City Chic has recorded a 32% slump in global revenue as the business navigates promotional and margin contraction tactics to reduce inventory.
Revenue in the Australian market for the first quarter of FY24 was down 36%, while its US market decreased 26.8%.
For the second quarter to date, revenue decreased 29%, while November to-date was down 22%.
In response to the current business performance and the resulting share price - which is currently at $0.34 - the City Chic board has taken a 20% pay cut, following an initial 20% pay cut in February this year.
“These are challenging times for retail businesses,” City Chic chairman Michael Kay said. “Inflationary conditions and the resulting interest rate rises have materially impacted our customer demographic. She is battling high mortgage repayments and skyrocketing food, fuel and electricity prices.
“We have seen demand impacted and customer price sensitivity beyond anything our business has seen before, including during the global financial crisis.”
Kay also highlighted the company’s past inventory strategy for the current slump in revenue.
“As has been well documented, we bought additional inventory to protect us from the supply chain disruption and inflation caused by COVID-19 at a time when City Chic was recording record sales.
“We thought this was the right risk-adjusted decision. In hindsight, with inflation of basic household items persisting well beyond what most experts were predicting, this was the wrong decision, and the past year has seen us unwinding the inventory through promotion and margin contraction.”
Kay said City Chic has all but completed the rightsizing of its inventory in the first quarter of FY24.
By FY23 end, inventory was reduced by 73% year-on-year to $53.8 million. City Chic then sold off its Evans business in the United Kingdom as well as its Europe, Middle East and Asia (EMEA) inventory via an asset sale and purchase agreement.
“The second key action was to refocus on what has been the hallmark of City Chic’s success for two decades, namely, intimate knowledge of the plus size market and customer and through this, creating an emotional connection with Her,” Kay said.
“Many retailers offer ‘size inclusive’ apparel but it is limited in range, quality and fit. City Chic focuses exclusively on the plus size customer.”
The third key initiative, according to Kay, was to simplify the business model and drive down the cost base. He said this enables the company to trade through the current difficult economic conditions.
“With the right sizing of inventory we now have considerably more ‘newness’ in stores and online,” he said. “These products are selling through well and at good margins.
“She hasn’t left us; our brands are still strong; she is still buying; but with less free cash, she is more selective.”
Meanwhile, City Chic’s cost savings are in excess of what it announced in August. Kay said headcount savings are running $3 million better than the $6 million plan.
“Annualised logistics costs have been reduced by $7 million through warehouse consolidation, and additional annualized savings have been renegotiated with suppliers to assist us achieve our target of fulfillment costs of 19% of revenue. We have also achieved operating cost savings of $2 million.
“That said, with geopolitical risks adding to economic uncertainty and continuing pressure on households in our customer demographic, we believe we have to continue to monitor demand, sales and margin very closely in the traditionally strong period through to Christmas.
“We are committed to taking whatever steps are necessary to ensure our business model remains sustainable, and that we have a cost base which is appropriate for the revenue we are able to generate.”
Looking ahead, CEO Phil Ryan predicts City Chic to be trading profitably in the second half of FY24.
He said the current strategy around right-sizing inventory is starting to gain traction, noting the reduced revenue decline through the first and second quarter.
City Chic’s comparative full price stores are now 12% down in revenue. Gross margin is above the prior corresponding period (PCP) and 10 percentage points above the lows of July this year.
The company’s US market sales have risen in the November to date period, at 13% below the PCP. This is improving through the holiday period, according to Ryan, driven by increased promotional activity.
Gross margin for the second quarter to date is trading above last year, with City Chic on track to hit its 60% target in the second half. And the company’s average order value (AOV) is around 10% up year-on-year.
At a product level, Ryan said the company is seeing the impacts of its more focused range with improvements in sell-through.
“While market conditions remain uncertain, we expect to be trading profitably in the second half of FY24 as we see the benefits of these strategic initiatives emerging along with our cost out program,” Ryan said.
“The revenue and margin trend in the second quarter gives me confidence that sales will be where we need them at the peak times and that we are on track to achieving our financial targets, including being cash positive at the end of FY24.
“I am very optimistic about the future for City Chic and have the right team around me to make sure we execute on the key pillars I have outlined today, which will set us on a path to profitability.”