Analysts at Morgan Stanley have raised concern over City Chic’s aggressive discounting strategy, saying the long term impacts from this remain unknown.
The analysts added there is a risk that gross margins are “permanently impaired” if discounts become entrenched.
In its FY23 trading update, City Chic reported it has continued to “aggressively” clear winter inventory in Australia and New Zealand and summer inventory in the USA for the first eight weeks of FY24 in a bid to rightsize business operations.
The omni-channel retailer noted its stock clearing initiative was done to ensure City Chic has new seasonal product for the upcoming holiday period.
This has impacted revenue and margins with sales down by 33% on the prior corresponding period (PCP). In AU/NZ, sales were down 34% year-on-year (YoY) as the majority of Europe, Middle East and Asia (EMEA) stock was relocated to Australia.
In the USA, sales were down 31% with online performing better than partners.
At first look, the analysts claim City Chic’s FY23 result missed the mark, with its trading update tracking well below expectations. However, they highlighted that the plus size retailer’s balance sheet is improving, with net cash and inventory “close to normalised”.
By FY23 end, City Chic’s net cash was $10.9 million, with inventory at $53.8 million.
City Chic cited heavy promotional discounting alongside stock write-downs of aged and fragmented lines. As a result, its gross margin per cent of revenue was down 18.7% with nearly half of that related to inventory provisions and write-downs.
The plus-size retailer also reduced its debt facility limit to $20 million and adjusted its covenants in line with the changing business requirements. This will reportedly reduce a further $5 million post the end of FY24, further lowering its funding costs.
“The cost reduction program will continue through H1 [first half] FY24 and City Chic expects to have new seasonal inventory in market ready for Q2 with a strong inventory position into H2 FY24,” City Chic CEO and MD Phil Ryan said.
“City Chic is targeting 60% gross margin and fulfilment cost of below 19% of revenue. It is also targeting three inventory stock turns and maintaining positive net cash at year-end.
“While City Chic is forecast to be loss-making in 1H FY24, it expects to be trading profitably in H2 FY24 as the benefits of these strategic actions are realised.”