FY26 result (12 months to 30 June 2026). Reporting currency: A$

ANZ business: [insert macro view here] (this is a joke, not a typo)

A view on the Nick Scali ANZ business is largely a view on the Australian housing market. Yet in this weak housing market the ANZ business got through this July with flat written sales cycling +8% in July 2025. And management thinks gross margins in the region can stay close-ish to current levels. That is clearly a good operator (non-contentious view) and looks like a good way to play an interest rate cut cycle when it comes.

I don’t think I’m clever on the ANZ business - overlay your macro view is probably the best course of action.

The UK on the other hand…

I’m recently back from store-walking three regional England Nick Scali stores and the surrounding competitors. 

I think they have built a really solid foundation from which to grow. The store fit-outs look great. The product in store is mostly now all changed over to the Nick Scali sourced, and seems to fill a somewhat unique place in the market (value-for-money plus depth of customisation). The in-store staff came across as higher quality than peers. Anecdotally word-of-mouth / positive referral traffic is now coming through well. The repositioning enables the business to access customers at a higher price point than Fabb. And the refurbishment program with its disruptions is behind them.

But on the flip side, this is a low frequency purchase so it takes longer to build a brand. Part of lounge growth needs to fill the bed and bedroom hole as that category was exited. Advertising / marketing is now what is needed but the business is subscale. And speaking of scale it sounds like there is an upfront headwind as NCK invests on the warehousing side.

Plus, the UK consumer is weak (probably best put as rather glum). Per DFS in a mid July trading update:

I have done plenty more analysis on the UK business - competitors, advertising, store productivity, margins… get in touch if you are interested

Early FY27 trading provided

No formal revenue, earnings or margin guidance was issued for FY27. The forward disclosure is confined to first-five-weeks trading and store openings (consistent with usual practice).

FY27 store outlook provided

Two of the six planned ANZ FY27 new stores were opened in July.

The one UK FY27 new store is planned for October with the company “in negotiations on a number of other locations”.

Store network aspirations remain unchanged from the 1H26 result

Margin, cost and UK breakeven outlook commentary

ANZ gross margin: "the Australian ANZ margin was very high. I'm not committing that, that's always going to be at that level, but somewhere in the range of 65%, 66% is where I think it can remain."

UK gross margin: "the U.K. margin is probably where it will sit at…somewhere between 60% and 61%."

UK breakeven: "I think we're lowering the breakeven at the moment. We think it's going to be lower than AUD 51 million."

ANZ wage costs: Employees are "above award, quite a bit above award", so award increases "won't have an impact", though "there's wage inflation, just natural, particularly if you want good salespeople". Asked whether 4.75% was a reasonable starting point for wage growth next year, or whether the business could run leaner: "Hopefully run leaner than that."

The FY25 comparative is an underlying figure excluding $2.4m of UK restructuring and integration costs and $2.8m ($1.9m post-tax) of ANZ freight-forwarder costs — headline NPAT growth is +22% against FY25 underlying and +31% against FY25 statutory. FY26 carries no normalisation items.

Gross margin expansion of 210 basis points reflects "disciplined pricing, sourcing and inventory management".

Impact of AASB16 was -A$1.7m after tax vs nil in FY25.

Basic and diluted earnings per share are both 88.5 cents: there are no dilutive shares outstanding. Ordinary shares on issue were unchanged over the year at 85,530,699.

ANZ operating expenses increased $5.0m, "the majority being attributable to higher employment and additional marketing expenses in 1H with costs being comparable to prior year in 2H". The second half included $600k of start-up costs for four new stores.

UK operating expenses in local currency terms were aligned to the prior year, "with savings in employment offset by logistics costs".

UK other income of $1.6m included a lower than estimated final acquisition payment and "the early surrender of onerous leases, on stores which incurred trading losses during landlord negotiations".

UK written sales orders "are not directly comparable year on year due to the disruption caused for refurbishments across the network between late 2024 through to December 2025". On a comparable basis, Nick Scali-branded UK showrooms trading in both periods grew written orders 19.0% in the second half.

On UK operating priorities, leadership "focus remains on retail teams in stores" alongside "evaluating and seeking new store opportunities". On product, "best sellers in the UK in line with best sellers in Australia", with "new product introductions based on Australian performance" — a new product "is first tested in Australia, which has been an advantage and being successful to date, that strategy".

On the ANZ division, "we're sticking to the strategy... we're not doing anything different. The main thing is we're trying to have our dollar go further because it's a tough market for the media" — employment sits "above award, quite a bit above award" with "not a lot of fat in our employment", and there is "a lot and lot of focus on conversion".

Asked where management is most optimistic looking bottom up rather than at the macro: "I think maybe rostering practices across the group. Certainly in the U.K."

Gross margins expanded and are elevated. ANZ reached 66.0% from 65.0% and the UK 60.3% from 47.1%. The driver is "disciplined pricing, sourcing and inventory management". Looking forward ANZ to be "somewhere in the range of 65%, 66% is where I think it can remain"; the UK "will sit at where it is in somewhere between 60% and 61%". Hedges rolling off lower rates are "getting offset by, at the moment, freight... up because of the oil issue".

ANZ is facing one of the worst macro environments. "The macro is not good at all... this is one of the worst macro for furniture for sure. We've got house prices going down... interest rate increases... inflation... cost of living." Second-half orders fell 3.6% against a prior-year second half up 7.3% like-for-like; the first five weeks of FY27 were flat, "cycling off high single digit growth". Traffic is "down in stores a lot" and, after the May budget, "it has deteriorated further" — but "transaction values are holding" and "conversions are up". The UK is separately "not easy at the moment as well on the macro".

The UK turned profitable in the second half. Full-year loss before tax was -$4.8m on revenue of $40.0m, with a $0.8m profit in 2H. Breakeven is being lowered to "lower than A$51 million". The constraint is scale — "not enough stores and not enough brand awareness" — and marketing is gated on it: television is "very, very expensive" and "we don't have enough stores to justify a spend that would be meaningful", needing "at least, another 10 stores". The +35% written order growth to start FY27 is not expected to persist, the comparative flattered by stores "closed for refurb last year".

Independent valuation puts the property book well above carrying value. Thirteen locations, 52,678m², valued at $208m against a book value of $131m and $145m of acquisition cost. FY26 added Campbelltown NSW for $7.9m and land at Edinburgh SA for $3.8m; the Richmond VIC showroom completes in August 2026 and "won't be operated for approximately 18 months". Property debt of $44m sits at "less than 22%" LVR.

The higher dividend was not a signal on acquisitions. The final dividend was lifted to 39 cents fully franked. Asked whether that implied M&A was less likely: "we've got a stronger balance sheet than we've ever had and a lot of cash... No relation to M&A... a lot of capacity in our balance sheet." On targets: "We're always looking."

UK distribution has moved in-house to a leased warehouse. The lease commenced June 2026, replacing a third party: "a brand-new building that allows us a lot of capacity for growth". The cost effect is "a larger property cost, but a lower logistics cost. Overall, it will be marginally higher".

Q: How should the ANZ gross margin be thought about going forward, given movement in FX and freight in the second half and hedging arrangements that may roll off?

A: We're rolling off hedges that were at lower rates, lower dollar rates. We've got a bit of the benefit coming through now, but that's getting offset by, at the moment, freight. It is up because of the oil issue, with an increase in the bunker, the "BAF". The Australian ANZ margin was very high. I'm not committing that, that's always going to be at that level, but somewhere in the range of 65%, 66% is where I think it can remain.

Q: How much higher can the UK gross margin go, given a solid second-half outcome?

A: The U.K. margin is probably where it will sit at where it is in somewhere between 60% and 61%.

Q: On like-for-like written order trends, does it look as though the trend improved from down mid-single digit in February to June to down low single digits in the first five weeks?

A: The quarter 4 was volatile, some months up, some months down, but we were off high comps of prior year, in fairness. So the first 5 weeks doesn't mean it's going to be that for sure. It's just very difficult to predict.

Q: How difficult is the macro environment at present?

A: The macro is not good at all. This is one of the worst macro for furniture for sure. We've got house prices going down. So there's a negative wealth effect. We've had interest rate increases. We've got inflation. We've got cost of living. And housing transactions have been slow for 6 months. So it's a tough macro, very tough. You've got a bad consumer, I think, at the moment. So hopefully, my hope, obviously, that the — if the war stops and oil comes back down and maybe inflation is controlled, but it would certainly be helpful if interest rates are dropping.

Q: On written sales orders in the trading update, adjusted for new stores, were the declines modestly negative single digit on a like-for-like basis?

A: Very marginal, very marginal. It might be almost negligible, to be honest with you, on a like-for-like because we actually have two stores that we closed, and then new stores that were opened.

Q: So broadly flat, even on a like-for-like basis?

A: Yes. But that's only the first 5 weeks. So we've got a long way to go.

Q: Advertising spend was roughly flat in the second half after a bump in the first — given the weaker consumer in Australia, will there be any change in how the business promotes over FY27?

A: No, I think we're sticking to the strategy — we're not doing anything different. The main thing is we're trying to have our dollar go further because it's a tough market for the media. So we're just trying to get better value, is how we're looking at it.

Q: The UK bank holiday weekend fell within these first five weeks — what effect did it have?

A: The bank holidays in August. There was one in Wales and Scotland, not the U.K. The bank holiday is at the end of August in the U.K.

Q: How promotional were competitors in the UK over the period?

A: The U.K. has got tougher because as you know, the DFS Group, which is more than 25% of the market, reported negative 4% written sales order growth. So it's a tougher environment. Traffic is down, but our conversion has improved a lot. So U.K. is not easy at the moment as well on the macro.

Q: The 35% increase in July was affected by closures and remodelling — should that rate be expected for the rest of the year?

A: No, that's what I'm qualifying. It's better to look at the like-for-like, the stores that were opened in the prior year is a better indication. No, we don't expect that.

Q: A$51 million has previously been given as the UK breakeven point, against A$40 million delivered in the year — how confident is the business of reaching A$51 million in FY27, or is breakeven more likely in FY28?

A: I think we're lowering the breakeven at the moment. We think it's going to be lower than AUD 51 million. I'm becoming more confident, and the sales teams are definitely better. They're converting better. It's going to depend a bit about the macro there. I think product is doing well, and we keep introducing proven winners in Australia that seem to be working, and the range is just improving as well. I'm feeling confident in our strategy and what we're offering the customer. The thing holding us back is not enough stores and not enough brand awareness.

Q: Two Fabb branded stores are still operating — what is the plan for them?

A: One of them is in a place Canterbury, we inherited the store, and it's in an industrial area. It's not in the retail park. We're just running the lease out there because it's not very high rent, but it hardly makes any sales. So we're always going to quit that. The other one is a smaller store that we're using as a clearance outlet, and we'll continue to do that.

Q: On like-for-like in the Australian trading update, the only closures shown in the pack are Lincoln and Nottingham in the UK — which closures were being referred to?

A: In Australia, we've got one around Brisbane Airport.

Q: Is the stronger-than-expected final dividend a function of M&A being less likely over the next six months?

A: No, the dividend — we've got a stronger balance sheet than we've ever had and a lot of cash. So that's not going to impact that at all. No relation to M&A. As you can see, even our properties now, that $200 million, and we've got property debt of $43 million. So a lot of capacity in our balance sheet, a lot of capacity.

Q: Are there potential acquisition targets under consideration in ANZ at present?

A: We're always looking. We're always looking.

Q: At what point is the post-budget deterioration in the housing market expected to show up in company sales, allowing for settlement and move-in timing?

A: I think that's happened. I think we've already seen that. That started happening back in February. Traffic is down. The traffic is down in stores a lot. It has deteriorated further, yes, I agree. But I don't know. Interest rates might drop sometime later.

Q: UK operating costs were similar in the second half to the first — excluding new stores, how does the new warehouse affect that line?

A: We've moved from a third party to a new warehouse. So we're going to have a larger property cost, but a lower logistics cost. Overall, it will be marginally higher, the cost, maybe, because we've got a warehouse with capacity. So there's a benefit from the third party, the savings there, but then we've got the property cost. So it's a small number, but it's higher overall, that cost.

Q: How quickly will the UK marketing expense line be ramped through FY27?

A: The U.K., it's a big population, advertising on what we traditionally do like on TVs. It's very, very expensive. And we did experiment with it, and the fact is we don't have enough stores to justify a spend that would be meaningful, that would work at the moment. We're getting good results anyway because we are in retail parks after all, and we're paying a lot of rent to be in a retail park for a good reason. So we will do promotions from time to time, but very controlled, very controlled.

Q: What revenue level does the UK need to reach to give the scale and confidence to spend on marketing equivalent to a normal business?

A: You look at the percentage. We need, at least, another 10 stores to be able to promote, as we would like to promote, with a decent schedule, and that costs money, but that's what I think we need.

Q: Given the ANZ macro, what is being observed on conversion and average transaction value?

A: The transaction values are holding. The average is. Conversions are up. They have to be because traffic is down. Traffic can be down, at times, 10% to 15%. So there's a lot and lot of focus on conversion. I've been in the stores talking to the salespeople and what they're seeing is that the people coming are really buyers. We're fortunate that we've held the average transaction value because that was my concern. And our focus is on conversion. But it's a tough environment. It's a really tough environment.

Q: On ANZ costs, how are award wage increases into next year being approached, and what rationalisation can be achieved?

A: That's challenging. Fortunately, our people, above award, quite a bit above award. So that won't have an impact. But I think there's wage inflation, just natural, particularly if you want good salespeople. So it's about being more efficient and rostering and managing numbers carefully and having effective people. There's not a lot of — we don't have a lot of fat in our employment.

Q: Against 4.75%, is that a reasonable starting point for wage growth next year, or can the business run leaner?

A: Hopefully run leaner than that.

Q: On UK profitability in the second half, are the economies of scale annualised, and what does incremental FY27 profitability look like given the lowered breakeven?

A: Overall, we're having to hold costs pretty flat. In certain areas, we think there's potential savings on costs, but small. There's lots of small — but overall, there's nothing material on the cost side.

Q: On ANZ, is there any element of balancing gross margins against traffic and conversion, or is the like-for-like outcome predominantly the traffic and macro issue?

A: Of course, we watch that carefully. You're right, and that's something we manage all, every day. Overall, 66% is a very high number, and I'm not saying that will be sustained, but you could bank on somewhere between 65% and 66%.

Q: Looking bottom up rather than at the macro, where is management most optimistic within the business?

A: I think maybe rostering practices across the group. Certainly in the U.K.