AFR’s Carrie La Frenz looking at City Chic as an ugly duckling with its’ only swan potential as black :/.
She says Wilsons analysts think it may be set to be culled by private equity at 54c a share then carved up, and that there is someone out there who used to be in retail who thinks Phil Ryan - who created the City Chic brand back in 2006 then was appointed CCX as CEO in February 2019 [ref] has the business sense of a rather deaf and colour-blind goose. (*ouch*?)
City Chic’s big mess is going to get worse Carrie LaFrenzSenior reporter
Dec 21, 2022 – 2.52pm
Women’s specialty fashion retailer City Chic Collective is in a big mess and it is likely to get worse in coming months, leaving it vulnerable to private equity.
The group operates many brands, including City Chic, Avenue, Evans, CCX, Hips & Curves, Fox & Royal and Navabi, catering to the plus-size women’s apparel and footwear market.
City Chic shares have tumbled 92 per cent to just 46¢ in the year to date.
The stock is down over 90 per cent in the year date to just 46¢ – although on Wednesday it clawed back some significant losses from the previous day when it crashed after another poor update.
At what is the biggest time of the year for retail, City Chic said on Tuesday it would post a “small underlying EBITDA loss” in the first half of financial year 2023.
This was driven by a further softening in the group’s revenue and lower-than-expected gross margins due to increased discounting to move ageing stock.
It also said momentum over the key Black Friday-Cyber Monday trading period was softer than the company expected, despite heavy discounting.
Citi analyst Sam Teeger said this could suggest the customer database and/or brand names were not as strong as previously thought.
Put simply: City Chic appears to have more than three times the stock it should, and now must heavily discount to move it. It will not have new stock – so no new freshness to keep consumers coming back.
Wilsons analysts John Hynd and Tom Camilleri rightfully raise the possibility that private equity could pay up to $142.6 million, or 54¢ a share, under a leveraged buyout, then restructure the group.
Its offshore operations could easily be divested or closed down and a liquidation of allocated inventory could fund part or all of this closure, they said.
The private equity buyer would then be left with the well-established and highly profitable Australian business.
Inventory issues
City Chic is a global online and bricks-and-mortar retailer with a network of 90 stores across Australia and New Zealand and websites operating in ANZ, the US, the UK and Europe.
It posted sales of nearly $370 million last financial year. The Americas and Australia-NZ are equal in sales generation at around $162 million.
Underlying EBITDA grew by 11.3 per cent to $47.1 million over the year, representing a 12.8 per cent margin. Annual cost of goods sold is sitting at about $130 million.
If it had stock turns of about three times, it should have average inventory on hand of $40 million to $45 million, and that would move higher to around $60 million at peak times ahead of key seasonal trading such as Christmas.
City Chic said in its annual report it expected inventory to reduce to more normal levels over the financial year, targeting a balance of $125 million to $135 million by June 30. The group, led by Phil Ryan, said this week it expects to have around $170 million worth of stock at the end of December.
Wilsons analysts believe City Chic will achieve those inventory targets in June. It will be costly, though, given 80 per cent off Winter Essentials are available on Avenue.com after 80 per cent discounts store wide during the Black Friday-Cyber sale period – highlighting the degree of discounting required to reach these targets.
The inventory issue talks to a massive board and management failure, and a complete lack of understanding inventory management plays in the business.
City Chic is buying summer dresses for Australia’s summer and for the UK-US but can’t trade that stock until next year.
The seasonality is wrong and so is the volume and therefore the markdowns are higher – putting a squeeze on margin as fulfilment costs rise.
In fashion, inventory is perishable. Hefty constant discounting hurts the brand. And what’s worse is many of City Chic’s US peers have similar overstock issues, so the segment is drowning in stock … but it appears City Chic is the worst of the bunch.
One former retailing executive says there is no supplier in the world that doesn’t make a northern hemisphere range and a southern hemisphere range. Any gains made in the cost price is outweighed by the markdowns required to move old stock.
“The board, through its lack of knowledge, has allowed a CEO to pursue this faulty strategy and place the company on shaky ground. This is a snowball impact on the company ... there is no clear path to a return to profitability. The destruction of value is unbelievable. It could go under,” he says.
CCX Price at posting:
48.5¢ Sentiment: None Disclosure: Held
(20min delay)
