Small Caps | May 26 2020
City Chic Collective has highlighted the strength of its online apparel business which has enabled profitable trading during the period of store closures.
-Margin decline during closures reflecting increased promotions
-Avenue resonating strongly in current environment
-Likely to benefit from gains in market share longer term
By Eva Brocklehurst
A strong online business has enabled City Chic Collective ((CCX)) to withstand the onslaught to retailers of the pandemic-induced restrictions, and the company has now begun a staged re-opening of its Australasian stores.
City Chic has a flexible supply chain and a low fixed cost structure, which has enabled it to trade profitably during the restrictions. Moreover, Bell Potter points out the business is eligible for the Australian government's JobKeeper subsidy and the wage subsidy in New Zealand, which further supports the re-opening of stores.
Nevertheless, stores were closed for a little longer than Wilsons expected, causing a downgrade to its forecasts. Still, City Chic's update is encouraging, as this highlights the strength of the online business. Online sales were already a large part but have lifted 57% while the shops were closed.
Bell Potter believes the latter reflects a quick adjustment in product mix to cater for the demand for casual garments, and also reflects customers shopping online for the first time. However promotions also boosted business, which instigated lower gross margins.
Citi downgrades to Neutral from Buy, disappointed that gross margins are lower as a result of increased promotions. The broker also does not envisage a margin of safety in the share price, while good sales and margin results from Avenue are required to meet expectations.
A lack of gross margin improvement in the Avenue e-commerce business could be a challenge over the longer term, in the broker's view, given the brand has low price points and customers are very price sensitive.
Excluding the boost from the Avenue acquisition, Citi expects a slight decline in second half sales of around -2%. Rental reductions have been achieved and the final outcome will be a negotiated when the store disruptions are settled.
Morgan Stanley suggests the strong online offering should give the company bargaining power with landlords while, in the longer term, the store numbers could reduce.
Avenue, the recently-acquired e-commerce business in the US, continues to exceed the company's expectations, which Bell Potter attributes to a strong integration process.
The value brand provides a strong offering in casual wear that has resonated strongly in the current environment. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, maintains a Buy rating and $3.40 target.
While Wilsons estimates Avenue achieved revenue of $1.72m per week in its first eleven weeks of ownership by City Chic, regular visits to the online store have indicated frequent promotional activity during the second half and a slightly softer run-rate is now expected.
In North America, Wilsons understands the company suspended shipping to its wholesale partners in order to manage receivables and is therefore uncertain if this revenue line, albeit lower margin, will return in the short term.
Still, The broker, also not one of the seven, remains optimistic about the online growth in FY21, now forecasting 25%. Coupled with modest improvements in the store network results in a new target of $3.25 with an Overweight rating maintained.
City Chic Collective is one of the key Overweight stocks for Morgan Stanley. The broker is comfortable the company can withstand the current period of low consumer confidence.
There company has enough liquidity, moreover, to support two years of depressed sales and Morgan Stanley is of the opinion the shift to online will accelerate after the current crisis, with the company being well-positioned to benefit.
City Chic's longer term industry position is also likely to improve incrementally as a number of its competitors, particularly department stores, are in financial distress.
In this context, department stores have around 50% share of the plus-size apparel market in the US and there could be further opportunities for accretive transactions as a number of smaller unlisted operators are also challenged.
Apparel is highly discretionary and vulnerable to a recession as it ranks low in terms of the categories where consumers are willing to deployed disposable income. Still, Morgan Stanley notes recent data points to a modest lift in discretionary expenditure.
FNArena's database has two Buy ratings and one Hold (Citi). The consensus target is $2.86, signalling 1.3% upside to the last share price.
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