Small Caps | May 13 2019
In a difficult, changing and subdued retail/housing environment the success of City Chic Collective and Adairs can be attributed to a deep knowledge of their customer base. Canaccord Genuity initiates coverage on the two.
-City Chic growing partnerships globally with retailers and online marketplaces
-Adairs highly successful in category and private-label expansion
-Both developing a significant online presence
By Eva Brocklehurst
Two retail stocks have attracted the attention of Canaccord Genuity: City Chic Collective ((CCX)) and Adairs ((ADH)), both standing out in a difficult environment. City Chic specialises in large women's apparel in Australasia via a network of over 100 stores. Underpinning the company success is an understanding of customer needs amid the poor service provided by mainstream clothing retailers.
Adairs boasts a network of around 170 stores, specialising in home furnishings, and is continuing to take share of the home decoration wallet through larger, fashionably-designed store formats and expanded categories.
City Chic's online store represents 35% of sales and its products are offered by major US and European retailers, both in-store and online. The message appears to resonate with the global consumer for such items, which the broker believes points to the potential for a long period of growth.
The reason for the company's success is that major fashion labels, in the main, have opted not to produce large sizes (over 14). Those that have such offerings also tend to be inconsistent in terms of variety and stocking. The broker suspects these retailers are leaving a lot of money on the table.
In Australia, the US and Europe over half of adult females fit the category yet represent less than 20% of the total expenditure on women's wear. However, media coverage promoting body confidence is resulting in shoppers demanding more from their retail experience.
The broker expects City Chic to participate in the growth in this segment globally by building out international partnerships with retailers and online marketplaces, rolling out new stores domestically, which funnel future online sales, and improve better-performing stores by increasing product ranges.
Historically, there is limited information on the financial performance because this was combined with the other retailers within the Specialty Fashion group until 2017. Yet, City Chic's total sales online have grown in the last two years by 87%. Canaccord Genuity assesses that, while all stores are profitable, the online business is delivering the majority of like-for-like sales growth.
The balance sheet is ungeared and, while operating cash flow was negative in the first half, the broker expects this to normalise in the second half. Citi has noted that dividends are back on the agenda and the interim dividend of 2.5c paid at the last results was well ahead of forecasts. There was also a special 2.5c dividend. Citi has a Neutral rating and $1.45 target while Canaccord Genuity initiates coverage with a Buy rating and $2 target.
The company attributed reduced cash flow in the first half to a one-off shortening in trade creditor terms while it finalised a new trade facility. Cannaccord Genuity expects FY19 growth of 2% like-for-like in physical stores and 25% online. There is limited local competition in what the broker describes as a $1bn market, and this is mostly focused on an older demographic.
Domestically, beme, owned by Noni B ((NBL)), and My Size are the closest competitors. Both retailers has significantly fewer stores and tend to have ranges at lower price points. Autograph, also owned by Noni B, and Taking Shape specialise in larger sizes but appear more focused on an older demographic.
Adairs has the largest national footprint of its peer group and is also developing a deep knowledge of customer preferences. On this basis, the company's investment in online channels, if this continues to be successful, will provide a buffer against a weakening consumers/housing backdrop, Canaccord Genuity asserts.
Morgans agrees that the company's ability to sustain solid sales growth is becoming sharply evident, despite weakness in macro housing conditions. The company has transitioned from being a retailer of third-party linen, bedding and towel products to stocking and designing its own ranges which incorporate fashion trends and inspire customer loyalty.
Category expansion has also been successful, with the product range growing at around twice the rate of core products since the IPO in June 2015. Category expansion is seen driving like-for-like sales rather than a higher average basket price.
Expansion items include soft furnishings, tableware, occasional furniture and bedroom furniture. Online sales are growing rapidly, UBS points out, suggesting benefits from the omni-channel approach are starting to be realised. The broker finds the valuation undemanding and retains a Buy rating and $2.60 target.
Adairs has delivered relatively consistent performance financially since listing, Canaccord Genuity notes, ahead of initiating coverage with a Buy rating and $2.32 target. Winter sales are the most significant of the seasonal promotional campaigns and responsible for a slight weighting to second half revenue and earnings. Cash conversion has been strong and net debt has fallen to $10m at the end of 2018. Guidance provided in August 2018 indicated FY19 like-for-like sales growth of 5-8%.
Higher costs were one area that disappointed Morgans in the first half, although this was attributed to capacity constraints at the distribution centre. The broker also notes the dividend pay-out policy has been increased to 60-85% from 55-70%. Morgans maintains an Add rating and $2.25 target.
The company's target customer is in the middle to upper class, with a desire to decorate their living space and move with trends. Canaccord Genuity estimates the average transaction value is around $120.
Adairs is now largely a private-label retailer and estimates the Australian homewares market at around $14bn. Home textiles is a small percentage of this, which Canaccord Genuity estimates at $2bn, implying a market share for the company of just under 20%. Direct competitors are Bed, Bath N' Table, Sheridan, Pillow Talk Homewares and My House.
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