City Chic’s trading update reveals an expected slowing rate of growth as online sales give way to normalising store sales. CCX’s mostly online sales model is still performing well and should benefit from carrying higher inventory.
So far in calendar 2022 (to 24 April), sales growth of 25% has been solid so that CCX is expecting 2H22f EBITDA to be slightly ahead of 1H22. The softer sales pattern was more pronounced in the Americas business. We think there will be a small sales pickup for the remainder of 2H22 with growth in Australia outpacing further softness in the US. Heading into FY23f, we think sales growth of 16% is achievable.
After a slow start due to Omicron impacts, store sales in Australia are beginning to pick up pace. Easter this year was bigger than last year, and dress sales are increasing as events such as weddings are back in the social calendar.
We understand the company has increased its inventory position from $67 million at 1H22 towards $174 million by the end of FY22f. This has taken the company from a net cash position to net debt of around $6-12 million for FY22f. This is a material increase in inventory that, in normal circumstances, might raise some concern.
However, considering the parlous state of supply chain issues, particularly in China, and with input costs rising, a higher level of inventory will prove to be a good decision if prices rise, something CCX is contemplating.
Investment view
Most of CCX’s sales growth is coming from overseas and non-Australian sales now represent about 56% of group sales. CCX will still look to increase its store numbers (current 94, could add 10-12) and its average store size in ANZ.
CCX will need to carefully control its online delivery costs (fulfilment costs were 11.9% of total sales in FY21) so that it maintains a strong mix of full margin sales. As it spends more on marketing and advertising, this aspect will also need to be managed against the anticipated sales growth.
CCX specialises in the global plus-size market that is estimated at US$180 billion although we think the contestable market is about one-third of that figure with the remainder sold at discount department stores and hypermarkets at very low prices.
Consensus forecasts suggest CCX’s revenue can almost double in three years from FY21. If the company can successfully manage its margins through that growth, there is a positive reason to own the stock.
Risks to investment view
Growth in online fashion retail may not be as robust as expected and consumer confidence could be affected by rising interest rates and higher living costs generally. CCX’s gross margins could be impacted by slowing sales trends. Competition in the fashion industry is always intense and this could affect sales growth.
Recommendation
We have retained our Buy recommendation.
