Good morning. We are now going to present to you the H1 2021 results, starting with page one 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 worth totaling AUD 191.1 million, with sales revenue at AUD 171 million. The gross profit margin improved by 180 basis points due to reduced SKU 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. AUD 32.4 million to be paid to shareholders through a AUD 0.40 interim dividend. Two new stores successfully opened during the half, bringing the Nick Scali Furniture store network to 60. Training and sales orders.
Sales momentum maintained through the first half of the financial year with comparable store sales orders up 58% on the first half compared to the first half of FY20. As mentioned, total sales orders up 52% to AUD 191 million. The growth rates were across all geographies and categories. Total sales orders from New Zealand up 85%, particularly strong. Online represents 9% of our total written sales orders in non-lounge categories and 4.5% of total written sales orders across all categories. Sales revenue is up AUD 24 million. It was supported by 24% growth to AUD 171 million, supported by an order bank which reached an all-time record high of AUD 34 at December 2020. As you can see, the sales are behind sales order growth, that's basically due to the aging of the order bank, which increased from 63 days to 92 days.
This has been driven by delays in the supply chains, 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 AUD 40.5 million. You can see there was an improvement in the group's gross margin. As mentioned, it was reduced SKU discounting. The operating expenses through wage subsidies, marketing expense, and headcount rationalization further supported a reduction in general and administrative expenses. Cash flow, I'll let Chris Malley, our CFO, run through the cash and balance sheet.
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 profits has led to a very strong operating cash flow. In fact, we've had a threefold increase in operating cash flow. Operating cash flow for the period was AUD 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. Just noting that in the prior period, we sold a property, our Mandurah property, so that's the difference between the two halves. The dividend payments in the half were AUD 18 million. After those items, the net movement was a net increase of cash of almost AUD 25 million for the half. Moving on to the balance sheet.
Just running down the key items there. The cash balance, as just mentioned, is up nearly AUD 25 million, at AUD 87.6 million at the 31st of December. Our inventory in transit has increased by AUD 4.8 million. 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 DCs has remained stable through the period, with a slight decrease, but generally no real change in the level of inventory on hand. Property balances increased by AUD 6 million as a reflection of the purchase of the Keswick property, as just mentioned. There's been no change to the level of borrowings. That purchase was fully funded through cash, there's been no change to the borrowings, which remain at AUD 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. 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 AUD 50 million. Overall, and before we account for AASB 16, there's been an increase in the net asset position of AUD 24.9 million. I think that's the cash flow and balance sheet highlights. I'll hand you back to Anthony.
On page seven of the presentation is our property slide. A key strategy of this company is to continue to expand the retail property network. We've continued to do that recently by the purchase of our Keswick store in 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 is allowing us to continue to increase our property portfolio, which in turn lowers our occupancy cost and increases profitability. That strategy is continuing and will continue. The online and digital offering continues growth in the company's online offering with 8.8 million written sales orders. Case goods continue to represent the majority of our sales orders, and the average transaction value is AUD 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 AUD 3.5 million for the first half 2021, materially ahead of previous guidance of AUD 4 million for the full year. Launch of a refreshed Nick Scali transaction online offering will occur in the second half of this half. Additional categories will be launched online in the future. Importantly, we will be implementing an online configuration module that will be launched in September to try and boost some lounge sales online. New Zealand is becoming an important market for us, we've seen extremely good growth. During the half, we opened our flagship showroom in Wairau Park during the half. As you can see, the average transaction value is AUD 3,000 for our New Zealand showrooms compared to AUD 10,500 in Australia.
New Zealand's written orders were up 79% against the same comparable period. Same sales floor growth increased 42%. Sales revenue increased despite the impact on 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 Island, which will be supported by our centralized distribution model. Scale benefits will begin to be realized in the second half FY 2021 as sales orders convert to delivered sales, particularly from the Wairau Park store, and contribute positively to 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 is we utilize our direct-to-consumer model to expand into adjacent product categories and increase overall value proposition to customers.
Leverage successful expansion to beddings to 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's 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 via acquisition to focus on business where Nick Scali can add considerable value. The other point on the capital side is the improvement of company-owned versus leased property, particularly in key growth corridors, and the continued expansion of our lettings in company-owned property builds the asset base and reduce fixed costs for the company. Turning to page 11, the store network. We currently have 60 stores. We opened two 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. 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 continued to be strong as the same as the first half. In terms of the store network, the company expects to open two new showrooms in the second half of the financial year, taking net store openings for FY 2021 to four stores. Sales by order growth for the group in January 2021 was up 47% compared with 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, the sales order bank at 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 for 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.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Mark Wade of CLSA. Please go ahead.
Good morning, guys. Yeah, cracking result. Well done. Just a high-level question to start with. COVID has changed customer behavior and values and as well as challenged a lot of business models. In your view, 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?
What changes will we be retaining that we've made for COVID?
Yeah. Just essentially trying to understand 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.
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 growth sales, which are probably double what the market is anyway, and we believe the addition of the online offering is additional growth. We'll bank that in the future. The other thing obviously for us is the store network growth, which will continue to accelerate. There's plenty of scope for 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 set up. Every additional store there, bit of that contribution there that goes straight to our bottom line.
Of course, any acquisitions that will work for us and particularly giving us opportunity to grow and synergies. That's the future for us.
Sure. I suppose on that, the expectations for the coming June half, you're starting to cycle some elevated sales really late in the piece, but so how long does it stay this good? Is what everyone's asking.
Yeah. Look, I don't know if it'll stay the elevated levels, but I certainly think 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. What's been a key driver for us has always been housing and housing sales and volume of buildings and renovations and refurbishments. It seems. For me, I think we're going to continue at a pretty good level for at least another 12 months after that, I really don't know. Irrespective of that, our job is to almost ignore that and build the business as it wasn't so elevated, and that's why we store all our online and everything that we talked about.
Fantastic. Last one, the cash, the dividend payout was slightly down. Still, the dividend was huge, but the payout was slightly down. Is that just a case of saving it for a rainy day, or do shareholders just need to wait until the final dividend in August for a bigger slice of the action?
Look, that's a board discussion. I think it could've been 80% or 90%, but it's certainly still a 50% increase on the same period.
Mm-hmm. Okay. Thanks so much, guys. All the best for the coming six months and beyond.
Thank you, Mark.
Thank you. Your next question comes from Sam Teeger of Citi. Please go ahead.
Hello.
Anthony?
Yes. Sam.
Yeah. Great. Yeah, thanks.
No worries.
At the AGM in late October, the company indicated that the second half profit growth would be in line with the 70%-80% profit growth, which at that time you were expecting for the first half.
Yeah.
Is that 70%-80% second half profit growth still in the ballpark of what should we be expecting? Just wanting to know, has the outlook from your perspective got better or worse?
Yeah. Look, we didn't talk about that in the outlook. Certainly, I can tell you that the January sales orders were better than we expected, particularly after a very strong first half. 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 lockdowns because all our sourcing comes from 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.
I think the guidance at the AGMs is still probably relevant to that number at that time, not to this number necessarily. Really hard for me to commit to, Sam. All I can say is that trading's good, it continues to be strong, but there's some challenges on the delivery side for us.
Sure. 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 three-month issue, or a six-month issue, or something a lot longer than that?
It's hard to tell, to be honest with you. The shipping lines have less empty containers all over the world. I think there's 90,000 empty containers in Australia. They're 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's dealing with. We're fortunate we've got the currency. We're coming off a hedge, the lower hedge in the currency, we gain a bit on the currency. There's a little bit of uncertainty for me to be able to predict accurately what the cost will be second half of the year. There's a lot unknowns on shipping.
Sure. No, I can appreciate that. How are you thinking about the differences in returns you can generate for shareholders, when you consider business acquisitions versus property acquisitions or development?
Yeah, 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 trading there, but it's all about long-term strategies and being a sustainable business in the future to ride the highs and lows, 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 unknowns. There's so many advantages owning the property that don't give necessarily enormous returns immediately, but certainly long-term returns and sustainability of the business. It's like a hedge.
Got it.
an acquisition's gonna give a better return to shareholders, yes.
Sure. 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?
Yeah, 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, it was probably around 25%. Yeah.
Because of the.
Got it. Yeah. Don't forget, we had to adjust for the Melbourne closure. It was shut three months in Melbourne. We were shut in New Zealand over two different periods, we had adjusted for those as well.
Okay.
Yeah.
All right. Okay. Thanks very much, guys. Appreciate it.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from Callum Sinclair of Macquarie. Please go ahead.
Hi, Anthony. Hi, Chris. Just going back to that supply chain question Sam asked. Clearly the second half is dependent on, when product gets delivered to customers, but eventually that's gonna be recognized and it's a timing issue. 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.
Yeah, I think. Well, we've seen clearly customers are willing to wait. 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. It seems a propensity for customers is to wait. I think they understand the issues. In so many industries, you're waiting, you can't get things you want immediately. From cars to kayaks to lots of products, it's just people are having to wait longer and I think that the customer understands that at the moment. Obviously, long-term, they're not gonna accept that if things come back to normal.
Yeah. Great. Just on the competitive landscape or more specifically on the marketing spend, just the decline in the period, do you think that's permanent or just a decision not to push hard given demand's already been elevated?
Yeah, look, what we did, we changed strategy in the marketing. 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. That's been a strategy that I think is probably permanent. What we will spend more money in the future is on digital marketing. That's just been the change. Yeah.
Yeah. That helps. I guess that probably would segue into the online store. You put some comments in there that 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 would that deliver?
Yeah. From online, we see the investment more in being able to configure lounges. As you know, their 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, we don't want to go into particulars 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. That will be something in this path coming that we'll be particularly focused on trialing, also launching into the back end of the year early category two.
It's a bit of a wait and see at the moment. The investment's 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.
Right. 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. How much of operating leverage coming through as you scale up the DC infrastructure over there has come through in terms of the reported result versus what actually is likely to come through in the forward periods?
Yeah, there's certainly going to be a lot more coming through in the second half out of New Zealand. Don't forget, we're closed there quite a bit in New Zealand as well. Yeah, there's a good order bank. At the moment, it's obviously got its highest order bank of all time, by a long way. A lot more higher than in Australia in terms of %. Yes, it's going to contribute positively much significantly more in the second half than it did in the first half.
Okay. That's it from me. Thanks, guys. Appreciate it.
Okay.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from John Hind of Wilsons. Please go ahead.
Oh, good morning, Anthony and Chris. Thanks for taking my question. 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? Also, can you give us a little bit more color on 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?
Yeah, look, I think the first point is about the categories online. We're seeing obviously the propensity online is to order case goods and rather than lounges, because people clearly want to go and sit on the lounges. Particularly if you're going to spend more than AUD 2,000 on a lounge, there's a propensity you want to go and see and sit in it. Probably our average unit price on average unit sale on lounges now is over AUD 3,000. My view is that's more difficult to sell online. If I was in the AUD 699 sofa category, that price point would be easier. People are not going to be worried too much about that. Our lounges are at a premium level. They're a significant investment, people want to see it.
However, saying that, there's a view here that that could be wrong and that people will start to buy even higher priced lounges 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 lounge, and we'll see the result of that. My view is the other online retailers, which we are pure furniture retailers, do battle with sofa sales, even at the lower price point, even at price point of AUD 1,000 or AUD 700 in terms of volume. And looking overseas, looking at the people we know in the U.K., yes, you'll sell lounges, but it's a lower price point and it's not super. Has never been so compelling. However, we'll still test these waters and see if we can improve. I'm sure we will improve that.
When we talk about category expansion, online, it's going to be not lounges, it's going to be other items, which we will launch in the near future.
Thank you. The new offering, will customers be able to, I guess, complete their transactions purely online?
Correct
I understand it's still an inbound sales call process.
Correct.
Which does give you the chance to, I guess, upsell and which helps your margin. Just if we could just talk around that a little bit, please, with the new offering.
With the new offering, yes, you're right. They'll be able to transact online, but obviously there'll be messages there, or the intention to engage with the customer as they do overseas. You're right, by talking with people, you can add on. We've proven that with customers come in with an inquiry on a dining table and walk away buying the dining table, buffet, chairs, and coffee table.
Yeah.
You can see that from the average unit sales is really high, considering 70% is case goods, which is a lower-priced item. Yeah, engaging the customer directly, it really works in terms of add-ons. They'll be able to transact without having to necessarily engage with anybody at all.
Okay. Just moving on to gross margins. Obviously, a great result this period with case goods being more of your online sales. Yet you're having some issues in China at the moment. How should we think about margins looking forward, particularly in the second half, given the degree you can see profitability around for your group?
Yeah. Yeah, the second half, look, certainly the 64% result was just above normal, that's for sure. It's difficult. My inclination is that it probably won't repeat that the second half. Where it lands, I think it'll be solid in terms of the margin and historical performance.
What headwinds do you think you're facing now with that gross margin that were tailwinds?
Oh, look-
You reversed?
For me, it's just a temporary issue, which is the freight cost.
that are at high levels. That really affects margins if you're not increasing prices, particularly on lounges, not so much on the case goods because the currency's offsetting that. We've got this balancing act at the moment where we've got the freight prices, it's enormously a lot higher than it was. We're coming off lower hedges at a better rate during the half. It's the offset and where the freight lands.
Okay.
Yeah.
Just a final one from me on acquisitions. Obviously, with the issues, the 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? There's been a lot of businesses, furniture businesses looking to exit given the strong sales.
Yeah.
How do you see the landscape at the moment? 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?
No, I wouldn't assume that at all. I would say to you that I've never seen so many opportunities for acquisitions.
As you said, every furniture business is at its peak at the moment. This is a very unusual time. We are certainly not ignoring these opportunities, and we're looking at them, provided it makes sense for us and we can see synergies and we can see growth.
Got it.
Acquisitions, yeah.
Great. Thanks. Thank you very much, Anthony.
Thanks, John.
Thank you. Once again, if you wish to ask a question, please Press Star one on your telephone and wait for your name to be announced. There are no further questions at this time. I'll now hand back to Mr. Scali for closing remarks.
Yes. Thanks, everyone, for attending the conference today. Overall, an unusual time and encouraging result for the company. Thank you. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.