Initially, the stock seems expensive.However, it is worth...

Initially, the stock seems expensive.
However, it is worth looking at it into more details, as City Chic is on a niche, where it enjoys a good level of growth, high margins and a low level of capital employed. As a result, it already gets a high level of return on investment, while it still has a significant potential of growth.


1. Business
City Chic (CCX) is a plus size woman apparel and footwear retailer, operating both shops and e-commerce (74 % of their sales are online).
They still do 56 % of their sales in Australia/NZ (online + shops), 38 % in Americas (online only) and 6 % in EMEA (online only).

2. Growth/profitability/returns
One of the main interest of this story : they have identified a niche, which seems under served by the rest of the market.
As a result, CCX is having :
- already a high level of margin (underlying EBITDA margin of around 16.4 % in FY21),
- and a strong top line growth, driven both by the growth of the market and their active M&A policy.
- low Capex requirement with a Capex of 4.7 m (net of landlord contribution) vs 42.4 m of underlying EBITDA (all figures in FY 21).
As a result, they have a high return on investment (return on capital employed of around 27.8 % in FY21 before tax).
What's surprising : this kind of return does not seem to attract more competition. More the opposite looking at all the companies leaving this business.

3. Competition
This is probably one of the main interest of City Chic story.
From the start, City Chic has been thriving because not many companies were addressing their part of the clothing market.
Recently, a lot of their competitors have been strongly affected by covid and some have left the market.
Which has created even more opportunities for CCX.

4. M&A policy
So far, CCX has been able to do acquisitions at rather low prices.
While CCX is now valued at an EV/FY 21 sales of 5.6 x, it acquired Avenue (US) at 0.24 x, Evans (UK) at 0.9 x and Navabi (Germany) at 0.57 x.
It has also proved that it was not ready to pay unreasonable prices, preferring to give up in the case of Catherines (July 20).

5. Valuation
Since July 2018 (when Specialty Fashion sold its other brands and kept City Chic), the share price has been multiplied by around 6 x (+ 130 % on 1 year).
They also have a great list of shareholders : Australian Super, Paradice, Ophir, WAM...
So, the stock does not look cheap, based on the last earnings published.

They have an EV/EBITDA 21 of 34.4 x. Looks high, but this ratio needs also to be put into perspective, as the company has been growing its revenues by more than 30 % per year, during the last 2 years (+ 32 % in FY 21 on a comparable basis).
The underlying growth may, in fact, be much higher as they have been growing their number of customers* by more than 60 % per year, during the last 2 years (not yet reflected in revenues, as the growth was driven by the increase out of ANZ, where their annual sales/customer are around half the level of ANZ).

And the potential of growth continues to look significant as CCX has a global market share of around 0.1 %, while the plus size market is a growing market.


For further details on City Chic business model, there is also this youtube video of Ophir (done in December 2019, but still relevant).
https://www.youtube.com/watch?v=5cOf8TwmRHc
2 interesting points, in particular in this video :
- City Chic has a very low level of marketing expenses (around 2 % of sales),
- CCX customers are very valuable, as there is a high level of repeat customers (interesting point, but I was not able to find elements to check it).

* including acquisitions of Avenue from Oct 19 and Evans from Dec 20.