Small Caps | Oct 14 2019
The acquisition of US apparel retailer Avenue, with a focus on online business, is expected to provide meaningful earnings accretion for City Chic Collective.
-Key feature is a well-established customer database
-Some revenue leakage likely from physical stores being closed
-City Chic's northern hemisphere sales likely to increase to over 35%
By Eva Brocklehurst
City Chic Collective ((CCX)) is prioritising investment in its online business and to this end has acquired the e-commerce assets of Avenue, a US-based retailer of larger sizes in 'value brand' apparel.
The acquisition provides an additional customer base within the same broad US market, estimated to be worth US$25bn. Citi emphasises the synergies, noting the seller was distressed and the price paid is modest. The e-commerce assets of Avenue were acquired for US$16.5m, to be financed from cash reserves and a new credit facility.
The acquisition is considered highly attractive as it is accretive, and there is an immediate exposure to the value segment of the US, a key feature being a well-established customer database. Synergies are expected from improving the conversion of website traffic to sales, utilising the customer database and improving sourcing, as well as cost savings.
The main issue is whether the store base of 233 stores is central to e-commerce sales. Canaccord Genuity considers the acquisition a low-risk opportunity to help gain market share, although notes some revenue leakage is likely, given reports the physical store network will be completely shut down. The broker expects meaningful earnings accretion once the business is integrated and maintains a Buy rating and $2.25 target for City Chic.
Allowing for revenue leakage from physical stores being closed and the bankruptcy of Avenue, Bell Potter still estimates US sales for the company will more than triple. Moreover, the broker suspects cross-selling opportunities as Avenue customers can be introduced to City Chic's product range and vice versa.
Avenue currently buys product from vendors in New York. Based on conservative assumptions for revenue retention and margins, Bell Potter increases FY20-22 estimates for earnings per share by 10-17%. The broker increases the target to $3.10 and retains a Buy rating.
Avenue entered Chapter 11 bankruptcy in August and Baillieu warns that assuming sales progressively deteriorated over recent years to the point of bankruptcy, consumers may now be less willing to transact with the business.
Hence, the broker assumes the company is able to retain only around 50% of Avenue's online sales and, on a 10% earnings margin, derives an approximate earnings contribution of $4.8m. The broker assumes a lower margin for the Avenue online business of 10% versus the City Chic operating margin of 16.8% in FY19.
City Chic's northern hemisphere sales represented around 20% of the total in FY19 and Baillieu calculates the addition of Avenue is likely to increase northern hemisphere sales to over 35%.
The broker estimates a potential uplift in FY21 earnings per share of 16% but also notes considerable uncertainty around the the impact of the transaction as well as integration risks. Given the recent share price appreciation, Baillieu downgrades to Hold and has a target of $2.66.
Noting the Avenue online revenue component for the five months to May 2019 was US$27m, Citi scales up estimates to obtain some perspective over 12 months. The comparison shows Avenue would have US$65m in annual sales compared with the City Chic US sales of US$28m.
Citi agrees there is a risk the market may be overly enthusiastic about the deal, noting the City Chic share price has risen by $1.12 since the news of Avenue's Chapter 11 bankruptcy. While liking the transaction, the broker is mindful the integration will take time and retains a Sell rating on the stock with a target of $2.30.
While City Chic also focuses on the larger-sized market in women's apparel, accessories and footwear, its range appeals to a younger age group compared with Avenue. Price points are lower at Avenue and the range more conservative, owing to the slightly older target demographic.
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