City Chic shares tumble again as inventory gamble startles investors

The market has reacted in a similar fashion to plus-size clothing retailer City Chic's (ASX: CCX) full-year results as it did after its 1H22 announcement when the share price of the label plummeted significantly, with investors today spooked by higher inventory stocks and weaker trading conditions.

Shares dropped by more than 25 per cent this morning, indicating investor concerns during the first half of the year were not fully addressed.

However, there were some positive headline figures, with a bumper second half of the year helped by the end of lockdowns leading to 29.8 per cent ($186 million) growth in sales as the Sydney-based business turned over a $22.3 million profit (NPAT) – up 4.7 per cent on FY21.  

Sales revenue of $369.2 million for the year was up almost two-fifths on FY21. The company benefited from growth across all its regions, with the Americas contributing a significant 53.9 per cent jump in revenue, as it expanded its customer base and category market share across online, marketplace and store channels.

“We have continued to pursue our ambitious growth plans supported by an amazing group of people and have adapted our business to overcome the challenges presented by the pandemic,” City Chic CEO Phil Ryan said.

“We have entered new markets, secured several new partnerships, embedded new brands into the Collective, and expanded our customer base organically and inorganically, including the acquisitions of Navabi and CoEdition.

“All in the pursuit of our goal to provide the best assortment of plus-size product to our customers all around the world.”

With more than 8,000 styles across its 15 brands, including Avenue, Hips & Curves Body and UK-based Evans, City Chic added European online marketplace Navabi in July 2021 and US marketplace CoEdition in December as it attempts to build further inroads into a $260 billion global plus-size market.

Taking the strategic decision to invest in inventory to manage global supply chain volatility and support continued revenue growth during the year, the business moved a quarter of its products from China and built out its destination ports.

As a result, inventories at the end of the year jumped from $67 million in FY21 to $195.9 million, with 48 per cent available for sale, although City Chic expect this to normalise to $125-$135 million during FY23.

“To support this growth and ensure sustained growth into the future, we established a sophisticated global distribution network through our own websites and a global partner network,” Ryan said.

“This included diversifying our global supply chain into new sourcing regions and investing in inventory ahead of the curve.

“This investment will unwind in FY23 as accelerated inbounding reduces and we leverage new supply chain relationships. This will deliver strong free cash flows into FY23 which, along with our expanded debt facility, provides good funding flexibility to execute on our growth plans.”

The omni-channel retailer increased its global customer base by 30 per cent to 1.4 million active customers, while website traffic achieved 35 per cent year-on-year growth to 78.5 million visits.

Gross margin dropped from 62.8 per cent to 59.9 per cent, which reflects the evolving geographic and channel mix – with 56.2 per cent of total revenue coming from the Northern Hemisphere.

Formerly known as Specialty Fashion Group, the company decided to launch new marketplace partnerships in FY22, selling its brands through third-party marketplaces, which netted them $30 million during the year.

The apparel collective is looking to broaden its partnerships to Canada and the Middle East while expanding its global fashion and youth offering through its ‘a world of curves’ marketing campaign.

In Australia and NZ, CCX has spotted an opportunity in the $2.89 billion ‘conservative lifestyle’ market, launching 1,500 new styles aimed at lapsed and disengaged customers.

Revenue across both regions rose by 11 per cent despite the adverse impact of mandated COVID-19 store closures, with a rise in online sales (up 27.5 per cent) helping to offset store closures.

Trading in the first seven weeks of FY23 has been broadly in line with the corresponding prior period, with a return to positive momentum through August.

To hedge against promotional activity in the plus size market, City Chic aims to increase retail prices in FY23, expecting to deliver another year of profitable growth.

Shares in City Chic (ASX: CCX) dropped 21.26 per cent as of 11.15 AEST.