Analysts at Canaccord Genuity have revealed that its forward profit forecasts for Australian plus size retailer City Chic (ASX: CCX) are revised down materially, adding that its forecasts assume the business stabilises its revenue in FY25.
In a note to investors, the global capital markets firm reported that the City Chic business deteriorated throughout FY24, resulting in a divestment, restructure and capital call.
In its latest trading update, the business reported “continued challenging trading conditions", with group revenue, including its now divested Avenue business, expected to be down by 30-31 per cent to $186 million to $188 million, and 29 per cent excluding Avenue.
Pro forma earnings before interest, tax, depreciation and amortisation (EBITDA) including Avenue is expected to be down $26 million, but Canaccord Genuity claims this is showing signs of improved momentum, with 17 per cent growth in high value customers in first 10 weeks of the fourth quarter of FY24 compared to last year.
“CCX is returning to its previously successful business model (bricks-and-mortar complemented by a profitable online business) from 2019 where it generated revenues/EBITDA of $148m/$25m and had an equity valuation of $400m,” the note read.
“Everything has a price, and we believe that CCX is worth more than $32m. There has been a substantial distraction over the previous three years by its executives/board as it attempted to stabilise its inventory and balance sheet position in multiple jurisdictions.
“With balance sheet flexibility and a more focused management on its previously successful core business, we believe any return to growth will herald a large multiple re-rating.”
As part of its last trading update, City Chic also provided expectations that it expects gross profit margins to improve to around 62 per cent during FY25, with a further $12 million of cost out in FY25, having already achieved $9 million in FY24.
“On a pro forma FY24 revenue basis (excluding Avenue) of $132m and incorporating its targeted gross profit margins (62%) less its opex/leases (post cost-out) of $82m would see the stock run-rate breakeven EBITDA, illustrating strong operating leverage to growth from this revenue level.”
The capital markets firm also noted that the latest divestment from Avenue completes City Chic’s total unwinding of its global expansion strategy that began in 2019. During this time, the business has also reduced its domestic store footprint from 104 to 77 with a view to “review store portfolio with a view to a 120-store chain in 3-5 years”.
“CCX’s stores have been the profit driver, historically generating between $5m-$10m EBITDA at elevated gross profit margins (~70%) given the limited in-store discounting.
“Assuming capex/store of $250k, revenue/store of $650, gross profit margins of 70% ($440k), leases/opex of $340k at 15% EBIT (incl. leases) margins would generate an ungeared IRR of +40% on this investment, on our estimates. We believe a store rollout will occur post stabilisation of its revenue and profit profile in FY26E-FY28E.”
Following its latest analysis, Canaccord Genuity has reduced its target price of City Chic to $0.25ps (previously $0.65ps) after incorporating the dilution from the company’s recent raise and also revised forecasts with the capital markets firm’s valuation premised on a 4-year revenue compound annual growth rate (CAGR) of 5 per cent, returning the business to EBITDA margins of 5 per cent in FY27.