City Chic Throws Off The Winter Blues

This story features CITY CHIC COLLECTIVE LIMITED. For more info SHARE ANALYSIS: CCX

After a winter of lockdowns and pandemic blues, summer is underway in the northern hemisphere and this brightens the outlook for City Chic

-Demand rebounding as the physical footprint reopens
-Gross margins recovery suggests discounting not required
-Upside potential from partner channels
 

By Eva Brocklehurst

City Chic Collective ((CCX)) is on track for strong growth as summer in the northern hemisphere heralds the opportunity for consumers to go out in new clothing, after a drab winter of lockdowns and pandemic blues.

Already momentum has been positive in the current quarter, and May and June are the company's largest trading months in the US. The US business has returned to growth as the roll-out of the vaccine progresses, triggering increased demand, particularly for women's dresses.

Morgan Stanley assesses demand is elevated and the company's expansion is accelerating, with potential for more highly accretive M&A. While integration of Evans is ahead of schedule and below budget, brokers warn the company will need to invest in more inventory.

Canaccord Genuity welcomes the full integration of Evans as it minimises the cost drag on FY21 numbers and, as trading conditions start to normalise, it places the brand in a good position to take advantage of the summer months in the UK.

Expansion

In the UK, with non-essential shops permitted to open since April 12, demand for women's clothing is expected to recover in a similar manner to the US and City Chic will need to rebuild stock levels to ensure it can capture the demand. This is something Macquarie will monitor closely.

In the US, the City Chic brand has returned to growth. Canaccord Genuity points out this smaller volume brand does not have the recognition of Avenue, which meant it was severely affected throughout the pandemic.

Now, the brand appears to be a margin enhancer for other online channels. The broker points out City Chic branded product is now being sold through Avenue, and it appears to be achieving both an increase in sales and gross margin contribution.

In Australasia, strong trading has produced comparable growth of 19% and Canaccord flags a lot of fixed cost/earnings leverage potential, given the physical store footprint.

Furthermore, gross margins are recovering to pre-pandemic levels which suggests to Citi discounting is not required. The broker envisages second half sales growth of 59% or more amid a strong rebound in the US business, Australasian cycling of store closures and the Evans acquisition.

As a dampener, while gross margins may have rebounded, Morgan Stanley notes shipping/logistics costs remain elevated. Also the costs of digital marketing for Australasia need to be accounted for, although Macquarie believes this will pay off in terms of top-line growth in excess of what would have been the case without such investment.

The broker finds signs of extracting market share and attracting new customers — significant and positive given the relative maturity of the business in Australasia. There was no disclosure regarding any progress on M&A, which Macquarie welcomes and attributes to discipline surrounding acquisitive growth along with the company's interest in maintaining a strong balance sheet.

Citi estimates net profit of $22.4m in FY21, which would be up more than 79% on the prior year. While envisaging strong growth prospects, the broker retains a Neutral rating as the stock is trading at 28x FY22 PE estimates.

Bell Potter strengthens growth forecasts, particularly with respect to the US. The net effect is an 6% increase to FY21-23 estimates for earnings per share. Macquarie anticipates growth initiatives across all channels are likely to materialise in full during FY23 and not be distorted by the pandemic.

Upside

Upside risk comes from successful execution of the company's "conservative value" offering in Australasia and its partner strategy in Europe. There is also potential upside from a stronger recovery for the Nordstrom channel. The Nordstrom channel has been live since the end of February, Co-edition is growing and Macy's will go live this month.

Bell Potter believes Evans will provide a strong platform for growth in the UK/Europe and add to the significant opportunity in the US. Sales through US partner channels remain down of pre-pandemic levels, but over the past two months the broker notes these have been moving up.

Among those stockbrokers that are not monitored daily on the FNArena database, both Canaccord Genuity and Bell Potter have Buy ratings with targets of $5.00 and $4.90, respectively. The database has three Buy ratings and one Hold (Citi). The consensus target is $4.69, suggesting 8.3% upside to the last share price.

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