Australian plus-size retailer City Chic is a long way off from hitting profitability again despite the company starting to show signs of turning around.
This is according to financial analysts at Citi in a note to investors.
“The company's focus remains on rebasing the business after divesting its lossmaking offshore divisions so may neglect growth strategy,” the analysts wrote. “At this stage, we think it is prudent to wait for more substantial signs of a turnaround before turning more positive on the stock.”
Earlier this month, City Chic sold off its US-based subsidiary Avenue for $18 million. The plus-size business also sold off its Evans business in Europe for $15.5 million, and sold off inventory across Europe, Middle East and Asia.
According to Citi analysts, the three encouraging signs of a turnaround in City Chic include the rapid pace of gross profit margin recovery, which was at 59 per cent in the second half of FY24. There is also $11.5 million of additional cost savings to be made in FY25, with inventory having returned to a normal purchasing cycle.
Citi analysts welcomed the divestment from both the US and Europe, which ends City Chic’s offshore operations, with the company now focusing on its core geography and customer segment in Australia.
“The business is fundamentally closer to its 2019 self with the divestment of offshore businesses,” Citi analysts wrote. “At that time, the stock was clearly on an upward trajectory and finished the year trading at ~$2.70 per share.”
The analysts said a return to similar valuations will require a return of robust growth expectations and a return to profitability. “Neither is likely to occur in the near term.”
Given this, Citi analysts would like to see more concrete signs of a solid turnaround in better sales momentum and a more efficient cost base.
“Despite having a net cash position, the company has a degree of operating leverage to changes in retail spending,” analysts reported. “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 - which is at $0.16 per share - are faster retail spending growth and a faster-than-expected store rollout of City Chic and increased store sizes, which could boost sales and earnings.
However, Citi analysts revealed several downside risks to its forecasts of City Chic stock. This includes competition, aggressive discounting, and price transparency being greater online which can lower gross profit margins.
Other listed risks include the loss of a key retail partner, particularly in the US where City Chic sells via department store websites, increased operating costs such as rental and a further slowdown in retail spending.
“City Chic has a high degree of operating leverage,” Citi analysts wrote. “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.”