Company Overview: City Chic Collective Limited (ASX: CCX) is engaged in the sale of woman’s apparel, footwear, and accessories. The company had 93 retail operational stores across Australasia as on 28 June 2020. It has also several operating websites in Australasia and the USA, and marketplace and wholesale partnerships in the USA, Europe and the UK. Hence, its operations are bifurcated into the following geographies- Southern Hemisphere: Australia & New Zealand; Northern Hemisphere: includes the US, Europe and UK. The Southern Hemisphere is serviced by both stores and website, whereas US sales are comprised of online and wholesale and European & UK business is only wholesale.
CCX Details
Acquisitions & Market Demand to Drive Growth: City Chic Collective Limited (ASX: CCX) is involved in the retailing of women’s apparel. The market capitalisation of the company as on 09 March 2021, stood at ~$871.03 million. The company has completed the acquisition of UK based Evans brand, e-Commerce and wholesale businesses for ~$41 million from Evans Retail Limited and certain other entities, on 23 December 2020. CCX funded the transaction from its existing cash reserves.
The overall strategy of the group is to operate as a global omni-channel retailer, focused on the plus-size market.
The company delivered resilient financial results in 1HFY21 with sales revenue growth of 13.5% to ~$119 million, compared to the previous corresponding period. There was comparable sales growth of 20.8%, excluding the closure of the Victorian stores. The US online websites contributed sales of $45 million during the first half, compared to $26 million in the pcp, aided by the expanded customer base from the Avenue acquisition. There was an increase of 21.8% in underlying EBITDA to $23.3 million, with an improved margin of 19.6% during the same period. Statutory NPAT increased by 24.8% to $13.1 million. The company reported an improvement in the normalised operating cash flow to $21.5 million. The Underlying Cost of Doing Business (CODB) saw a reduction to 41.6% of sales in H1FY21 from 43.7% in H1FY20, driven by a greater contribution from the online channel, as well as cost-saving initiatives from the management.
H1FY21 Financial Performance (Source: Company Reports)
Addressing the Plus-Size Market: The company is focussed on providing retailing and designing needs for the plus-size category in women wear. It has a diverse range of brands starting from conservative to fashion with a global reach through its flagship websites, City Chic stores in ANZ and global partners. The global plus-size market is presently valued at over ~US$180 billion annually. The market addressed by CCX is valued at over ~US$58 billion annually, which is an increase from previously declared ~US$50 billion based on 2019 research. The plus-size market is forecasted to grow at ~7% annually.
Market Size of Global Plus-Size Segment (Source: Company Reports)
Acquisition of Evans to Diversify Market Reach: CCX completed the acquisition of Evans e-commerce and wholesale business from Evans Retail Limited on 23 December 2020, for a cash consideration of ~$41 million. The transaction puts the company in a favourable position to make inroads in the UK plus-size market valued at ~US$7 billion, with high online penetration. The business structure and focus of Evans is aligned to the existing City Chic Collective product, which will help to accelerate on the business synergies. CCX plans to leverage the existing traffic and customer base of Evans to introduce a wider range of products and lifestyles. Evans generated annual online traffic of 19 million for the twelve months to August 2020, and annual online revenue of ~£23 million. CCX has made progressions on the acquisition and has secured a third-party logistics provider based in the UK. It plans to implement a customer-centric operating model for UK operations.
Top 10 Shareholders: The top 10 shareholders together form around 37.66% of the total shareholding, while the top 4 constitute the maximum holding. AustralianSuper and Spheria Asset Management Pty Limited. are holding a maximum stake in the company at 7.45% and 6.19%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: The company delivered an improved net margin performance during H1FY21 at 10.9%, compared to 10% in the prior corresponding period. ROE of the company stood at 11.6% during the period. There was an improvement in the liquidity position of the company with the current ratio at 2.17x, from 0.89x in the prior period. CCX also reported a decrease in the debt to equity ratio of the company to 0.13x from a level of 0.98x during the same period under consideration.
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Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The COVID-19 pandemic had an impact on the company’s operations, where it had to resort to discounting to give a push to the sales. It also had to close some stores owing to COVID-19 restrictions and guidelines in ANZ region. The pandemic has also weakened the demand for party and occasion apparel. However, the impact was offset by increasing the intimates and sleepwear offerings. CCX is dependent on imported products and this exposes the company to currency risks. The Group is also exposed to risks from environmental changes, which is managed by diversifying its vendors and material sourcing.
Outlook: The average annual spend in the plus-size segment is significantly less than the rest of the women's apparel market. This provides the company with an opportunity to increase on its market share by further penetrating its business and diversifying its reach. Moreover, there has been a trend where curvy women are gaining confidence and is comfortable with their body shape, which augurs well for CCX’s business and aligns with its business philosophy. It has reported decent comparable sales growth in the second half of FY21 to date. It plans to introduce marketplace and expand wholesale partnerships in the UK and EU region. The company will also look to integrate Evans into its business model and plans to introduce a wider product range.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: The company has a net cash position of ~$83 million as on 27 December 2020. As per ASX, the stock of CCX is trading above its average 52-weeks’ levels of $0.715-$4.420. The stock of CCX gave a positive return of ~31.42% in the past nine months and a positive return of ~7.60% in the past six months. On a technical analysis front, the stock of CCX has a support level of ~$3.51 and a resistance level of ~$3.835. We have valued the stock using an EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium to its peer average EV/EBITDA (NTM trading multiple), considering the decent financial performance, improvement in cash flow and a comfortable balance sheet. For the purpose, we have taken peers such as Premier Investments Limited (ASX: PMV), Lovisa Holdings Limited (ASX: LOV), Wesfarmers Limited (ASX: WES), to name a few. Considering the indicative upside in valuation, impressive performance in H1FY21, expected synergies from the acquisition of Evans and the comfortable net cash position of the company, we recommend a ‘Buy’ rating on the stock at the current market price of $3.680, up by 0.272% as on March 09, 2021.
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CCX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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