3 reasons why the Nick Scali (ASX:NCK) share price could be a long-term idea

3 reasons why the Nick Scali (ASX:NCK) share price could be a long-term idea

I believe that the Nick Scali Limited (ASX: NCK) share price could be a good one to consider.

It may be a really good opportunistic idea, in my opinion, if the economy goes through a slowdown and Nick Scali shares fall.

What is Nick Scali?

You may already have seen some of its showrooms. It’s a furniture business. Nick Scali imports high-quality furniture.

Retail shares may not be the strongest ideas in the world (like ASX tech shares), but I think Nick Scali could be one to watch for a few different reasons:

Online potential

Since its inception, Nick Scali has essentially been a bricks and mortar business, generating profit via its store network.

However, COVID-19 has opened up the possibility of making a lot of sales through the online channel. Not only does this expand its addressable market to places that don’t have stores nearby, but the margins are also seemingly very good.

In FY21 Nick Scali saw a total EBIT (EBIT explained) margin of 32.7%. But it said that during the 2021 financial year, it generated $8.8 million of online EBIT with $18.3 million of online written sales orders.

3 reasons why the Nick Scali (ASX:NCK) share price could be a long-term idea

That implies a very attractive online EBIT margin and it would benefit if online sales made up a greater proportion of overall sales. Management are looking to grow its percentage of online sales.

Dividends

Dividends can be a really good way to boost the returns of a business over time, combined with the impact of profit growth on the Nick Scali share price.

In FY21, Nick Scali generated 104 cents of profit / earnings per share (EPS). It paid a total dividend in FY21 of $0.65 per share, representing a payout ratio of 63%. That means it kept plenty of profit for re-investment into the business for more growth.

Analysts are expecting the FY22 profit to not be quite as good as FY21 as the retail boom slows. But CommSec numbers still suggest Nick Scali could have a fully franked dividend yield of 5.4% in FY22.

Showroom network expansion

In FY21 it added three new showrooms and opened another in July 2021. It currently has a total network of 61 showrooms across Australia and New Zealand.

Over the long-term, it has a showroom target of 85 showrooms across the two countries. It’s also continuing to assess new opportunities.

Nick Scali could also make some bolt-on acquisitions that may add to its earnings and diversification. For example, a few months ago it confirmed it was in talks about potentially buying the Plush Sofas business, although nothing has come from that yet.

What is the Nick Scali share price valuation?

Using the profit estimate on CommSec, Nick Scali shares are valued at 15 times the estimated earnings for the 2022 financial year. That seems a fair bit cheaper than a business like Temple & Webster Group Ltd (ASX: TPW). However, cheaper may not mean stronger long-term returns.

Nick Scali is not a super defensive or high growth business. Demand for Nick Scali products could decline in the shorter term. However, I think Nick Scali is a better business than many investors give it credit for. A steady change to online could lead to even higher profit margins.

I believe that Nick Scali could be a good business to consider on any price weakness. Until then, there are other ASX dividend shares that I’ve got my eyes on.