Sales trends are positive despite the pandemic, as City Chic Collective ((CCX)) undertakes a number of initiatives and the operating environment stabilises in Australasia.
City Chic has embarked on a standardised e-commerce platform and a material expansion of its clothing ranges online. A 24-hour live chat for customers across all brands has recently been introduced.
The plan is to expand market share in North America and add a more conservative segment in Australasia, launching a new website to leverage product from Avenue. Acquisition opportunities particularly outside of Australasia remain on the cards.
There was no detail provided at the AGM about any progress following the unsuccessful attempt to buy Catherines in September, while Wilsons notes this leaves $135m in cash on the balance sheet that could be used for bolt-on acquisitions.
Goldman Sachs continues to believe the investment case is skewed to the positive, noting more than 15% of market capitalisation is backed by cash.
Comparable sales were strong over the first 20 weeks of FY21, up 18.7% outside of the Victorian store closures and up 7.9% inclusive. There is strong momentum for the Avenue brand and this has traded profitably, exceeding the company’s expectations despite the pandemic and US election disruptions.
The re-opening of stores, particularly in Victoria, should benefit Australia while the opposite situation in the US should provide a tailwind for the predominantly online Avenue brand.
This is important because the US consumer environment may face a slower recovery. Acceleration of coronavirus cases nationwide is driving a reversion to behaviour seen earlier in the pandemic as cities and states reinstate mandates and more people react to the worsening situation.
Goldman Sachs also points out, when acquiring Avenue in October last year, City Chic went into the peak sales period of Thanksgiving-New Year with a sub-optimal inventory and this makes a relatively easy comparable to cycle.
Bell Potter notes City Chic is also starting to benefit from the cross-selling of casual wear on the Avenue platform and strengthens estimates to reflect the latest growth rates, upping forecasts for earnings per share by 14% for FY21.
Online
Commentary implies 60% growth in online business in the northern hemisphere and 20% growth in the southern hemisphere for the first half and Wilsons points out recent Google trends highlight ongoing improvement in searches for City Chic and Avenue.
While the pandemic may threaten confidence in the short term the transition to online continues unabated. Positive sales trends occurred across the main online platforms as the company further expanded its ranges to capture more share.
City Chic noted online sales were strong in Australia while in the US the brand is finding it more challenging, because of its large range. Nevertheless, Goldman Sachs has pointed to internal assessments that reveal store closures in the US have been accelerating since 2017 as more retailers migrate to online channels.
In Australasia the company will benefit from a steady trend towards a full re-opening and while 53% of its FY20 sales were still in-store City Chic has the highest exposure to online sales compared with its omni-channel peers.
Margins
The company finished FY20 with a clean inventory and gross margins are better than at the peak of disruptions, only slightly below those experienced in the prior year for the City Chic brand. Morgan Stanley highlights, while gross margins may be down comparatively, these have improved since the peak of the pandemic. The broker models gross margins of 48% for FY21.
Citi expects a recovery in margins along with more normal sales patterns and upgrades to Buy from Neutral. The broker forecasts -150 basis points of margin decline, assessing investment in marketing the Avenue brand is likely to offset any improvement.
Among those stockbrokers not monitored daily on the FNArena database Goldman Sachs reiterates a Buy rating with a $3.90 target, Wilsons has an Overweight rating and $3.10 target and Bell Potter a Buy rating with a $3.75 target. The database has three Buy ratings with a consensus target of $3.68, signalling 27.5% upside to the last share price.
