Nelly Group (OM:NELLY) Profit Margin Doubles, But Non-Cash Gains Raise Earnings Quality Concerns

Nelly Group (OM:NELLY) delivered a net profit margin of 12.1%, a sharp rise from last year’s 6.2%, as EPS surged by 119.5% compared to its five-year average annual growth rate of 63.2%. The company, newly profitable over this period, is now trading at 20.3x price-to-earnings, which is below both the European Specialty Retail industry average and peers, although this remains modestly above the internally estimated fair value. While investors may be encouraged by the progress in profitability and attractive valuation, there is an ongoing concern due to the significant portion of non-cash earnings, which could impact earnings quality and future sustainability.

See our full analysis for Nelly Group.

Now that the headline results are in, it’s time to see how they stack up against the market’s key narratives, where they fit and where the prevailing story may need to be revised.

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Profit Margin Doubles, But Non-Cash Gains Loom Large

• Nelly Group’s net profit margin climbed to 12.1%, up from 6.2% last year, with the business achieving profitability for the first time in this period.
• The AI-generated narrative highlights that while stability is a positive sign in volatile retail markets, the magnitude of profit margin improvement may foster a “wait-and-see” attitude among investors.
  • Operational improvement is evident. However, the heavy reliance on non-cash earnings means some investors might hold back until cash flows show a similar trend.
  • Incremental improvements may support moderate optimism. With no major growth catalysts flagged, enthusiasm is likely to remain measured.

Earnings Surge Far Outpaces Historic Growth

• Earnings growth for the year hit 119.5%, compared to an already strong five-year average of 63.2% annual growth.
• Prevailing analysis notes the sharp jump in profit growth demonstrates Nelly’s ability to benefit from sector stability. However, the absence of spectacular growth drivers or news could keep valuation in check.
  • The business looks resilient and adaptable. Investors may want to see confirmation that this year’s outsized leap is not a one-off.
  • Steady retail sector sentiment means sustained growth, rather than one good year, will be needed to re-rate the stock upward.

Valuation Sits Below Peers, Still Exceeds DCF Fair Value

• Nelly trades at a 20.3x price-to-earnings ratio, which is below both the industry (21.2x) and peer (21.9x) averages. However, the SEK97.5 share price still stands a touch above its DCF fair value of SEK94.03.
• Analysis of the prevailing view suggests the market acknowledges Nelly’s relative value, but cautious sentiment persists as the share price sits modestly above fair value and earnings quality draws scrutiny.
  • The discount to sector and peer multiples is attractive. With non-cash earnings a key contributor, analysts likely want more reassurance before assigning a premium valuation.
  • Short-term sentiment can shift with sector momentum. For now, the modest premium to intrinsic value and earnings mix keeps enthusiasm in check.

Next Steps

Don't just look at this quarter; the real story is in the long-term trend. We've done an in-depth analysis on Nelly Group's growth and its valuation to see if today's price is a bargain. Add the company to your watchlist or portfolio now so you don't miss the next big move.

See What Else Is Out There

While Nelly Group’s profit margin and earnings have jumped, the heavy reliance on non-cash gains raises questions about its earnings quality and future sustainability.

If you want companies where the numbers reflect solid underlying performance, check out stable growth stocks screener (2090 results) for proven, consistently growing businesses you can count on.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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