Financial Statement Analysis: Nick Scali Furniture Performance Report

This report presents a comprehensive financial analysis of Nick Scali Furniture Limited, an ASX-listed company. The analysis encompasses various aspects of the company's financial performance, including revenue, gross profit, property, plant, and equipment, provisions, contingent assets and liabilities, and sustainability. The report examines the company's revenue streams, highlighting the impact of new store openings and the application of IFRS 15. It reviews gross profit trends over the past two years and incorporates insights from news articles regarding Nick Scali's earnings and market position. The report also delves into the company's property, plant, and equipment, addressing revaluation and impairment issues. Furthermore, it explores provisions, contingent assets and liabilities, and the company's approach to sustainability, identifying potential risks associated with its current practices. The report concludes with an overview of the company's strengths, as highlighted by the Chairman and CEO, and provides revenue forecasting considerations for the next two years, offering a holistic view of Nick Scali's financial health and strategic direction.

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SPA 242 Assignments

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Executive Summary
The present report has been undertaken for the purpose of recognizing the importance
and significance of financial statements developed by an entity to analyze its financial
performance. The significance of the accounting standards for demonstrating real world
application as such has been illustrated with this report. IN this context, the report has extracted
the information from the financial statements of an ASX listed entity for reporting on its specific
financial position. The company selected for the purpose is Nick Scali Furniture Limited. It has
been analyzed form the general overview of the company that it is presently in a expansion phase
as depicted by the increase in its share prices over the past 5 years. The revenue section ahs
depicted that company’s operating profit is on rise with increasing sales being derived from its
new stores. The property, plant and equipment section has depicted it has impaired the value of
land and buildings as the recoverable amount of these assets have been reduced in comparison to
the carrying value. The company has maintained two provisions in the liability side of balance
sheet. There were no contingent assets and liabilities recognised by the company. Also, its
sustainability performance is not adequate as the company has not disclosed any information in
this regard. This can proved to a major risk for the company’s future growth and development by
negatively impacting its goodwill in the eyes of its stakeholders.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Part 1: General Information about the Company.............................................................................5
Part 2: Revenue................................................................................................................................7
Review of Gross Profit during last two years..............................................................................7
Review of articles related to Nick Scali Earnings........................................................................8
Strength and weakness of Nick Scali as per Chairman and CEO Report and revenue
forecasting for next two years......................................................................................................9
Part 3: Property, Plant and Equipment..........................................................................................11
Different categories of property, plant and equipment..............................................................11
Revaluation or Impairment on assets.........................................................................................11
Part 4: Provisions, contingent assets and liabilities and leases......................................................12
Provisions...................................................................................................................................12
Contingent assets and Contingent liabilities..............................................................................12
Leased Assets.............................................................................................................................12
Part 5: Responsibility & Sustainability..........................................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................15
Appendix 1: Financial Statements of Nick Scali...........................................................................17
Appendix 2: Other significant items..............................................................................................21

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Introduction
The present report is developed for the purpose of carrying out an analysis of the
financial statements of a public listed company. This is carried out by gaining access to its latest
financial report (Year- 2018) and conducting an evaluation of its income statement, balance
sheet, statement of changes in equity and cash flow statement. The information extracted from
the general purpose financial statements of the company is used for addressing the various
sections of the report. The report is divided into four sections, that is, general information,
revenue, property plant and equipment, provisions, contingent assets and liabilities and
responsibility. The company selected for the purpose of evaluation is an ASX listed entity that is
Nick Scali Furniture, a public-listed Australian company involved in import and retailing of
furniture products. The overall evaluation carried out with the use of information disclosed in the
annual report by the company will help in depicting the applicability of the accounting standard
to analyze the realistic phenomena’s of business entities.

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Part 1: General Information about the Company
The company selected for the evaluation purpose is ‘Nick Scali Furniture’ listed on the
ASX (Australian Securities Exchange). The company was established in the year 1962 by Nick
D. Scali and thus its ASX code is NCK (ASX). The company is headquartered in Lidcombe in
Australia employing about 360 people. The company’s operations mainly includes import and
retail sell of furniture products such as lounges, dining tables, coffee tables, chairs and
entertainment units. It is recognized to being a specialist in manufacturing of leather and fabric
lounges and providing dining room and bedroom furniture products. The company is known to
import about 5,000 containers of furniture products on an annual basis from across the world and
have its retail showrooms and distribution centers across Australia. The main brands of the
company include Nick Scali Furniture, Nick Scali Online and Sofas2Go. The company has an
official website https://www.nickscali.com.au/ for disclosing the pertinent information to all its
stakeholders (Nick Scali Limited, 2018). The company operates within the Furniture Retailing
Industry of Australia that is estimated to provide about $7bn of revenue on an annual basis. The
industry is regarded to be highly labor-intensive as large number of employees is needed for
carrying out daily operational activities (Furniture Retailing - Australia Market Research Report,
2018).
As depicted from the graph (See in appendix Figure 1) reflecting the share price of the
company for the past 5 years, there has been sharp rise and decline in the share prices of the
company from the selected financial period of 2014-2018. There is a sharp decline in the share
price of the company in the year 2015 and a steep increase in the year 2017 with a gradual
decline in the year 2018. The declining performance of the company’s stocks during the financial
years 2014-2015 can largely be explained on account of depreciating value of Australian dollar
that has significantly resulted in increasing the supply costs. However, Nick Scali at present is
realizing higher growth on account of increasing consumer spending power supported by lower
level of inflation within the country. This is supporting the company to yield consistent sales that
has enabled it to deliver high-quality products to the customers at competitive prices. The steep
increase in the share price of the company in the year 2017 can be attributed to opening of its
new stores that has increased its profit to a large extent driven by improved sales (Wilson, 2015).

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The company is able to maintain its profitability position in the year 2018 with attaining higher
profit margin supported by the reduction in its operational expenses and supporting the future
growth. The decline in share price in the year 2018 in respect of the year 2017 can be explained
due to reduced sales growth of its new stores in comparison to the previous year (Pash, 2018).
However, it can be expected that the share price of the company has significantly
improved over the financial years 2014-2018. The main reason for the large growth realized by
the company is its ability to effectively position itself within a retail niche and providing
sustainable growth for its investors. This has been achieved by the company by opening new
retail stores that have delivered huge sales and significantly improving its gross positive margins.
This has enabled the company to become one of the largest importers of high-end furniture
products and translate them into high quality at relatively low prices as compared with that of its
competitors (Pash, 2018). The increasing profit margins enabled the company to declare higher
dividends over the period 2014-2018 and thus leading to increase in the share prices. The
company is further emphasizing to open new stores in the coming period of time and as such it is
expected to maintain its higher profitability position in the future also delivering higher returns
for the shareholders (Nick Scali Limited: Results Announcement, 2018).

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Part 2: Revenue
Companies earn revenue either through sale of goods or rendering of services to their
customer. Nick Scali is well known furniture company of Australia that derives its main revenue
from the sale of wooden furniture of all types and other related services to make available the
goods to customer at its door step. There are no special services provided by Nick Scali that
comes under the category of rendering of services list as all services are provided in connection
with the sale of goods. Some of important category of furniture sold by Nick Scali that makes its
revenue are lounges, dining tables, chairs, all types of cabinets (Custom or predesigned), TV
cabinets, coffee tables, consoles, rugs, and all other type of home or office furniture. It has been
seen from the notes to accounts of the financial statements of the Nick Scali that company has
used new revenue recognition accounting standard IFRS 15: Revenue from contract with
customers provided by the IAS to recognize the revenue (IFRS 15, 2018).
Review of Gross Profit during last two years
As discussed in above paragraph, Nick Scali is engaged in sale of goods and also shows
gross profit in the income statement. The amount of gross profit for current year as well as
previous year can be seen in the income statement of the company. The copy of income
statement has been provided in the appendix section of the annual report (See figure 2). Below
table shows the gross profit and percentage of gross earned by the company in last two years:
Items 2018 2017
$ '000 $ '000
Gross Profit $ 157,206.00 $ 145,562.00
Net Revenue $ 250,768.00 $ 232,908.00
Gross profit percentage 62.69% 62.50%

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2018 2017
62.40%
62.45%
62.50%
62.55%
62.60%
62.65%
62.70%
Gross profit percentage
Percentage
Review of articles related to Nick Scali Earnings
First news article related to Nick Scali earnings has been found on Inside Retail Australia
website (See Appendix, Figure 3). Inside Retail Australia reviews the retails companies of
Australia and provide brief news on the changes made in the companies in recent time. This
article discusses the information on company earnings and provides factors that have played a
major role in increasing the earnings of the company during the last year. As per information
provided in the news article, Nick Scali has recorded a increase of 10.1 % in their net profit after
tax showing a change from $ 41 million in year 2018 up from $ 37.2 million in year 2017 (Blake,
2018). The increase in revenue in derived from the increase in number of stores across Australia
and New Zealand. The factors such as strong solvency position, cash flows from operating
activity and continued growth in revenue helps the Nick Scali to take advantage of any
opportunity driven to them. The fast roll out from the stores allows the company to keep the
operating margin high which in turn drives debt capital with ease. The scheme & offers and sale
of goods at lower prices compared with top competitors allow the company to expand at very
rapid pace and provide a very tough competition to their competitors. In this regard, news has
come across that John Cootes; a famous furniture retailer in Australia has announced the closure
of 12 of its stores in New Zealand and Australia (Blake, 2018).
Second article has been taken from Business Insider Australia (See Appendix, Figure: 4)
and this news article provides information about the earnings and trends in share price of the

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company has been provided. This article tells that despite of decrease in share price during year
2018, company has jumped a new height of revenue all due to opening of new stores and impact
of lower cost. The overall cost ratios have been declined due aggressive policy of company to
keep high operating margin only through minimizing the cost of sales. There was a major
announcement made by the company to open six more stores in year 2018 to rise the total
number of stores to 60 by the end of year 2018 (Pash, 2018).
Strength and weakness of Nick Scali as per Chairman and CEO Report and revenue
forecasting for next two years
There are multiple strengths of the Nick Scali that are highlighted in the statement of
Chairman and CEO. As such no weakness was provided in the report. Copy of CEO and
Chairman Report has been included in appendix section (Figure: 5). According to the
information provided in the report the major strength of company is its store roll program and
tremendous increase in cash during the year 2018. The offers, scheme, royalty programs and
other benefits that are provided to the customer help to the company to remain in the market and
provide very tough competition to the competitors.
 Reasons for forecasting the revenue are as follows:
 Sales revenue has been rise by 7.7 % in previous year and it is expected to rise
about 8 % to 9% this year due to store roll out program and increase in demand
 Further decrease in operating expenses to 37% in year 2019 and 36 % in year
2020 due to lower fixed cost spending by the company
 Gross margin will expected to rise but not significantly so it is decided to keep
same level of gross profit ratio of 62.7%.
Revenue Forecast of Nick Scali
Items Basis 2018 2018 2019 2020
$ '000 in % $ '000 $ '000
Revenue
rise by
8.5% in
each year
$
250,768.00
100.0
%
$
272,083.28
$
295,210.36
Cost of Sales in
proportion
$
(93,562.00)
-37.3% $
(101,514.77)
$
(110,143.53)

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to sales
revenue as
no change
in gross
profit
Gross Profit no change $
157,206.00 62.7% $
170,568.51
$
185,066.83
Gross Profit in % 62.69% 62.69
% 62.69% 62.69%
Operating
expenses
decrease in
operating
expenses to
37% in
year 2019
and 36 %
in year
2020
$
97,420.00
38.85
%
$
100,670.81
$
106,275.73
EBIT
$
59,786.00
$
69,897.70
$
78,791.10

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Part 3: Property, Plant and Equipment
Different categories of property, plant and equipment
Property, plant and equipment represent tangible assets of the company and these are
used as resources to derive the revenue. The major categories in which plant, property and
equipment have been divided are land & buildings, leasehold improvements, fixtures & fittings,
motors vehicles and office equipments. Among all these categories, land & buildings have
increased the most over the last two year. Same can been from the notes to accounts section of
the annual report and copy of notes to accounts has also been attached to the appendix section
(Figure: 6).
The value of land & building has been increased in last two year due to expansion of
stores in Australia and New Zealand. The expansion of stores requires either purchase of land
and construction of building or directly purchasing the developed buildings at the preferred
location. Although company prefers the leasing the required property but if the value of property
is under the budgeted cost than it is purchased not leased out.
Revaluation or Impairment on assets
On the basis of the information provided in the notes to accounts of financial statements,
there was revaluation was made in relation to assets but a small impairment has been carried out
in value of land & buildings. The impairment on land & building has been carried out in
accordance with the IAS – 136: Impairment of assets. The reason for impairing or reducing the
value of land & building was because the recoverable of such assets was less than the carrying
value of such assets. It is the policy of Nick Scali to review the carrying values of property, plant
and equipment for impairment purpose or when there is a significant event occurred that reflects
the change in value. The recoverable amount is determined through calculating the cash inflows
derived from the cash generating units and carrying value is reflects as book value less
accumulated depreciation to the date adjusted to any significant items. (Please refer the appendix
to check impairment information of assets, Figure: 7).

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Part 4: Provisions, contingent assets and liabilities and leases
Provisions
As per AASB 137, a provision is defined as liability that is uncertain in regard to timing
or its value. Provisions are recognised in liabilities side of balance sheet because they are present
obligation of the company that requires some outflow of economic resources in order to settle
them in future (AASB 137, 2014). The amount of provision is based on judgments and
assumptions based on benefits it will take to settle the liability. Nick Scali has two sets of
provisions that have been shown in liability side of balance sheet they are employee entitlements
and deferred lease incentives. Employee entitlements is recognised as provisions because
expenses related to long service leaves and annual leaves are tends to settled in future period but
such expenses are need to be recognised previously so that future estimation of expenses can be
made. Deferred lease incentives refer to the commitment due to the lessor for the financial
incentives received. (Please see appendix to look for the value of provisions, figure: 8).
Contingent assets and Contingent liabilities
Nick Scali has no contingent assets and contingent liabilities present in notes to account
section of financial statements.
Leased Assets
Nick Scali has only operating lease commitments in regards to the commercial properties
of stores (AASB 16, 2016). The value of leases has been determined operating lease because
lessor has retained all the significant rewards and risks of ownership. The value of lease hold
properties improvements recognised as assets was 15229000 AUD in year 2018 (Annual Report,
2018).

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Part 5: Responsibility & Sustainability
Business sustainability can be regarded as an approach adopted by a company for
managing its Triple Bottom line (TBL). TBL refers to the initiatives taken by a company for
addressing its social, economic, environment and financial risks and obligations adequately. The
company as per the concept of sustainability needs to carry out its business in a manner so that it
does not negatively impacts the society, economy and the environment in which it operates. This
is largely required for achieving support by a business company for its operational activities from
the societies and thus ensuring its sustainable growth and development. As such, businesses are
largely emphasizing on voluntary disclosing their sustainability performance by development
and presentation of their sustainability reports. These voluntary disclosures are aimed at
enhancing transparency and accountability in the business operations in the mind of stakeholders
and supporting its sustainable growth (Wells, 2013).
However, in the case of Nick Scali Furniture it has been identified that the
company has not disclosed any information in relation to the initiatives adopted by it for
promoting the development of nearby communities or environment. The company does not
disclose its sustainability performance either in the annual report or undertake separate voluntary
disclosure. As such, it can be said that the company operates within the retailing furniture
industry need to disclose its sustainability information as it is associated with many operational
risks that can have a negative impact on the nearby communities and environment. The
development and presentation of such information is necessary for supporting the long-term
growth by achieving the trust and confidence of the stakeholders by being accountable to them in
all aspects (Carbo, 2017).

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Conclusion
It can be stated from the overall analysis of the annual report of the Nick Scali for year
2018 and 2017 that company has prepared its financial statements in accordance with AASB
standards. AASB played a major role in depicting the actual financial performance of the
company. Various sections of the financial statements have been evaluated to evaluate the
application of accounting standards. It has been found that company truly follows all the required
guidelines and method provided in accounting standards provided by the Australian Board. It is
suggested that company must produce its sustainability report to improve the business
accounting and to have the positive impact of stakeholders and society on the company
operations.

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References
AASB 136. 2007. Impairment of Assets. Retrieved 5 October, 2018, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-
07.pdf
AASB 137. 2014. Provisions, Contingent Liabilities and Contingent Assets. Retrieved 5 October,
2018, from https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-
04_COMPjun14_04-14.pdf
AASB 16. 2016. Leases. Retrieved 5 October, 2018, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf
Annual Report. (2018). Nick Scali. Retrieved 5 October, 2018, from
https://www.nickscali.com.au/media/wysiwyg/pdfs/NCK_-_Annual_Report_2018.pdf
Blake, D. (2018). Nick Scali hits record profits: Inside Retail. Retrieved 5 October, 2018, from
https://www.insideretail.com.au/news/nick-scali-hits-record-profits-201808
Carbo, J. (2017). Social Sustainability for Business. Routledge.
Furniture Retailing - Australia Market Research Report. (2018). Retrieved 5 October, 2018, from
https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/other-
store-based-retailing/furniture-retailing.html
IFRS 15. (2018). Revenue from Contracts with Customers. Retrieved 5 October, 2018, from
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-contracts-
with-customers/
Nick Scali Limited. (2018). Retrieved 5 October, 2018, from https://www.nickscali.com.au/
Nick Scali Limited: Results Announcement. (2018). Retrieved 5 October, 2018, from
https://www.nickscali.com.au/media/wysiwyg/pdfs/180816_Nick_Scali_Ltd_FY18_-
_Results_Announcement_1.pdf

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Pash, C. (2018). Furniture retailer Nick Scali defied the retail crunch but its shares still slumped.
Retrieved 5 October, 2018, from https://www.businessinsider.com.au/furniture-retailer-
nick-scali-defied-the-retail-crunch-but-its-shares-still-slumped-2018-2
Pash, C. (2018). Nick Scali posts a record profit, its shares go nuts: Business insider. Retrieved 5
October, 2018, from https://www.businessinsider.com.au/nick-scali-results-record-profit-
2018-8
Wells, G. (2013). Sustainable Business: Theory and Practice of Business Under Sustainability
Principles. Edward Elgar Publishing.
Wilson, J. (2015). Value Investor: Nick Scali's sturdy foundations. Retrieved 5 October, 2018,
from https://www.theaustralian.com.au/business/business-spectator/value-investor-
nick-scalis-sturdy-foundations/news-story/cfd46b04f5044d6c9be746f0da853989

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Appendix 1: Financial Statements of Nick Scali

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Appendix 2: Other significant items
Figure: 1
(Source: https://www.marketindex.com.au/asx/nck)

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Figure: 2
(Source: Annual Report, 2018, Web link:
https://www.nickscali.com.au/media/wysiwyg/pdfs/NCK_-_Annual_Report_2018.pdf )

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Figure: 3
(Source: https://www.insideretail.com.au/news/nick-scali-hits-record-profits-201808 )

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Figure: 4
(Source: https://www.businessinsider.com.au/nick-scali-results-record-profit-2018-8 )

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Figure: 5
(Source: Annual Report)

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Figure: 6
(Source: Annual Report)

27
Figure: 7
(Source: Annual Report)

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Figure: 8
(Source: Annual Report)