Even though City Chic’s share price shot up by 70 per cent after releasing its annual reading update on August 28, financial analysts at investment bank Citi believe “there is more to go” for the plus-size fashion business.
Nearly two weeks on, City Chic’s (ASX: CCX) share price has fallen from its recent peak of $0.17 to $0.14, but Citi analysts indicate the effectiveness of the business's turnaround will be seen at the latter end of FY25. The investment firm is projecting a $0.25 target price and upgraded its rating to buy, adding that it does come with a high risk.
“Even after a ~60% one-day return, we think there is more to go for CCX,” investors wrote in a note to investors. “With arguably conservative earnings estimates, we still see significant upside.
“The stock is trading on a ~6x EBITDA multiple despite a path of earnings growth in its turnaround. The result and update were very encouraging and showed the business is executing its turnaround well.
“Heading into FY25, a recovering consumer environment should further mitigate risks.”
Speaking on the high-risk rating, Citi analysts say this accounts for execution as City Chic is still undergoing its turnaround and repositioning of the business.
“Despite having a net cash position, the company has a degree of operating leverage to changes in retail spending,” Citi analysts wrote. “This is due to the company's large fixed cost base given high specialty tenant rents and non-store overhead costs.
The upside risks to Citi’s forecasts and target price are faster retail spending growth and faster-than-expected store rollout of City Chic and increased store sizes.
The downside risks to achieving the forecasts are competition alongside aggressive discounting across the retail sector, which could impact group margins.
“Moreover, price transparency is greater online and may lower gross profit margins,” Citi analysts said.
A loss of a key retail partner could also impact City Chic sales, which comes as other ASX-listed fashion businesses report drops in wholesale demand, including Universal Store Holdings and Accent Group.
According to Citi analysts, City Chic’s US market generates sales from its marketplace sales on department store websites. “If one of these department stores changes direction or range and delists City Chic, its sales and earnings could fall.”
There is also risk in increased operating costs, including rental costs which represent a significant portion of operating costs across City Chic. Analysts said a rise in rental inflation could see margins deteriorate for the business.
Finally, there is also the risk of a slowdown in retail spending.
“City Chic has a high degree of operating leverage,” Citi analysts claim. “Any slowdown in sales could have a material impact on profitability.
“If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. However, should they be less than anticipated, the stock could trade above our target price.”
Investment firm Jarden Wealth Limited recently shared in a note to investors that the consumer spending backdrop is improving thanks to easing inflation and discerning consumers, but added it is maybe not at the pace the market has expected. The firm then cited July retail spending figures from the Australian Bureau of Statistics (ABS) which showed that retail sales rose 2.3 per cent year-on-year in July, above expectations.
“Retailer results for FY24 and trading updates for July ⁄ August have been a case of the haves and have-nots, with in-line results/trading updates driving disproportionate share price moves (up), and weaker updates the opposite.
“While we are becoming more positive on the consumer, costs continue to rise, the competitive backdrop is increasing and consumers are becoming more discerning - we think this means the gap between winners and losers is likely to continue to widen.
“We are beginning to see risk to expectations in the absence of interest rate cuts pre-Christmas.”
For City Chic, internal expectations are that the business will hit $142-$160 million in revenue and $11-$18 million in earnings before interest, tax, depreciation and amortisation (EBITDA) for FY25 end. Citi analysts are pinning for a conservative forecast of $145 million and $12.2 million for both measures respectively.
“CCX has repositioned itself to focus on its core ANZ region and demographic,” the analysts reported. “This gives management the best chance to execute on their targets.
“We think there is upside potential given where the valuation is sitting and risks look manageable.”