Analysts at E&P Financial Group are claiming it would be in the best interest of shareholders if City Chic exits its US market.
In a note to shareholders, E&P highlighted a 12% drop in City Chic’s US sales in November.
“However, given they are cycling -12% [for the] first 20 weeks [of] FY23 USA comps, it is not an inspiring figure," E&P analysts wrote.
"We still maintain the view that exiting the USA would be in the best interest of shareholders."
Speaking at the company's AGM this week, City Chic CEO Phil Ryan said the company undertook a strategic review this year to assess the best way to return to profitable trading. Results confirmed to the retailer that the opportunity in both Australia and the USA is substantial.
"This led to the divestment of the European business," Ryan said.
"The USA is now a $54 billion market with strong future growth prospects, and within that, the channel we play in is the USA plus size online market, which is $6 billion. This is projected to grow at 7.2% CAGR between now and 2030.
"The Australian market, where we are the major player at almost 20% market share, is expected to double by 2030, so there is a lot of runway for us to grow.
"The review also found that for specialty plus size apparel retailers to be successful, they need to offer fit and styling expertise for Her body. This is something that has always been a strength for our business.
"Our strategic review involved extensive market research. The results of this process delivered us a path that I know we can execute on."
Meanwhile, E&P analysts said City Chic's revenue growth rates were worse than anticipated. For the first quarter of FY24, City Chic’s US market was down 26.8% on last year, while Australia was down 36%.
Overall, City Chic recorded a 32% slump in global revenue.
However, E&P analysts reported its gross trading margins were better than anticipated. Due to this, E&P analysts upgraded its FY24 earnings before interest and tax (EBIT) from negative $12.5 million to positive $3.5 million.
“We anticipate increased debt on the balance sheet from FY25 onwards, thus we've reduced our FY25/26 profit figures to account for interest costs.”
Analysts also highlighted City Chic’s rightsizing of inventory and its shifts in costs and supply chain management.
In its latest trading update, City Chic reported its inventory is now at levels that reflect demand.
"In August, we said that in the first quarter we would be accelerating the clean down of inventory and that this would impact Q1 revenue and margin," Ryan said. "The inventory is clean in Australia and while we still have work to do in the USA our inventory levels are in a much better position and we will continue to transition our assortment into the second half."
E&P added that the retailer’s cost savings are in excess of its August announcements, with headcount savings $3 million better than the $6 million plan.
“Annualised logistics costs have been reduced [by] $7 million through warehouse consolidation. The US customer base is being transitioned (to higher-value products). The higher value customer makes up 45% of the base; in October over 65% of new customers fell in that range.”
Average order values have shown improvements in October and November, up by around 10% above last year.
“SKU's are being simplified to 3-4k SKU's (down from 8k)," E&P analysts wrote. "Streamlined the supply chain, reducing origins from 7 to 3, factories from 101 to 61 with further consolidation expected in the next 12 months, and now have 2 global warehouses down from 12. Trading in 3 countries, down from 6.”
Whilst City Chic’s stock price remains highly speculative, E&P analysts said if the plus-size retailer can ride out the inventory-related issues and return to profitable trade, “there should be an upside.”
“Today's update contained some minor positives, in that inventory has been rightsized, and there is no need for additional funding. We still need to see the customer return, and for sales growth to turn positive, to have reassurance that the brand/products are still resonating with consumers.
“Our valuation increases +4% to 67cps and we upgrade from Neutral to a Speculative Buy.”
For the second half of FY24, E&P predicts City Chic will hit an earnings before interest, tax, depreciation and amortisation (EBITDA) of $8.3 million, up from a past expectation of $0.4 million.
First-half earnings are expected to now hit minus $4.9 million, down from negative $12.9 million.