Slimmed-down City Chic expected to trade profitably in June 2024 half-year

About City Chic Collection

City Chic Collective Limited (City Chic, the Group, ASX: CCV) is a global omni-channel retailer specialising in plus-size women’s apparel, footwear, and accessories. The Group’s omni-channel model comprises 82 stores across Australia and New Zealand (ANZ) and websites operating in ANZ and USA.

Pathway to profitable growth

Although City Chic disappointed the market with an underlying EBITDA loss of $7.5 million for the six months to 31 December 2023, measurable headway was achieved in right-sizing the Group’s cost base, optimising its inventory position, increasing gross margin, and revitalising the product range to drive demand. These initiatives are expected to support a return to profitable trading in the second half year.

Ongoing cost reduction measures are progressing ahead of the $15 million original target with $25 million in annualised cost savings now implemented that include headcount reductions in February and warehouse renegotiations to be implemented over the next seven months. Inventory carrying amounts have now been normalised at $39.5 million at 31 December 2023, down 27 percent from July 2023. This inventory amount comprises gross inventory of $47.6 million and provisions for write-down of $8.1 million, as the Group focuses on a new assortment of relevant product to support second half trading. This change in inventory intake will represent three stock turns which is considered to be the optimal inventory turnover rate for a retailer of City Chic’s size and product mix.

Gross selling margins are improving by targeting customers with the most attractive customer economics through leveraging the Group’s rich customer understanding by providing research-driven new store ranges, focusing on high-value and fashionable styling. This deliberate focus is delivering increased average sell prices of 31 percent, higher average order values of 7 percent and 10 percent higher gross margins following clearance activity in the September 2023 quarter. City Chic is targeting 60 percent gross margin post FY2024 by leveraging the Group’s rich customer understanding based on new and larger store ranges, strategic marketing programs to drive traffic and reduced option count to focus on core ranges and freshness.

Potential sale of US business unit

Recent media speculation that City Chic has been approached by a buyer for its US business has forced City Chic to advise the market that while the Group is regularly involved in exploratory discussions with different parties regarding initiatives that could create value for its shareholders, there is no certainty that these discussions proceed to a binding transaction. Interestingly, management have observed that the US business has relied on promotional activity throughout the

December half-year to clear inventory and this has impacted margins. The US business accounts for about 49 percent of Group revenue and comprises online and wholesale retailing activities.

It is noteworthy in this context that as part of a strategic review, the sale of City Chic’s Europe, Middle East and Asia business, including its UK brand Evans, was settled in August 2023. The sale resulted in the Group’s net cash position of $3.5 million at 31 December 2023. There is a reasonable possibility that sale of the US business is also on the agenda of this strategic review.

FY24 Outlook

Trading for the 8 weeks to 25 February shows revenue down 33 percent compared to the previous corresponding period but at higher margins, resulting in gross margin dollars down by half of this amount at 16 per cent. Store trading performance at the 82 owned stores is in line with expectations but the online channel plus-size business sales remain challenging.

Although economic conditions are impacting transaction volumes, overall stores performance is strengthening on improved gross margin, and the Group has confirmed that it will return to profit in the second half-year.

City Chic’s $3.5 million net cash position, improved inventory management, successfully executed cost out program and re-freshed product initiatives should support ongoing profitability from FY24. This return to profitability and the potential sale of the US online and wholesale business may create opportunities for the Group to rebase itself and return to sustained long-term earnings growth.