City Chic Collective – outperforming in a challenging environment

City Chic Collective (ASX:CCX) provided a better than feared 1H22 trading update highlighting strong sales outperformance against a challenging trading backdrop, plagued by rapidly rising COVID-19 infections and ongoing global supply chain disruptions. Management’s decision to invest in additional inventory ahead of the curve clearly paid off with first half sales growing 50% to $178 million; further evidence of strong strategic execution which remains central to our investment thesis.

Interim margins were impacted by 1Q22 ANZ store closures, recent acquisitions and a normalisation of marketing expenditure, resulting in flat 1H22 earnings. CCX continues to anticipate stronger second half earnings due to the growing contribution from the northern hemisphere operations and assuming ANZ stores remain open. We think the medium-term growth profile looks robust as the company targets a large, underserved global market opportunity with its highly scalable online business model and a net cash balance sheet providing optionality.

Market expectations heading into the release had been rebased materially lower following an earnings downgrade delivered by offshore peer, Torrid Holdings Inc. (CURV.US), earlier in January (the company’s second miss in as many months). CURV, a US-based omni-channel plus-sized focused apparel retailer with around 600 stores and annual sales of c.US$1.3 billion (FY22f), cut 4Q21 sales guidance by 8% to US$300-305 million with EBITDA lowered by 36% to US$23-25 million (causing the stock to plunge 23%). CURV Management attributed the miss to labour challenges at the company’s distribution centre and some stores due to the pandemic.

For the six months to December 2021, CCX’s Americas business grew sales by 62%, significantly outpacing CURV which expects to grow sales by 8% (for the six months to January 2022). We suspect this sales outperformance reflects CCX’s pure online model in the US, a broader customer demographic, a broader product range and better management execution, particularly around stock and supply chain.

There were also market concerns around CCX’s web traffic based on third party data analysis. These look to have been way overblown based on the solid website traffic growth of 22% in 1H22 and strong frequency and basket size improvement implied by the 50% top line growth.

Key details from the CCX trading update (14 January 2022) are as follows:

• 1H22 (unaudited) sales revenue grew 49.8% to $178.3 million (6% ahead of consensus forecasts) with comparable sales growth of 44 per cent;
• Revenue growth was driven by 23% growth in active customers (to 1.316 million), higher purchasing frequency and higher average basket size;
• Website traffic increased 22% to 70.6 million while conversion also improved;
• 1H22 revenue growth was strong in all regions despite well-publicised labour shortages and impacts to global logistics and supply chains, as well as government mandated lockdowns during the period;
• ANZ sales grew 14% to $80.8 million, an impressive result from the company’s more mature segment considering the impacts of store closures during 1Q22. ANZ online sales grew 40%, benefiting from the addition of Avenue’s conservative product stream;
• Americas sales grew 62% to $77.2 million, reflecting strong execution of the company’s strategy to re-engage the significant Avenue customer base (Avenue trading materially above pre-acquisition levels) and the City Chic USA website trading back to historic growth levels;
• EMEA sales of $20.3 million (vs $0.5 million in the prior period), impacted by well flagged supply and logistics challenges;
• 1H22 (unaudited) underlying EBITDA $22.5-23.5 million, broadly flat year on year, impacted by ANZ store closures ($4 million), acquisitions (EMEA generated $20.3 million revenue with EBITDA break-even as the business builds and navigates the supply chain issues) and a normalisation of marketing costs (1H21 marketing costs were cut due to COVID-19 related cost saving measures);
• Ongoing supply chain pressures, driven by freight capacity shortages and delivery delays, will result in higher inventory levels in 1H22 with CCX expecting further build in the second half to secure stock for the Northern Hemisphere summer season and key sales periods; and
• Cash as at 1H22 was $40.5 million with no debt drawn.