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Annual Report 2017 Chifley 100% Leather 3 Seater Dual-Electric Recliner; Provence Console; Provence Dining Table and Primo Dining Chair; Harley Armchair; Laurie Coffee Tables; Libertine Floor Rug Nick Scali Limited Annual Report 20172 Turin 100% Leather 4 Seater Lounge; Inma Coffee Table; Yolmen Pendant Lamps; Berta Floor Rug Nick Scali Limited Annual Report 2017 3 Page Chairman and Managing Director’s Review 5 Directors’ Report 6 Auditor’s Independence Declaration 16 Statement of Comprehensive Income 18 Statement of Financial Position 19 Statement of Changes in Equity 20 Statement of Cash Flows 21 Directors’ Declaration 42 Independent Auditor’s Report 44 Shareholder Information 48 Corporate Information 51 Page Notes to the financial statements Note 1. Basis of preparation 22 Performance for the year Note 2. Segment Information 23 Note 3. Revenue 23 Note 4. Expenses 24 Note 5. Income tax expense 25 Note 6. Earnings per share 26 Note 7. Equity – Dividends 26 Note 8. Reconciliation of profit after income tax to net cash from operating activities 27 Operating assets and liabilities Current assets Note 9. Current assets – Cash and cash equivalents 28 Note 10. Current assets – Receivables 28 Note 11. Current assets – Inventories 28 Note 12. Current assets – Other financial assets 28 Non-current assets Note 13. Non-current assets – Property, Plant and Equipment 29 Note 14. Non-current assets – Intangibles assets 30 Current liabilities Note 15. Current liabilities – Payables 31 Note 16. Current liabilities – Provisions 31 Non-current liabilities Note 17. Non-current liabilities – Borrowings 31 Note 18. Non-current liabilities – Provisions 32 Capital structure and finance cost Note 19. Equity – Issued capital 33 Note 20. Financial instruments 33 Note 21. Fair value measurement 35 Other Notes Note 22. Equity – Reserves 36 Note 23. Key management personnel disclosures 37 Note 24. Remuneration of auditors 37 Note 25. Contingent liabilities 37 Note 26. Commitments 37 Note 27. Related party transaction 38 Note 28. Events after the reporting period 38 Note 29. Share-based payments 38 Note 30. Parent entity information 39 Note 31. Controlled Entities 40 Note 32. Summary of significant accounting policies 40 Contents Nick Scali Limited Annual Report 20174 Cooper Dining Table and Vansu Dining Chair Nick Scali Limited Annual Report 2017 5 Operating Performance We are delighted to report that Nick Scali has had another excellent year, delivering a net profit after tax increase of 42.4% on the previous year with earnings per share increasing from 32.3 cents per share to 46.0 cents per share. This result was driven by a combination of sales growth, solid gross margins and our low cost of doing business, underpinned by our continued new store rollout. Sales revenue increased 14.7% to $232.9 million for the year, resulting from same store sales growth of 10.1%, two new stores which opened during FY16 and traded for the full 2017 financial year plus some contribution from the four new stores which opened in FY17, thus only trading for part of the year. Operating expenses decreased as a percentage of sales from 41.3% last year to 38.9%. The Company maintains tight cost control and the percentage decrease was assisted by the ability of the Company to leverage new store growth off its existing infrastructure. The Company’s gross margin strengthened to 62.5% from 60.8% with volume growth in certain product categories contributing to the higher margins. Four Nick Scali Furniture stores were opened and one was closed during the year, bringing the total number of Company stores at 30 June 2017 to 51. Two new stores opened during the first half of the fiscal year, at Geelong (Victoria) and Hobart, which was our first store in Tasmania. A further two new stores opened in the second half - at Jandakot (our fifth store in Western Australia) and at Preston in Victoria. The Company expects to open up to ten new stores during FY18. This includes the first New Zealand store which is planned to open in Auckland in December 2017. A new, custom built, warehouse facility for NSW was completed in June 2017 to support the growth of the business. Supply chain efficiencies will benefit from this investment and from a new warehouse management system introduced at the same time. Cash flow generation remained strong, with operating cash flow of $42.9m up $10.9m (34.0%) on the prior financial year. Nick Scali maintained its disciplined approach to financial management and maintained its robust balance sheet. Dividends The Directors have declared a fully franked final dividend of 20 cents per share, bringing the total dividend for the year to 34 cents per share. The final dividend has a record date of 4th October 2017 and will be paid on 25th October 2017. The Directors consider that the dividend payout ratio of 74% appropriately balances the distribution of profit to shareholders and the reinvestment of earnings for future growth. Board During 2016, Mr Nick Scali advised the Board of his intention to retire and not seek re-election at the October 2016 AGM and as a result, Nick ceased to be a director on 27 October 2016. Nick founded the Company over 55 years ago and is widely recognised as a leader and visionary in the furniture industry. On behalf of the Board, Staff and Shareholders, the Directors thank Nick for his service and unique contribution to the success of the Company, in particular as a member of the Board since listing in 2004. We all join together in wishing Nick a long and well deserved retirement and hope that he enjoys it in good health and happiness. Outlook The furniture market is directly influenced by consumer confidence, interest rates, unemployment levels and the volume of home renovations and housing sales. Given an expected slowdown in housing sales, the Company believes that same store sales order growth will be challenging. Whilst the Company is planning to open around 10 new stores in FY18, the benefit to earnings will be generated mainly in FY19 and beyond, due to the associated new store start-up costs and their staggered starting dates. Nick Scali has a strong balance sheet, with a healthy net cash position, enabling the Company to continue its growth strategy and take advantage of any other opportunities that may arise. Finally, on behalf of the Board, we thank the Management team and our many Nick Scali team members around the country, for their dedication and hard work. We also thank our shareholders, customers and suppliers, whose continuing support underpins the ongoing success of the Company. Chairman and Managing Director’s Review Nick Scali Limited Annual Report 20176 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘consolidated entity’) consisting of Nick Scali Limited (referred to hereafter as the ‘company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2017. Directors The names and details of the Company’s Directors in office at any time during the financial year or until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. John W Ingram Nick D Scali (resigned on 27 October 2016) Greg R Laurie Carole A Molyneux Anthony J Scali Principal activities The principal activities of the consolidated entity during the period were the sourcing and retailing of household furniture and related accessories. No significant change in the nature of these activities occurred during the period. Dividends Dividends paid during the financial year were as follows: 2017 2016 $’000 $’000 Final franked dividend for 30 June 2016: 14.0 cents (2015: 8.0 cents) 11,340 6,480 Special franked dividend for 30 June 2016: 3.0 cents (2015: Nil) 2,430 Interim franked dividend for 30 June 2017: 14.0 cents (2016: 9.0 cents) 11,340 7,290 25,110 13,770 In addition to the above dividend, since the end of the financial year directors have declared a fully franked final dividend of 20.0 cents per fully paid ordinary share to be paid on 25 October 2017 out of retained profits at 30 June 2017. Operating and financial review Nick Scali Limited is a furniture retailer operating in Australia. The Company operates two brands; the Nick Scali brand with forty six stores and Sofas2Go with five stores. The two brands operate under the same infrastructure provided by the Company but are positioned differently to capture somewhat different customers within the furniture market, which is heavily fragmented. Key profitability drivers are the ability to continue to grow sales and market share through a store network with appropriate reach and to manage the style, quality and cost of the furniture to maintain margins. Group Operating Results 2017 2016 % Change $m $m Revenue 232.9 203.0 14.7% EBITDA 55.7 40.2 38.7% EBIT 52.9 37.1 42.7% NPAT 37.2 26.2 42.4% EPS (cents) 46.0 32.3 42.4% DPS (cents) 34.0 23.0 47.8% Net Cash 18.8 15.9 18.3% For the financial year ended 30 June 2017 the Company reported a record NPAT result of $37.2m, up 42.4% on the previous year. This strong profit result was generated from Sales Revenue of $232.9m which was up 14.7% on last year. Comparable store sales growth was a healthy 10%. The result was driven by the opening of two new stores in the 2016 financial year, a further four new stores during the 2017 financial year and supported by strong marketing activity. The continued focus on product, price and corresponding range management led to gross margin increasing to 62.5%, higher than during the last five years when it ranged between 60% and 61%. Operating expenses decreased as a percentage of sales from 41.3% in FY16 to 38.9% for FY17. The Company continues to maintain tight cost control and the sales increase off the existing infrastructure, leveraged this further. Net cash flows from operating activities during the year were $42.9m, up 34.0% on the previous year. Net cash inflows from all