Small Caps | Aug 28 2019
Fashion retailer City Chic has successfully expanded its online presence in the US, providing confidence in the substantial potential offshore.
-Poised for expansion with the US progressing strongly
-20 new stores expected in Australasia over the next 2 years
-Majority of growth from online business offshore
By Eva Brocklehurst
Fashion retailer City Chic Collective ((CCX)) is expanding and growth prospects will be supported by additional stores, new categories and the burgeoning online business in the northern hemisphere.
The company's US website continues to gain traction and new partnerships have been established with Belk and Co-edition. The company has also acquired online plus-size intimates retailer, Hips & Curves, which has a large customer base in the US.
Northern hemisphere sales, the greatest majority being in the US, lifted 39% in FY19 and accounted for 20% of the sales total. Citi believes offshore sales will continue to be the largest contributor to growth, while additional stores in Australia and operating cost leverage should also help.
Australasian stores reported flat like-for-like sales but growth is expected in FY20 from the expansion of categories and stores. The company expects to add 20 new stores over the next two years and will also convert 15 high performing stores to large format stores over the next three years.
Baillieu considers the business well capitalised, rating the stock a Buy with a $2.20 target. Wilsons found the commentary on the outlook vague, although the revenue gains amid substantial market potential provide confidence. The broker estimates both the southern and northern hemisphere online businesses achieved revenue growth of 39.8% and 34.3% respectively in FY19.
The broker is encouraged by the composition of the financials and retains a Hold rating and $1.79 target, noting City Chic is showing the strong traits of an online company as earnings margins expanded while gross margins contracted.
Online is the most profitable channel for the company, Bell Potter highlights, and the company is now poised for global expansion with the US now at an inflection point. The broker assesses the business model and prospects are attractive, maintaining a Buy rating with a $2.45 target.
FY19 underlying operating earnings (EBITDA) of $24.9m were up 25%. Sales increased 12.6% and online sales now represent 45% of the total. Operating margins increased to 16.8% from 15.1% because of the increased contribution from online.
Citi suggests the second half may provide the clue to online profitability going forward as the majority of growth came from online and offshore, underscoring the margin and mix benefit.
The shape of growth in each half year was different in FY19, Citi notes, with stronger sales growth in the second half but much slower margin expansion for operating earnings. Most of the decline in gross margin reflects a shifting sales mix towards online sales in the US and additional wholesale and marketplace sales.
Second half margin on incremental sales was 18.6% and Citi believes a margin of 18-22% is plausible, while store margins are expected to be nearer to 14-16% in the near term. Citi expects net cash to fall to $17m in FY20 as additional taxes are paid (related to the capital gain on sale of the other Specialty Fashion brands) and expenditure steps up.
Still, a dividend of 8.5c is forecast, delivering a pay-out ratio of 95%. While the stock has good growth prospects, Citi believes there is insufficient safety in the valuation to reflect the risks and maintains a Sell rating with a $1.70 target.
The dividend pay-out supports the share price and offers potential upside risk to the rating, Citi acknowledges. The broker upgrades earnings forecasts because of a faster roll-out of stores while reducing estimates for earnings per share by -4-7% over the next three years because of higher depreciation and tax rates.
Late addition: Goldman Sachs has upgraded to Buy on increased growth projections post the FY19 result. The new price target is set at $2.45.
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