CCX has transformed itself in recent years from an Australian store-based plus-size women’s retailer to an international, multi-channel version of the same retail segment. The company has added brands but most importantly, has become a highly effective online retailer. In FY21, 73% of group sales were online with 44% of sales outside Australia and New Zealand.
The expansion of CCX outside ANZ has been opportunistic and deliberate with businesses now in the UK, Europe and America which are providing an excellent platform for the group’s total brand portfolio.
In December 2020, CCX completed the acquisition of the 100-year old Evans brand (A$40.2 million) which has singularly focused on the plus-size market. CCX only purchased the brand, eCommerce and wholesale businesses while the stores were closed. CCX has transformed Evans to an online only business and has introduced all of the group’s brands.
The July 2021 acquisition of German-based marketplace business, Navabi (A$9.6 million) is rebuilding on a loyal customer base and provides a beachhead into Europe.
The acquisition of the Avenue business in the US in October 2019 (A$24.6 million) has worked out very well so far and gives CCX access to a US$49 billion market.
The combined websites of the four main markets (citychic.com.au, Avenue.com, Evans.co.uk and navabi.de) drives around 70 million annual visits globally. This is CCX’s ‘shopfront’ to the US$180 billion global plus size market although we argue the truly contestable market size is perhaps only one-third of that figure given the volume of product sold in hypermarkets and discount department stores at very low prices.
CCX has diversified its supply chain, so it is less reliant on China. The company is now sourcing from Bangladesh, Vietnam, Cambodia and Morocco as well as China. CCX has always focused on a high stock turn business model, and it has been increasing its inventory level substantially over the last two years. This carries the risk that gross margins could fall if sales trends soften and the company is subject to seasonal fashion changes in both hemispheres.
Online sales have become a major feature of retailing with penetration in Australia estimated at 18-20% of the fashion market of clothing, footwear and accessories. But CCX’s online penetration is much higher in Australia at 54% in FY21 and 73% at group level.
CCX will likely spend more on marketing and advertising over the next few years. Combined with its product range, this will provide the impetus for sales growth over the next few years. One aspect associated with the rising online sales is falling gross margin, particularly over the last two years. CCX separately discloses its fulfilment costs from its purchase of inventory costs. Fulfilment costs were 11.9% of total sales in FY21, up significantly from 6.2% in FY19. As online sales continue to rise as a proportion of group sales, we expect CCX’s gross margin to continue to fall to around 46%.
CCX’s net cash position as at 30 June 2021 was $71.5 million. The company raised $111.1 million of new equity in July 2020 (at $3.05 per share) that strengthened the balance sheet through the pandemic.
Investment view
Most of CCX’s sales growth will come from its offshore platforms and this could be expanded further if the company looks to invest or make acquisitions in other countries such as Canada, Latin America and other European countries outside Germany.
However, most of the growth will come from the existing platform and from increasing store numbers (current 94, could add 10-12) and average store size in ANZ. CCX will look to leverage its global online platforms to drive sales, and this is certainly possible based on its track record to date.
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 initiate our coverage with a Buy recommendation.
