Investors shriek at City Chic as shares tumble 35 per cent

Plus-size clothing retailer City Chic Collective (ASX: CCX) may have seen its sales rise by 49.8 per cent in the December half, but a decline in net profit was enough to spark a share price freefall today.

The company's shares dropped by almost 35 per cent on the news to $3.30 each, trimming $406 million off its market capitalisation.

Even though City Chic notched $178.3 million in sales, a four percentage point uptick in the cost of doing business (CODB) cut into margins, leading to a 5.9 per cent drop in profit to $12.3 million.

City Chic - formerly known as Specialty Fashion Group, with brands also including Avenue, Hips & Curves Body and UK-based Evans - acquired German online marketplace Navabi for $9.6 million in July last year, and has been building capacity in a bid to satisfy expected demand.

A decision to invest $125.7 million towards inventory was made to “offset global disruption to supply chains” and “support summer sales in the Northern Hemisphere,” but has come at the cost of cash reserves dropping by 45.9 per cent to $38.7 million in the space of six months.

The underlying CODB of 45.7 per cent of sales was higher than the prior corresponding period (41.6 per cent) as the retailer ramped up spending for fulfillment costs, advertising and marketing.

City Chic also announced it would not be paying shareholders a dividend for the quarter.

“Our revenue growth is very pleasing as we stayed focused on our three strategic pillars of plus size, digital and global customer acquisition,” City Chic managing director and CEO Phil Ryan said.

"We did this through expanding the customer base both organically and inorganically while accelerating our digital growth.”

The company’s customer base grew by 64 per cent, with sales in the US growing by 62 per cent to $77.2 million.

In Australia & New Zealand (ANZ) sales grew by 14 per cent to $80.7 million on a like-for-like basis, bolstered by a 42 per cent spike in online sales.

Sales in Europe, Middle East, and Africa (EMEA) came in at $20.3 million, with UK sales impacted by ongoing supply chain and logistics issues. 

Despite the setback, sales outside of ANZ now account for 55 per cent of group revenue.

“Our diversified global footprint has minimised the impact of the store closures in Australia and New Zealand where we lost 27 per cent of trading days in the first half due to lockdowns, while the online business continues to grow well,” Ryan said.

“The Americas continues to be strong, and we believe the UK and Europe will bounce back as we continue to address the ongoing supply chain issues and continue to integrate the new businesses."

The company notes online growth rates have been “more subdued” in the first eight calendar weeks of 2022 compared to 1H22 after strong sales in the peak trading period of the December half and COVID-19 impacted customer confidence.

City Chic also notes Australia’s physical store environment in 2022 has proven to be “challenging” so far.

“The COVID-19 pandemic continues to have an impact both locally and globally,” City Chic chairman and non-executive director Michael Kay said.

“The directors continue to monitor COVID-19 related developments and are working closely with management to assess and navigate the potential implications for team members, suppliers, customers, and operations.

“While the environment remains uncertain, the performance of the business to date demonstrates the management team’s ability to manage volatile market conditions. We are confident we are well-positioned to continue to grow our business and to lead a world of curves.”

Despite today's substantial fall in the CCX share price, it is still trading at close to pre-COVID levels.