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City Chic Out Of Vogue

Australia | Nov 29 2022

Brokers have given City Chic Collective the chainsaw treatment following yet another disappointing market update

-City Chic Collective has issued yet another disappointing market update
-The average broker target in FNArena’s database slumps to $1.56 from $2.45
-Operating margins fall, partly due to elevated fulfilment costs
-Ord Minnett feels margin contraction won’t abate in the near term


By Mark Woodruff

The share price for fashion retailer City Chic collective has fallen significantly in the past two trading sessions on the ASX after releasing a year-to-date trading update.

The share price has slumped from $5.50 at the beginning of 2022 to be currently trading around 84 cents.

The company is a multi-channel retailer with an offer that appeals to plus-sized women across a variety of lifestyles. Brands include Avenue, City Chic, Evans, and Navabi.

In reaction to the trading update for July 1 to November 20, two of the five covering brokers in the FNArena database have downgraded their rating for City Chic and the average target price falls to $1.56 from $2.45.

Outside of FNArena's daily monitoring, Goldman Sachs lowers its target to $1.55 from $4.25, while Jarden’s target falls to $1.17 from $2.09. Both brokers retain a Neutral rating.

Jarden points out consensus was expecting first half year-on-year revenue growth of 14% but management delivered a fall of -2%. US sales fell by -12% on declining traffic for Avenue, while sales in the EMEA region declined by -5% due to macroeconomic headwinds in Europe, according to the broker.

Avenue's growth in web traffic has been flat over the period and Evans' UK visitors have been down -10% year-on-year, explains the analyst.

Given the size of the decline in US and Australian online sales relative to the corresponding web traffic, Jarden assumes conversion rates and average basket sizes were lower.

Management noted competitive pressures have increased the promotional intensity in the Northern Hemisphere, eroding around -400bps of margin year-on-year. Macquarie also notes the twin impact from a mix shift to marketplace sales and elevated return rates in EMEA.

This broker points out a return to a net cash position by 30 June 2023 requires the company to meet its reconfirmed $125-135m inventory target for that date and release requisite working capital. Higher gearing is now expected at the end of December this year in order to lower recently elevated payables.

As weakness in the Northern Hemisphere is set to continue, Macquarie downgrades its rating to Neutral from Outperform. The broker sees limited near-term upside risk and expresses concern elevated stock levels leave the company vulnerable. However, it’s felt the customer proposition (oversized women) still stacks up for the longer-term.

Ord Minnett also lowers its rating (to Hold from Buy) and feels operating margin contraction from weaker demand is unlikely to abate anytime soon. Contraction in the operating margin is being driven by declining gross profit margins and elevated fulfilment costs, explains the analyst.

Additionally, management incentives to lower inventory are likely to result in further margin erosion, cautions the broker.

Additional broker views

While Buy-rated Citi suggests there are material downside risks to consensus EPS forecasts following the trading update, the business does not appear to be broken and should benefit once pressures on consumers abate. A recent moderation of input cost inflation should also flow through to (and lessen) the cost of goods sold (COGS).

This broker also expects comparisons to the previous corresponding period will become easier.

Morgan Stanley cites some additional positives including an improvement in demand coming into the Black Friday/Xmas trading period. Competition could also ease into the second half of the financial year as peers reduce inventory, while it’s felt the company's peak inventory has passed.

At the same time, the broker notes earnings downside risk should the sales trend continue in FY23, and points out the long-term impact on brand equity is unclear.

Many City Chic customers are low-to middle-income earners and are thereby more exposed to the recent higher cost of living, according to UBS. In response, the company has upped online promotional activity at a time when competitor discounting has been elevated, especially in the US, explains the analyst.

Further, as consumers react to the higher cost of living, product returns have increased and therefore increased fulfilment costs, highlights the broker.

Jarden’ s Neutral rating is predicated upon ongoing earnings risks and uncertainty around the clearing of the stock oversupply over FY23-FY24.

Before becoming more positive, this broker would need to see evidence of City Chic returning to positive sales growth while being able to clear inventory without a sizeable impact on gross margins.

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