A few months ago, I wrote a piece outlining the growth potential of Nova LifeStyle, Inc. (NASDAQ:NVFY). At the beginning of last week, the stock was up over 111% since the article's publication. This week, the stock has given back some of its gains, yet is still up 56% since the beginning of November. The thesis of the previous article however was not based on short-term gains. The fundamentals still apply; meaning that even with the recent rise, Nova's stock still has plenty of potential upside and that its current price offers a discounted entry point for exposure to these gains. Here is why.
Note: All Figures taken from Nova's Q3 2013 10-Q.
An Operational Recap
Nova LifeStyle is a designer, manufacturer and distributor of modern lifestyle furniture, headquartered in California. Nova's products feature upscale luxury designs appealing to middle and upper middle-income consumers. The company sells the vast majority of its products in the U.S., China and Europe.
The company's manufactures its products in a 100,000 square meter production facility based in the Nange industrial area of Dongguan, China. The production facility covers every aspect of the manufacturing process, from woodcutting to warehousing and distribution.
A Regional Breakdown
In China, Nova sells its branded products through a network of close to 100 franchise stores, mainly located in furniture marketplaces and large shopping malls. The stores are individually owned and owners advertise locally, but Nova also conducts regional and national promotional campaigns to drive large-scale brand awareness. Nova generates revenues from franchisees in the form of a guaranteed minimum purchase amount that the franchisee must meet to maintain franchise rights. In addition, the company also has a large online sales operation through its own retail website novalifestyle.cn and a number of partnerships with Chinese e-commerce platforms.
Sales in China (excluding Hong Kong) for the nine months ended September 30, 2013 totaled $11.79M, a 7% decline on the same period in 2012. Sales elsewhere in Asia (excluding china) for the period totaled $1.72M, a 141% increase over the same period in 2012.
In the U.S., Nova sells a combination of its own products and third party manufactured products under the Diamond Sofa brand. Established in 1992 and acquired by Nova in 2011, Diamond Sofa sells to the top 100 furniture companies in the U.S., including RC Wiley, The Brick and Berkshire Hathaway's (BRK.A) Nebraska Furniture Mart.
Sales in the U.S and Canada for the nine months ended September 30, 2013 totaled $30.77M, a 68% increase over the same period in 2012. Nova reports the gain as attributable to an aggressive expansion of its sales to the U.S. and Canadian markets, alongside the integration of the operations of Diamond Bar and Bright Swallow, a Canadian furniture distribution company with over 200 Canadian retail locations.
In Europe, Nova sells primarily to retailers under its Nova Lifestyle brand but also has original design manufacturer and original equipment manufacturer capabilities through which it supplies Nova products for rebranding. Customers across Europe include several high profile, household names such as IKEA, John Lewis and Hermes.
Sales across Europe for the nine months ended September 30, 2013 totaled $11.11M, a 5% decline on sales during the same period in 2012. The company attributes this to the lagging recovery of the European economy and expects sales to increase as the economic outlook approves in line with that of the U.S.
Most Recent Financials
Global net sales during the three months ended September 30, 2013 totaled $22.31M, up 16% from the $19.20M comparable figure in 2012, despite a 2% decline in the average sales price. The increase in net sales derives from a 15% increase in global sales volume, driven by sales of third party manufactured goods.
Gross profit during the three months ended September 30, 2013 totaled $4.39M, a 15% increase over the $3.83M reported during the same quarter in 2012. Gross profit margin was 20% during both periods, making the increase in gross profit solely attributable to the increase in net sales.
The company's balance sheet at September 30, 2013 is strong, with net working capital of $21.92M, a 32% increase from the $15.54 reported at the end of 2012. Current ratio as of September 30, 2013 was 2.75.
In my last piece, I alluded to the stock's trading range at the time, and the potential catalyst effect of a NASDAQ uplisting. On January 14, 2013, the company announced the SEC had approved this uplisting, and that the company's stock would begin trading on the NASDAQ from January 17, 2013. Price action following the announcement vindicated this prediction, as record volume (over half a million shares changed hands) on January 13 and 14 catalyzed the breakout and pushed the stock up 80%.
The uplisting should draw the attention of institutional investors, which could have a significant upside impact on the company's share price throughout 2014. It will also serve to increase share liquidity and boost retail investors' confidence in the company.
Nebraska Furniture Mart Development
Berkshire Hathaway's Nebraska Furniture Mart announced in November that it had begun work on Grandscape, a development comprising 3.9 million square feet of retail space in Dallas/Ft. Worth, Texas. Nova has an established, long standing relationship with Nebraska Furniture Mart, and the company expects the development to present it with an opportunity to expand into the North Texas market. This should boost U.S revenues medium to long term.
Home sales growth drives the furniture industry. During 2012, U.S home sales increased 26% for new homes and 9% for existing homes. As of July 2013, new home sales were up 29% year-to-date, with existing home sales up 7% during the same period.
Furniture Today, an industry research organization, reports that, by 2015 and 2016, homebuilding and sales should be back to pre-recession levels. Coupled with measurable increases in consumers' disposable income, this could translate into increased new furniture purchases. The market validates this perception, with furniture stocks up 30% since 2012.
Since I last wrote about this company, the risks have not changed.
The primary risk is the company's overseas manufacturing location and global distribution system. This business model exposes Nova to exchange rate fluctuations, supply chain issues and political and economic risk. Having said this, the wide reaching global distribution channels also serve to mitigate this risk somewhat, through demand diversification.
Further risk lies in the Nova's float size. Despite having 18.98M shares outstanding as of September 30, 2013, high insider ownership gives the company a float of just 8.14M. Simple supply and demand dictates that a low float can create high volatility in a company's share price. Investors considering Nova should be aware that, at least in the short term, the company's stock might be subject to large, sharp fluctuations.
The investment opportunity in Nova is clear. The company has suffered post-2008, but recovery of both the global housing market and the global furniture industry should drive up Nova's revenues. A strong balance sheet coupled with net sales and gross profit growth illustrate the company's potential, while a pullback from recent highs present investors with a discounted entry point.