Financial analysts at advisory firms Wilsons and Morgan Stanley say City Chic’s European exit makes sense following inventory challenges and lower-than-expected sales by its now-former subsidiary Evans.
Last week, City Chic (or CCX) announced it would exit Europe, Middle East and Asia (EMEA) - which made up 12% of its FY22 revenue - after selling its Evans business and its complete EMEA inventory for circa $12 million to AK Retail Holdings.
The plus-size retailer had bought Evans for $41 million in December 2020, and acquired Navabi for $10 million in July 2021.
In the same swoop, the brand will close its UK warehouse and its Navabi brand will cease trading.
In an initial analysis, Wilsons analysts noted that City Chic purchased Evans out of administration when it was generating sales of $46 million.
“Following the acquisition, we estimate sales peaked at $33.6 million in FY22a and was either break-even or loss-making," Wilsons analysts wrote to investors.
“It is clear Evans never achieved to expectations and we understand there were issues (customer alignment, demand profile) for the remaining businesses. Following the cleansing in November 2022, we expected CCX to close or sell EMEA as it appeared to be the key driver of the inventory issues.”
On the sale of City Chic's European arm, Wilsons analysts note this was part of a strategic review following a mistimed purchase of inventory by the plus-size retailer of $165-170 million in November 2022.
“CCX’s other European business, Navabi, was closed likely because a buyer could not be found,” Wilsons analysts wrote. “We estimate total closure costs were $3.0 million.
“Impairments of $29.0-31.0m and further restructure details are expected at the result in August 2023 (FY23e).
“We view the EMEA disposal favourably, as the core business likely never performed to expectations and had broader issues with excess inventory than the group in the last 6-9 months.”
Excluding Evans, City Chic’s EMEA market included Navabi, marketplace and partners such as Zalando, Amazon, and Curvissa, with wholesale through Debenhams.
“We estimate sales of $6.6 million, $4.1 million and $0.9 million for Navabi, wholesale and partners respectively in FY22a ($11.0m).”
Meanwhile, Morgan Stanley analysts say City Chic's Evans divestment makes strategic and financial sense. They added the divestment should be a positive catalyst for the sale of its stock.
“However, the long-term impact from aggressive discounting on CCX's brands remains unknown, with a risk that gross margins are permanently impaired if discounts become entrenched," Morgan Stanley analysts wrote to investors.
Morgan Stanley analysts said the key concerns for City Chic going forward include capital allocation and total addressable market contraction. However, they noted potential opportunities for the brand in the United States and locally in Australia.
The analysts suspect City Chic’s overall inventory is still elevated, but said the brand is making progress.