City Chix (CCX) was a market darling, till it wasn’t - a share price fall from $5.43 to just a tad under 10c certainly says so. Management was 100% to blame – via a massive overstock gamble during Covid and worse still, overstocking on crap merchandise. And the CEO, who is still there, came from a merchandising background. This still troubles me, but he does have the confidence of one of Australia’s premier retailers in Brett Blundy who owns a tad lss than 8% at an average price well higher than the current SP of 13.5c

The result of this fiasco: stock ultimately flogged at almost cost, a lost two years whilst the global ''over reach'' was righted, and massive damage to the brand.

 But the underlying business model is still intact. They sell fashionista to ’SHE” - that’s what they call her, the larger lady, and if it’s not politically incorrect to say, I don’t think there is any significant trend to a slimmer ‘SHE’.  But SHE is conscious of wanting to look good in modern styles and SHE is prepared to pay to look stylish.

I took a riverboat gamble at around 40c about a year ago and things looked grim and still are. But, the ugly duckling is showing distinctive signs of a marvellous makeover, so I’ve taken a big punt on SHE at 12c. I do think this will be close to a binary outcome – I will either be sporting ‘’two pennies on the eyes or I will get a two or three bagger. Here’s why I thinking/praying for the latter:

Early indications are that the turnaround has begun. The business model is intact, merchandising has improved, margins are improving big time, wasteful overreached and ‘over there” stores & brands have been sold off (at massive write offs as you can imagine). The focus now is the ANZ market & the recently released FY24 AR quotes as follows:

“In the first 8 weeks of FY25, the positive momentum we saw in the second half of ‘24 has continued as the strategy delivers a further uplift in gross margin dollars and average sell price. Our focus on new product that the customer is demanding and strong marketing campaigns with a refreshed tone of voice are working.

Total gross margin dollars are up 28%, with trading margin above 61%, a huge 17.7 percentage points up on last year. Revenue is down 9%, as the first eight weeks of FY23 was a period of high discounting to clear stock that drove unit volume and revenue, but not profitability.

At a gross margin level, comparative stores are up around 13% with total stores gross margin up 8%, even with the 11 closures.

Whilst they admit there is still a way to go to return to acceptable per store sales there are two factors which should be considered:

Firstly, cost of living pressure is affecting all retailers, but we may well be on the cusp of an up cycle, particularly if we get interest rate cuts. I suspect SHE will be champing at the bit to refresh the wardrobe.

Secondly, Mosaic (MOZ) from whom CCX was spun off a number of years ago is in dire straits and is literally struggling to survive. Personally, I don’t think they will make it, nor do they deserve to. Recently they announced the closure of a number of brands and stores which will take away significant choice for SHE. Can CCX snaffle this opportunity?

MOZ are shuttering the following:

Rockmans (150 stores 4.46m members) – not an exact fit with the CCX brands but its appeal is to the older SHE and so one can expect some extra biz for CCX

Autograph (49 stores 1.55m members) embracing “curves” so a good fit.

All up they are shuttering some 231 stores, but the real interest will be who can capture their online businesses which they are closing as well (BeMe and Crossroads with a combined membership of 3.7m). Definitely CCX has sharpened up its online presence so I’m thinking they are across the potential here.

 But, I’m not a smarty-pants loner in sniffing out the opportunities here. I was intrigued by Spheria’s strategy in investing in CCX. They now hold 19.8%. What’s more, another junk yard dog – Regal Funds - which has a habit of smelling opportunity has moved in with 7.7% as has Pinnacle with 9.55%. Brett Blundy is sitting quietly with a 7.3% holding.

I’m not sure Uncle Warren will be buying this one, but I’ll be cheering along all the size 16+ SHE’s of Australia & NZ to get out there and get a new frock!  

Guiding to a signifcant turnaround for FY25 with increase in revenue and dramatic increase in EBITDA

Intriguing they used Trading Gross Margins as THE indication that FY25 has started well. Trading gross margins "represents the difference between product sell price and product cost and is before accounting and other adjustments"

Todays announcement suggests it could be 'game on'. The statement below isn't a denial, more a confirmation that things are happening and the company is aware of its disclosure obligations.

"City Chic is regularly involved in exploratory discussions with different parties regarding initiatives that could createvalue for its shareholders. However, there is no certainty that any of these opportunities, including any potentialsale of City Chic's North American business, proceed to a binding transaction. Luminis Partners has been a long-standing adviser to City Chic on various projects. City Chic will keep shareholders informed of any materialdevelopments in accordance with its continuous disclosure obligations."

If this was war, I'd have my soldiers on high alert, the airforce scrambled and the navy heading out of port.

I am hoping this will be a happy ending to what has been one of the biggest management blunders in recent history.

I'm finding the FY23 results particularly difficult to read given they have decided to report on only the part of the company that remains (following the post EOFY decision to divest the EMEA assets and exit that part of the market).

Please correct me if I'm wrong but it looks like they have divested $40.3m worth of sales in EMEA (308.7-268.4) as well as $40.5m worth of costs (200.6-160.1). That seems like a good idea to me.

Any accountants out there who understand how the asset impairment of 29.4m impacts them moving forward and any other losses from the divestment of the EMEA business and how they might show up in FY24 numbers. That deal only closed 3 August 2023 according to ASX announcement so I'm not sure how to interpret the accounting moving forward.

DISC: Held IRL and in Strawman

Return (inc div)   1yr: -67.60%   3yr: -45.43% pa   5yr: -14.03% pa

Board:

Executive:

EOM ,

I haven’t seen Brett Blundy back a loser. Currently he is selling cattle stations and buying City Chic, now holding 7.3% of the company. I reckon you could do a lot worse than to follow in Brett Blundy’s footsteps! See the excerpt from this mornings AFR article below on The Blundy Effect.

Disc: I haven’t researched City Chic (yet) and I don’t currently hold

(photo from AFR)

”The Blundy effect has finally arrived at womenswear retailer City Chic Collective!

Bombed out and in need of a billionaire buddy, Blundy’s long-awaited arrival on City Chic’s share register sent the shares up 25 per cent during Wednesday’s match and fuelled expectations of more buying in the weeks ahead.

While Blundy’s substantial shareholder notice - revealing he owned a 7.3 per cent stake - sent the shares flying, the smart money had been expecting it for weeks.”

City Chic Collective Limited Interim FY21 Results

Results Highlights

•  Comparable sales growth of 20.8% excluding Victorian store closures, 12.7% including Victorian store closures1
•  Sales Revenue of $119.0m, representing 13.5% growth vs 1H FY20
•  Underlying EBITDA of $23.3m2, representing 21.8% growth vs 1H FY20 and an EBITDA margin of 19.6% (1H FY20: 18.2%)
•  Normalised operating cash flow of $21.5m (1H FY20: $17.1m)
•  Statutory NPAT of $13.1m, representing 24.8% growth vs 1H FY20
•  Global customer base growth of 56% YoY to 801k active customers
•  Online sales growth of 42% vs 1H FY20, off a high base with 73% of sales from the online channel (FY20: 65%, 1H FY20: 53%)3
•  45% of sales from the northern hemisphere (FY20: 42%, 1H FY20: 29%)3
•  Strong balance sheet with net cash of $83m at 27 December 2020 and undrawn debt facility of $40.0m; completed $111.1m equity raise in July-August 2020
•  Completed acquisition of dominant plus-size brand Evans in the United Kingdom

15-Feb-2021:  I have been watching Friday's "The Call" (from Ausbiz) today, and Ben Clark from TMS Capital (who I rate highly) and Adam Dawes from Shaw and Partners (not so much) both like CCX here, and had good things to say about them.  They both rate CCX as a "Buy" so it's now gone into "The Call" portfolio.  The commentary on CCX starts at the 35:30 mark.

Ben also added (right at the end) that some of the best small cap fund managers in Australia are on the CCX share register.  I've just had a look at that and only Spheria Asset Management are still on the substantial holders list with 5.96% of CCX (and they've been reducing their exposure lately).  AustralianSuper are also on there with 7.2% but that's far more a reflection of their "Member Direct" option that allows their thousands of members to choose their own stocks.  AustralianSuper is now Australia's largest superannuation fund, so they are popping up on a LOT of share registries.  Pendal and QVG Capital have both sold down now to below 5% (and possibly sold out, we don't know).  WAM Funds used to tout CCX as a "Strong Buy" but CCX are no longer showing as a top 20 position in any of WAM Funds' LICs, so I'm not sure who Ben is referring to there - other than Spheria.  It looks like most of them have locked in their profits already by either selling down or selling out of CCX.  Not exactly a huge surprise there really - because CCX has had a brilliant run.

Back in May last year, Wilsons (the broking firm, who are not connected with WAM Funds) had an "Overweight" call on CCX with a 12-month PT of $3.25.  CCX closed at $4.22 this afternoon, so I don't think Wilsons still rate CCX as a buy up here, being +29.8% higher than Wilson's May 2021 Price Target (of $3.25).

Arden Jennings from Ausbill said in July last year on a LivewireMarkets Buy-Hold-Sell segment that CCX was a high conviction position for Ausbill, and that CCX was in both their Ausbil Small Cap Fund and their Ausbill Microcap Fund.  CCX closed at $3.27 that day.  They are +29% higher now and have just announced a large overseas acquisition.  Not sure if Ausbill are still bullish on CCX, but they are certainly not substantial shareholders and it looks like they never were, so even when they were very bullish they never owned as much as 5% of CCX.  They could well be there with less than 5%, as could a number of other small company specialist fund managers, but I'd like to know who they are if they are still there.  More details please Ben!!

If anybody knows of any other small cap fundies who are still rating CCX as a "Buy" up here, please share.

30-July-2020:  In this LivewireMarkets Buy-Hold-Sell segment, Vishal Teckchandani discusses CCX (City Chic Collective), TPW (Temple & Webster) and UWL (Uniti Group, formerly Uniti Wireless Group) with Tobias Yao from Wilsons (Wilson Asset Management Group) and Arden Jennings from Ausbill.

Tobias and Arden both rate CCX, TPW and UWL as BUYS, and Arden said that both UWL and CCX were high conviction positions for Ausbill, with CCX in both their Ausbil Small Cap Fund and their Ausbill Microcap Fund.  However, both WAM Funds (Wilsons) and Ausbill clearly hold all 3 companies in their respective funds.

Tobias also likes IFM (Infomedia) and Arden likes LIC (Lifestyle Communities).

Warning:  Vishal's puns could elicit the odd groan...

25-May-2020:  COVID-19 Update

City Chic Collective Limited (CCX, formerly Specialty Fashion Group Limited) is up over +16% so far today on the back of this positive update.

31-March-2020:  Wilsons:  City Chic Collective (CCX):  “Third chances”

Wilsons have maintained their “Overweight” call on CCX.

Really?!  I would have thought “Plus-Sized” would have been more PC.

Excerpts:

In response to the escalation of COVID-19 in Australia and New Zealand City Chic has closed all of its Australian and New Zealand stores. This follows a trading update on 19 March 2020. We have accounted for the store closures in our forecasts which decline materially. However, we retain an OVERWEIGHT recommendation given; (i) strong and growing online business in Australia and North America; (ii) attractive multi-billion dollar end market; and (iii) potential early recovery story amongst listed peers.

Key points

Valuation: TP of $2.00/share reflects a downgrade of 33.2% (vs. prev.) and is based on a DCF methodology. CCX is trading on FY21e PE of 10.8x vs peers on 14.8x and the XSO on 9.9x.

Model changes: Material changes to forecasts. Our EBITDA forecasts decline 15.2% and 9.9% to $30.2m and $39.2m in FY20e and FY21e respectively. FY20e forecasts reflect 2H20e EBIT of $11.2m (+40.8% yoy) and conservatively assume six weeks of store closures in Australia and New Zealand. Operational cost reductions only provide a small offset (not standing down staff).

Store closures: CCX closed its New Zealand stores (11 stores) on 25 March 2020 and its Australian stores on 29 March 2020. We assume all stores are closed for a period of six weeks in our revised forecasts, which negatively impact 2H20e revenue by $8.6m. CCX has small wholesale operations in North America and we forecast some impact in that business too.

Online model: CCX has the most diverse, robust and high growth online business in our consumer coverage universe. Underlying revenue increased 52.2% yoy to $54.4m in 1H20a (51.9% of group sales), with the full benefit of the Avenue and Hips & Curves acquisitions yet to be realised. Our revised forecasts reflect Australian and North American online stores an alternative channel for store inventory and also the likely channel to experience faster growth once macro conditions stabilise.

Capital event: As at 1H20a CCX had net debt of $2.3m. We forecast this to increase to $8.9m in 2H20e due to softer sales and the acquisition of Avenue. While we also expect working capital to increase in 2H20e, CCX is a cash generative company and unlikely to require equity in the near-term.

Risks and catalysts

Key risks: 1) Poor Spring trading period; 2) aggressive discounting by peers; and 3) headwinds from US wholesale customers.

Key catalysts: 1) Stronger-than-expected LFL sales growth; 2) MOZ trading…

[click on the link at the top of this straw for more]