Following a trading update that shocked the market, City Chic Collective (ASX: CCX) has been dealt one of the most brutal slew of downgrades I can remember since we started this report six months ago. Not one but four brokers have downgraded the company, over concerns about a slump in its American business and warnings on margin compression and inventories.
Here's what some of the sell-side analysts have been saying:
Ord Minnett downgrades the stock to a HOLD from BUY, with the price target slashed by more than 60% to $1.10/share.
Morgan Stanley also downgrades to a HOLD from BUY, with the price target slashed by a similar magnitude to $1.20/share.
And... Macquarie is so concerned about the company's supply chain and inventory levels that it said "limited risk to the upside exists in the near term". Now a NEUTRAL, with a price target of just $1/share (it was $2.60/share).
Spheria still buying though?
It announced buys of nearly 23 million shares between October 18 and November 25 [ref]
And in the spoiler, FWIW is a retrospect to October 19 from Bridget Carter at The Australian, noting amongst other things (like a pending share buy back(?) that Regal has also been buying?
Short sellers appear to be reversing their views on the Australian listed plus-sized apparel chain City Chic, with some investors buying up large in the stock of late.
It appears that Regal Funds Management has moved from a short seller in City Chic to a long-term holder. A notice lodged to the Australian Securities Exchange shows Regal bought 18.5 million shares recently and retains 13.2 million, equating to a 5.51 per cent stake in the company.
The 5.3 million difference in shares purchased compared to its current holding suggests that it was covering a short position. City Chic has been one of the most shorted stocks on the Australian Securities Exchange, with 6.46 per cent held by short sellers. But the number holding a short position has fallen about 2 per cent in the past month.
Short sellers borrow a stock in the expectation it will fall before selling it, then buy it back at a lower price, returning it to the lender and profiting on the difference.
They have piled into City Chic as the company’s share price has collapsed from more than $6 a year ago to $1.25.
The stock has faced declines over concerns the company is holding too much stock and may need to raise capital.
City Chic’s strategy has been to source additional apparel to achieve greater supply chain diversity due to volatility and disruption caused by geopolitical and pandemic-related issues, and avoiding supply chain inflation.
With the US dollar now rising, it could be at an advantage compared with rivals when it comes to its profit margins.
That is if demand remains strong.
The other company that has been increasing its position is Spheria Asset Management, lifting its stake to 8.36 per cent from 6.41 per cent.
City Chic’s market value is $300m. For the year to June, it generated $22.3m of net profit, up 3.3 per cent from the previous corresponding period. It has an inventory position of $195.9m with a target of between $125m and $135m in June 2023.
Should the company’s strategy prove to be successful, a share buyback could be on the cards.
Some shareholders certainly hope so – they have written to the company’s board urging City Chic to consider a move where it could buy back about 10 per cent of the stock.
cheers
CCX Price at posting:
67.5¢ Sentiment: None Disclosure: Held
(20min delay)