes of the customer and then how you might change your own business to adapt to that? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [6] -------------------------------------------------------------------------------- I think the permanent gains we've made from COVID that caused us to move quickly was our online offering. We really see the online sales as additional sales. Because we've looked at the store network gross sales, which are probably above what the market is anyway. And we believe the addition of the online offering is additional growth. They will back that in the future. The other thing is, obviously, for us, is the store network growth, which we will continue to accelerate. There's plenty of scope to that. There's at least another 25 stores, and particularly in New Zealand, where we've got a lot of leverage there now with our infrastructure and fixed costs sets up. So every additional store, the EBITDA, that sort contribution, it goes straight to that bottom line. And then, of course, any acquisitions that will work for us and particularly giving us opportunity for growth and synergies. So that's the future for us. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [7] -------------------------------------------------------------------------------- Sure, sure. And I suppose on that, I mean, the expectations for the coming June half, I mean, you start to cycle some elevated sales really late in the piece. But -- so I mean how long does it stay this good is what everyone is asking? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [8] -------------------------------------------------------------------------------- Yes. Look, I don't know it will stay at these elevated levels, but I certainly think it's going to stay -- it's going to be better than pre-COVID whilst we can't travel. Look, the other encouraging thing for us is that there were record new dwelling applications in December. So what's been a key driver for us has always been housing and housing sales and volume of buildings and renovations and refurbishments, which seems -- so for me, I think we're going to continue at a pretty good level for at least 12 months, another 12 months. After that, I wouldn't really know. Irrespective of that, our job is to almost ignore that and work -- build the business as we would if it wasn't so elevated, and that's by the store rollout and online, everything that we talked about. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Fantastic. And last one, the cash, I mean, the dividend payout was slightly down. I mean, still, the dividend was huge, but slightly -- the payout was slightly down. Is that just a case of saving it for rainy day or do shareholders just need to wait until the final dividend in August for a bigger slice of the action? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [10] -------------------------------------------------------------------------------- Yes. Look, that's a board discussion. I think we -- it was -- it could have been 80% or 90%, but it certainly is still a 50% increase on the -- 60% increase on the same period. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Your next question comes from Sam Teeger with Citi. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc., Research Division - Head of the Australian Small Caps Team & Director [12] -------------------------------------------------------------------------------- At the AGM in late October, the company indicated that the second half profit growth would be in line with the 70% to 80% profit growth, which at that time, you were expecting for the first half. Is that 70% to 80% second half profit growth still in the ballpark of what should we be expecting? And just wanting to know, has the outlook from your perspective got better or worse? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [13] -------------------------------------------------------------------------------- Yes. Look, we didn't talk about that in the outlook. There are -- look, certainly, I can tell you that the January sales were better than we expected, particularly after a very strong first half. And so they're certainly there. The order bank looks pretty healthy and, yes, looks better than we thought. However, we've got challenges with the supply chain. And we don't know if they're going to get worse or better after the Chinese New Year lockdown because all our sourcing comes from the Asia and the factories are now closed. And the availability of containers has been a big issue. And hence, you can see our sales revenue growth has not matched our sales order growth because of the extended delays of getting product. So hence, it's -- I mean obviously, everyone can extrapolate where they think -- I think the guidance at the AGM is still probably relevant to that number at that time, not to this number necessarily. So really hard for me to commit to that. All I can say is that trading is good. It continues to be strong, but there's some challenges on the delivery side for us. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc., Research Division - Head of the Australian Small Caps Team & Director [14] -------------------------------------------------------------------------------- Sure. And then on the delivery side, I appreciate you say you probably will know more after Chinese New Year. But from all the people you speak to in China, and who are involved with freight and shipping, is your sense this is a 3-month issue, or a 6-month issue or something a lot longer than that? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [15] -------------------------------------------------------------------------------- Yes. It's hard to tell, to be honest with you. It's -- the shipping lines have left empty containers all over the world. I think there's 90,000 empty containers in Australia. So it's not which they don't seem to be addressing because it suits them because they're able to increase the freight rates enormously, which everyone is dealing with. We're fortunate we've got the currency, we're coming off a hedge, the lower hedge in the currency. So we gained a bit on the currency. So there's a little bit of uncertainty for me to be able to predict accurately what the profit will be second half. But yes, there's a lot unknown on shipping. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc., Research Division - Head of the Australian Small Caps Team & Director [16] -------------------------------------------------------------------------------- Sure. No, I can appreciate that. And then how are you thinking about the differences in returns you can generate for shareholders when you consider business acquisitions versus property acquisitions or development? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [17] -------------------------------------------------------------------------------- Yes. I think a business acquisition is going to generate great returns for shareholders. The property acquisition is more about occupancy cost. Yes, there's a profit saving there, but it's all about long-term strategy of being a sustainable business in the future to ride the highs and lows and be certain. Renting premises these days, things might get redeveloped, you may lose a site because it's going to be redeveloped. There's too many unknown. So we're really -- there's so many advantages owning the property that don't give necessarily enormous returns immediately, but certainly long-term returns and of sustainability of the business, it's like a hedge. But yes, an acquisition is going to give a better return to shareholders. Yes. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc., Research Division - Head of the Australian Small Caps Team & Director [18] -------------------------------------------------------------------------------- Sure. And then I might have missed it, but I can see order growth like comparable store order growth for the first half. Can you give us the like-for-like sales growth for the first half, just so we can continue the time series that you previously disclosed to us? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [19] -------------------------------------------------------------------------------- Yes. I think -- well, it was less than that because we didn't deliver the sales orders is what it is. It's not really a relevant figure, but it was probably around 25%. -------------------------------------------------------------------------------- Christopher Malley, Nick Scali Limited - CFO & Company Secretary [20] -------------------------------------------------------------------------------- Yes. Because of... -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [21] -------------------------------------------------------------------------------- Yes. Don't forget, we have to adjust for the Melbourne closures. So we shut 3 months in Melbourne, we were shut New Zealand over 2 different periods, and we've adjusted for those at least. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from Callum Sinclair of Macquarie. -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [23] -------------------------------------------------------------------------------- Just going back to that supply chain question Sam asked. I mean, clearly, the second half result is dependent on when product gets delivered to customers. But eventually, that's going to be recognized, and it's a timing issue. So maybe just thinking about how you see customers being understanding of those longer time frames and willing to continue to commit to written orders and deposits over the next couple of months? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [24] -------------------------------------------------------------------------------- Yes. I think, customers -- well, we're seeing, clearly, customers are willing to wait. The January result -- I mean, to be honest with you, there's a lot of items. Customers are waiting longer for during the January sale, but they were committing to it, which was to my surprise. So it seems the propensity for customers is to wait. I think they understand the issues. It's in so many industries, you wait and you can't get things you want immediately. People from cars to coax to lots of products is just people having to wait longer. And I think that the customer understands that at the moment. Obviously, long term, they're not going to accept that if things come back to normal. -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [25] -------------------------------------------------------------------------------- Yes. Great. And then just on the competitive landscape or more specifically on the marketing spend, just the decline in the period. Is it -- do you think that's permanent or just a decision not to push hard, given demand's already been elevated? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [26] -------------------------------------------------------------------------------- Yes. Look, we -- it's been -- what we did, we changed the strategy in the marketing. And that's really -- we didn't actually reduce our marketing spend on television and radio. We reduced it on press and other -- mainly press. We did reduce some other mediums. So that's been a strategy that we, I think, is probably permanent. What we will spend money -- more money in the future is on digital marketing. That's just been a change. So yes. -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [27] -------------------------------------------------------------------------------- Yes, that helps. Yes. And then, I guess, that's probably a good segue into the online store. You put some comments in there, but the investment required to, I guess, drive or facilitate that growth here. And then the SKU expansion from those additional categories, what kind of range expansion will that deliver? -------------------------------------------------------------------------------- Christopher Malley, Nick Scali Limited - CFO & Company Secretary [28] -------------------------------------------------------------------------------- Yes. So I think -- so from online, I mean, we see the investment more in the configure -- being able to configure lounges. As you note, the case goods do represent the majority of our current orders online. We see scope to sell more lounges, or at least to try to sell more lounges through enhanced tools, which we're looking at doing. As to category growth, I mean, we don't want to go into particular at the current time, but we do see scope to increase the categories, the amount of SKUs per category as well. Where we may be restricted in our showroom environment, we don't have the same restrictions online. It gives us the ability to trial new categories and expand others. So that will be something in this half coming that we'll be particularly focused on trialing. But then also launching into the back end of the year, other category, too. So it's a bit of a wait and see at the moment. The investment is underway. We don't believe it's going to be material to CapEx, but it will be something that we will focus on and we'll trial. -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [29] -------------------------------------------------------------------------------- Right. And just last one, if I can. Just on New Zealand and the new store rollout there. I mean, the written orders you've disclosed and that's been strong. But how much of operating leverage coming through as you scale up the DC infrastructure over there have come through in terms of the reported results versus what actually is likely to come through in the forward period. -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [30] -------------------------------------------------------------------------------- Yes, there's certainly going to be more -- a lot more coming through in the second half out of New Zealand. Don't forget we'll close there quite a bit in New Zealand as well. So there's a good order -- at the moment, it's obviously got its high order bank at all time. A long way. A lot more high than in Australia in terms of percentage. So yes, it's going to deliver -- it's going to contribute positively significantly more in the second half than it did in the first half. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from John Hynd of Wilsons. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [32] -------------------------------------------------------------------------------- If we can expand a little bit more on online with regards to the lounges taking more of the, I guess, revenue line there. Is there the opportunity for that ratio to reflect more like the stores at any point? And also, can you give us a little bit more color on what the product -- what the end product looks like with the online, you're talking about -- I'm noting that there are a few smaller players out there with pretty good models. Are you able to give us any comparison? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [33] -------------------------------------------------------------------------------- I think -- well, yes, look, I think the first point is about your point about the categories online. We're seeing -- obviously, the propensity online is to audit case scores and lounges, rather than lounges because people clearly want to go and sit on the lounge because -- particularly, if you're going to spend more than $2,000 on the lounges. There's a propensity you want to go and see and sit in it. And probably our average unit price -- average units on lounges now is over $3,000. And so my view is that's more difficult to sell online. If I was in the $699 sofa category, like that price might be big. People are not going to be worried too much about that. But our lounge is at a premium level, there are significant investments. So people want to see it. I feel, however, saying that, there's a view here that, that could be wrong and that people will start to buy even higher price of houses online. And hence, we're going to develop a module that will make it much, much more easier for someone to order online, customize their own line -- lounge, and then we'll -- and we'll see the result of that. I can -- my view is the other online retailers, which we -- pure furniture retailers do battle with sofa sales, even at the lower price point, even at price points of $1,000 or $700 in terms of volume. And looking overseas, looking at the people we know in the U.K. Yes, you'll sell lounge, but it's at a lower price point, and it's not super -- has never been so compelling. However, we will still test these waters and see if we can improve, I'm sure we will improve that. But when we talk about category expansion online, it's going to be not lounges, it's going to be the other items, which we will launch in the near future. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [34] -------------------------------------------------------------------------------- And so the new offering, will customers be able to, I guess, complete their transactions purely online because at the moment... -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [35] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [36] -------------------------------------------------------------------------------- I understand. It's still an inbound sales call process. -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [37] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [38] -------------------------------------------------------------------------------- Which does give you the chance to, I guess, upsell. And which helps your margin. So I think just if we could just talk around that a little bit, please, with the new offering. -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [39] -------------------------------------------------------------------------------- Yes. With a new offering, yes, you're right. They'll be able to transact online, but obviously, they can -- there will be messages, there will be attempting to engage with the customer as they do overseas because you're right, by talking to people, you can add on. And we've proven that customers have come in when inquiring a dining table and walk away buying the dining table, (inaudible) chairs and coffee table. So you can see that from the average unit sale, which is really high, considering 70% is case goods, which is a lower-priced item. So yes, the engaging the customers directly, it really works in terms of add on. But yes, they'll be able to transact without having to necessarily engage with anybody at all. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [40] -------------------------------------------------------------------------------- Okay. And just moving on to gross margins. Obviously, a great result this period with case goods being more of your online sales but yet you're having some -- I guess, there are some issues in China at the moment. How should we think about margins looking forward, particularly in the second half, given the degree seeing profitability around for your group? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [41] -------------------------------------------------------------------------------- Yes. It's -- John, the second half, look, certainly, a 64% result is above normal, that's for sure. It's difficult. My inclination is it probably won't repeat that the second half. But won't -- where it lands, I sort of think it will be solid in terms of the margin, and historically -- historical performance. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [42] -------------------------------------------------------------------------------- So what headwinds do you think you're facing now with that gross margin that you were tailwinds, I think, in the first? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [43] -------------------------------------------------------------------------------- Yes. To me, it's just a temporary issue, which is the freight cost. That are at high levels. And that really affects the margin if you're not increasing prices, particularly on lounges. Not so much on the case goods because the currency is offsetting that. So we've got this balancing act at the moment. We've got the freight prices. It was enormously a lot higher than it was. But we've got -- we're coming off lower hedges at a better rate during the half. So there's all -- it's the offset and where freight lands. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [44] -------------------------------------------------------------------------------- Okay. And just final one for me on acquisitions. Obviously, with the issues -- macro issues in the U.K., it's probably not the best time to be exploring those options. Can you talk about the landscape at all? I mean there's been a lot of businesses -- furniture business looking to exit, given the strong sales. I mean how do you see the landscape at the moment? And are we seeing you sort of put your foot down with these store acquisitions? Is that a signal that perhaps any sort of business acquisition is some time off? -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [45] -------------------------------------------------------------------------------- No, no, I wouldn't assume that at all. I would say to you that there's a lot -- I've never seen so many opportunities for acquisitions. But as you said, we're -- every furniture business is at its peak at the moment. This is a very unusual time. So we are certainly not ignoring these opportunities, and we're looking at them and -- providing it makes sense for us and we can see synergies and we can see growth in position. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Scali for closing remarks. -------------------------------------------------------------------------------- Anthony J. Scali, Nick Scali Limited - MD & Executive Director [47] -------------------------------------------------------------------------------- Yes. Thanks, everyone, for attending the conference today. Overall, an unusual time and an encouraging result for the company and thank you. -------------------------------------------------------------------------------- Christopher Malley, Nick Scali Limited - CFO & Company Secretary [48] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.