Today we’ll look at why we like City Chic Collective (CCX).
City Chic Collective is a leading women’s apparel retailer that recently divested underperforming businesses.
Since divesting, the stock has rallied strongly. Across almost all metrics, City Chic Collective is now a superior business to its competitors.
Sales growth has also increased strongly, with expansion overseas to North America and Europe now in its sights.
We think that City Chic Collective has potential.
About City Chic Collective Limited (CCX)
City Chic Collective Limited (ASX: CCX) is a large Australian women’s apparel retailer with 104 stores and 13.6% market share in Australia and New Zealand. The company also showed strong growth in North America and Europe market recently.
The City Chic share price rose 266.7% from $0.54 to $1.98 during the period FY2016 through FY2019. Currently, the company has a market cap of $346.03M.
The company reported strong results across all channels, including $148M of sales with a 12.2% growth rate, a gross profit margin of 57.8% and an EBITDA margin of 16.8%.
The company also launched an e-commerce platform in the domestic market, a new warehouse solution in the USA, and a meaningful partnership with Zalando in Germany.
Zalando SE is a European e-commerce company based in Berlin, Germany. The company follows a platform approach, offering Fashion and Lifestyle products to customers in 17 European markets.
Figure 1.1 CCX Share price history
| $ millions | FY2014 | FY2015 | FY2016 | FY2017 | FY2018 | FY2019E |
| Revenue | 638.16 | 790.38 | 824.68 | 807.76 | 131.87 | |
| EBITDA | 39.24 | 20.21 | 24.97 | 20.28 | 18.77 | |
| EBITDA Margin (%) | 5.74 | 2.56 | 3.03 | 2.51 | 14.24 | |
| Net Profit after Tax | 12.48 | (3.76) | 0.28 | (4.79) | 16.83 | |
| Net Operating Cash Flow | 3.53 | 5.37 | 30.72 | 20.57 | 39.07 | |
| EPS Adjusted ($) | 6.49 | (1.96) | 0.15 | (2.49) | 8.76 | |
| P/E Ratio | 13.56 | (32.14) | 360.00 | (15.86) | 11.30 | 23.41 |
| P/B Ratio | 2.54 | 1.85 | 1.87 | 1.72 | 5.13 | 9.53 |
Figure 1.2 CCX Highlight of Financials
Source: City Chic Collective. Morningstar (2019)
On 14 May 2018, the Group announced that it entered into an agreement to divest five brands for cash consideration of $31.0 million. The Group retains ownership of the brand City Chic.
Strategic Overview
Expanding overseas market
The company recently implemented new warehousing solutions in the USA and signed agreements with certain German companies. The operating revenue from the northern hemisphere increased from accounted for 16% of the company’s total sales in FY2018 to 20% in FY2019. This market is expected to grow further in the future.
Figure 2.1 Regional Contributions in Sales
Source: City Chic Collective 1H 2019 Results.
Margin improvement through Focus on costs
The company launched a new e-commerce platform in Australia to boost contribution from the lower-cost online channel.
Simultaneously, it exited from low-margin concessions and loss-making stores.
The 2019 result of City Chic Collective indicates that revenue share from store sales and concessions declined from 59% in FY2018 to 50% in FY2019.
On the other hand, the revenue component from online channels rose from 31% in FY2018 to 38% in FY2019.
Online City Chic generates more than 85% of online sales while the rest comes from other online marketplaces.
Figure 2.2 Channel Contributions in Sales
Source: City Chic Collective 2019 Results.
Migration to a standalone business model
The company incurred capital expenditure on Information Technology for the transition to, system and network.
This transition moved ahead of schedule, and after that, the company integrated the Australian and New Zealand online CCX platform with the US platform.
Capex also covered the new City Chic store roll-out and enhancements to the existing store portfolio.
Industry Analysis
Although the retail industry is facing headwinds, the plus-size clothing retail segment has enjoyed good times over the past five years due to rising rates of obesity and body weight.
In FY2017-18, 67.0% of Australians aged 18 years and over were either overweight or obese.
Figure 3.1 The overweight and obese rate over FY1995 -FY2018
Source: National Health Survey: First Results, 2017-18
The specialized nature of products earns the segment slightly higher profit margins compared to general clothing retailers. Purchase costs are generally higher for plus-size retailers since manufacturers often charge a premium for customization and use of excess fabric.
During the past five years, average profit margins have fallen in the industry as department stores, and general clothing retailers have expanded their plus-size collections. This trend consequently led to higher competition.
SWOT Analysis
Strengths
- The e-commerce platform improves overall margins due to its lower costs. The company’s online revenues are ahead of industry peers by 8.8%.
- It enjoys a leading position in the Australian and New Zealand women’s apparel retail market and has expanded successfully in the US and Europe.
- Strong cash flows provide high liquidity to the company’s operations.
- The company is zero-debt and therefore has excellent financial flexibility.
- With its 13.6% share in the plus-size clothing market, CCX has excellent brand recognition and recall.
Weaknesses
- The company suffers from churn in higher management. Its average tenure of 0.4 years is less than the normal span of 2 years.
- The company’s dividend policy is erratic. It discontinued dividends after September 2014 but resumed them in March 2019, on sustained improvement in profitability.
Opportunities
- The latest statistics reflect that 67% of Australian females aged 18 years and over were either overweight or obese. This rising trend may continue in the future, expanding the company’s client base.
- As online adoption gathers further strength, City Chic’s strengths in e-commerce will help revenue growth.
Threats
- The low entry barrier makes the industry highly competitive. The competition from domestic retailers and overseas conglomerates may weaken City Chic’s profitability.
- There is a rising trend of mergers and acquisitions within the industry during recent years. In such a scenario, companies with high potential profitability and poor current performance have a relatively high probability of being taken over.
- Weak consumer sentiment and flat real household disposable incomes paint a gloomy picture for the retail industry.
Profitability
Declining operating costs lead to a higher profit margin and return on equity. Though the gross profit margin remained stagnant around 57% over the past four years and the net profit margin shows a slight decrease, it still has been trending higher from FY2017 onwards.
This improvement in profitability has primarily been due to the focus on cost control. Operating expenses have declined due to the increasing share in revenues of the lower-cost online channels. Cost savings also resulted from the divestment of low-margin concessions and loss-making stores.
The trends of return on equity and asset turnover have therefore reversed.
Figure 5.1 Probability of CCX
Source: Morningstar & Factiva
Peer Comparisons
- Accent Group
- Premier
- Noni B
Wesfarmers’ retail operation is excluded from this comparison because it is not the company’s primary business.
TS 14 Plus Australia, though it has a market share comparable with CCX, is also excluded from the comparison because it does not provide any publicly available financial information relating to revenue or profit.
| Peers | P/E Ratio | Profit Margin | EBITDA Margin | Asset Turnover | 1-year Gain | 3-Year Gain |
| City Chic | 23.41 | 12.80 | 14.24 | 67.24 | 87.8% | 243.9% |
| Noni B Ltd. | 12.52 | 4.85 | 10.14 | 155.71 | -10.9% | 172.7% |
| Accent Group | 15.61 | 6.52 | 13.16 | 111.72 | -4.30% | -18.20% |
| Premier Investment | 20.06 | 9.61 | 15.80 | 67.50 | -6.50% | 8.30% |
Figure 6.1 Peer comparisons
Source: Morningstar
Although City Chic just divested a large part of its business, leading to a sharp decrease in revenue, the other metrics, especially the annual gain, are superior to the competition.
After the company’s divestments, City Chic’s margin improved sharply and is now the best amongst the sector peers. Also, City Chic’s asset turnover ratio is continually rising.
With the jump in its share price and a slightly lower EPS in FY2019, the PE ratio of City Chic is the highest among peers.
Figure 6.2 Peer comparisons in Asset Turnover, Profit margin and P/E ratio
Source: Morningstar & Factiva
Conclusion
City Chic is a major retailer of women’s apparel. It aims to build a stand-alone business with an effective and low-cost online platform to enhance its profitability. The company’s expansion in the overseas markets is also expected to generate higher revenue.
Margins in plus-size women’s apparel are relatively higher though they have fallen over the past five years due to increasing competition from domestic rivals and overseas retailers.
With the rising trends in obesity, the client base is forecast to expand steadily in the long term.
City Chic reported weak performance before FY2017. However, after the implementation of the new cost strategy, the company’s profit margins have risen sharply and are the best in the sector.
The net profit margin climbed to 9.63%, which is higher than the other competitors.
The stock price also showed an outstanding appreciation with gains of 87.8% over one year, and 243.9% over three years. In comparison, the next best stock performance is -4.3% and 172% respectively.
Based on the above analysis, City Chic may be expected to enjoy higher volumes in its online business, as well as gain overall market share even after the divestiture of its loss-making and low-margin businesses.
These factors are likely to result in higher profitability in the coming years.
