City Chic Collective Ltd (ASX: CCX) shares are down over 22% since August but overall, haven’t performed too badly considering they’re still up 240% since March.
CCX share price chart
Although the company has performed strongly this year despite the less than ideal conditions, there seems to be a giant cloud looming over many ASX retailers that have a fair bit of exposure to overseas markets.
Here’s a quick analysis of City Chic and a few of my own thoughts.
What does City Chic do?
City Chic is a retailer that specialises in plus-size women’s apparel, footwear and accessories with operations across Australia, New Zealand, USA, Europe and the UK. Its multi-channel offering includes physical stores, online sales and a smaller wholesale market.
The company operates through four different brands – its most recent addition is Avenue, an American e-commerce clothing chain that City Chic acquired in 2019 for US$16.5 million after the company filed for bankruptcy.
City Chic used to be one of Specialty Fashion Group’s brands, along with Rivers, Millers, Katies and a couple more. The company divested the other five brands and put all of its resources into City Chic from about 2018 onwards.
Since then, the company has been able to become profitable and grow both organically and through acquisitions that integrated well with its original offering.
Recent financial performance
Physical stores were City Chic’s primary revenue generator up until COVID-19. Based on the most recent FY20 results, online sales jumped over 113% and made up over 65% of the group’s total revenue for the year.
The company currently has over 663,000 active customers, with 278,000 of these added just in the last 12 months.
Like most retailers, the COVID-19 pandemic resulted in the temporary closure of physical stores. The company raised capital and streamlined its supply chain to help slash its cost base while revenues were expected to be lower.
Luckily, the company’s fixed cost base and a huge jump in online sales saw the group grow overall sales and EBITDA by 31% and 6.6%, respectively, despite the less than ideal conditions.
Why the City Chic share price has pulled back recently
Earlier this year, City Chic announced its intentions to potentially acquire Catherines, which is another women’s plus-size retailer that caters to a slightly more mature age bracket. It planned to acquire Catherines’ e-commerce platform, which was said to generate around US$67 million in revenues per year.
It looks like the market got a little bit ahead of itself on this one and priced in the potential cash flows of the acquisition into the City Chic share price. Unfortunately in September, City Chic announced it would not be going ahead with the acquisition as there was another bidder with a higher offer for the business.
What’s to like about City Chic shares?
I compare City Chic to other Australian retailers such as Accent Group Ltd (ASX: AX1). Both of these companies grew online sales significantly through COVID-19, with a huge amount of this growth coming from new customers.
While it’s not realistic that all of these new customers will result in repeat sales in the future, there’s now another 278,000 people who are familiar with the brand. This gives City Chic a massive advantage over retailers who didn’t achieve this same sort of growth or new retailers that would open from now on.
With this added customer base, the company can now focus on expanding its current offering by selling more products to increase its spend per customer across its platforms.
Although discretionary sectors aren’t the most attractive to some investors right now, I view City Chic’s products as relatively defensive compared to other high-end products such as jewellery.
Valuation and summary
City Chic shares trade on price-earnings multiple of around 70 based on FY20 earnings. After trying to make some sense out of this valuation, it looks like some analyst estimates for FY21 earnings are over double that of FY20.
However, even if City Chic could achieve this high earnings target, shares would still be trading on a P/E of around 30, significantly higher than most retailers on the ASX.
If you can look past the valuation, I think City Chic ticks lots of boxes in other areas. It’s only recently been split up from Specialty Fashion Group, so in that sense, it could very well be early stages in terms of the company’s full growth potential.
I’d be happy to be a buyer of City Chic shares today. That said, if I had to pick just one ASX retailer, I’d rather go with Accent Group at the moment because I think it has plenty of upside left and the valuation is far less stretched than City Chic’s.
Click here to read my full write-up on Accent Group, which explains why I think it could be a further wealth winner.
