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Model Portfolio | City Chic (CCX) trading short term risk for long term opportunity

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Analyst: Jonathan Wilson, Portfolio Manager, Smaller Companies

  • CCX rose 12% on Friday 14 January on a positive trading update, particularly within its US subsidiary Avenue, which grew by 62% for 1H22.
  • Early in the week commencing 10 January 2022 CCX sold off 8.5% after US peer Torrid downgraded its December quarter guidance due to Omicron disruptions. Omicron was detected in the US on 1 Dec.
  • It was our view that Avenue and CCX would be less impacted by Torrid’s recent downgrades, and we took advantage of the fall in prices adding to our position in our Smaller Companies Fund.

CCX, an online plus-size fashion retailer, sold off 8.5% on Tuesday 11 January after US peer Torrid downgraded its December quarter sales by approximately 8.5%, citing distribution and store-level labour shortages during December caused by the COVID-19 Omicron variant.

Following the drop, CCX rose 12% on 14 January due to a surprisingly robust 1H22 trading update, showing Australia and New Zealand revenue up 14%.

Despite closures within its network of 90 stores resulting in a 37% loss of trading days for the September quarter, ANZ revenue rose 14%. Americas was the positive surprise, with revenues up 62%. Europe, Middle East, Asia revenue reflects initial revenues from recent acquisitions of Evans (UK, Dec 2020) and Navabi (EU, Jul 2021).

Figure 1 – Sales by region

Source: CCX Trading Update, January 2022

 

During the recent trading update, management stated that December growth at Avenue, which operates the Avenue.com website in the US, was higher than the average for 1H21 (above 62%). Torrid, by comparison cited poor December month performance contributing to an 8-10% reduction in its fourth quarter guidance (ended 30 Jan 2022).

Group Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is expected to be in the range of $22.5-23.5 million, in line with the prior corresponding period despite a $4m fall in 1H22 EBITDA due to store closures. 1H21 EBITDA was also supported by lower sales and on average higher than usual marketing expenditure (an estimated $7m to $10m higher). Management predicts EBITDA in 2H22 to be higher due to the resumption of store operations in Australia and New Zealand (ANZ), and the seasonal impact of the now larger America's business.

The contrasting fortunes of CCX and Torrid during the Christmas trading season highlights the need for continual bottom-up analysis. Torrid’s update certainly contained issues pertinent to CCX. However, though direct competitors, they are two different businesses. In the US Torrid has a network of 600 stores that contributes approximately 30% to group sales. Labour shortages impacted not only distribution but also physical stores for Torrid. Avenue, on the other hand, is a digital business with no physical sales channel.

At CCX’s AGM (17 Nov) management highlighted strategic inventory investments within the ANZ and America’s divisions (approximately 90% of group sales) to mitigate supply risks heading into the Black Friday (26 Nov), Cyber Monday (29 Nov) and Christmas trading periods.

Although we were not expecting CCX to report the same impact from Omicron as Torrid, Avenue’s performance was surprisingly strong. As noted by Evans and Partners, December web traffic on Avenue.com as recorded by SimilarWeb declined by 5% YoY, suggesting Avenue was affected. But as management highlighted in the conference call, third party web tracking has become more challenging recently with web privacy advancements by Apple in particular, casting some doubt as to the ongoing reliability of third-party website measurement services.

Figure 2 – Avenue.com web traffic

Source: Similarweb, Evan and Partners

In moments like the sharp sell off early in the week commencing 10 January, it is important to see the bigger picture. CCX was trading on an FY23 earnings yield of about 5% (strong for a global growth stock), with the vast majority of a growing stock’s value predicated on future year earnings forecast.

We believe labour shortages in distribution will not be a permanent issue for CCX, in fact they may be confined to the Omicron wave.

The current earnings yield, underlying quality of the business and long-term growth opportunities available to CCX affirm our positive view as a long-term holding.

As previously noted, CCX is a specialist in the underserved plus size category and has the ingredients for capital efficient growth:

  • Gross margins (before fulfilment costs) are approximately 60% as CCX owns its brands.
  • Its customers demonstrate loyalty with high repeat purchases, yielding strong returns for customer acquisition costs.
  • CCX is skewed towards items with higher average sell prices (e.g., dresses), protecting EBITDA margins.
  • Capital requirements are low due to online focus globally, with an ANZ-only network of 90 stores.

Execution on its global growth strategy has been strong to date with opportunistic acquisitions of digital assets from distressed peers including Avenue (US, Jul 2020), Evans (UK, Dec 2020) and Navabi (EU, Jul 2021), with improved post-acquisition performance from Avenue in particular.

Perhaps a silver lining to the current disruptions is the potential for further merger and aqcuisition opportunities. CCX is well positioned with net cash as at 27 June 2021 of $71.5m (pre-Novabi acquisition of $9.6m) and $40m in undrawn debt.

Ownership Disclosures: 
Our fund partner Clime Asset Management (Clime) owns (CCX) on behalf of various mandates where it acts as an investment manager.

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