My ASX share of the week is City Chic Collective Ltd (ASX: CCX) at today's share price. I think it has a lot growth potential.
A quick overview of City Chic
City Chic describes itself as a global omni-channel retailer specialising in plus-size women's apparel, footwear and accessories. It now consists of several brands including City Chic, Avenue and Hips & Curves.
City Chic has 93 stores across Australia and New Zealand, multiple websites operating in Australasia and the US. It has marketplace and wholesale partnerships with major US retailers such as Macys and Nordstrom. The ASX share also has a wholesale business with European and UK partners such as ASOS and Zalando.
The Avenue brand targets value-conscious women and Hips & Curves is an intimates brand – both of these offerings are online-only with a "significant" customer following throughout the US.
Performance before COVID-19
The ASX share was doing very well before COVID-19 hit the world. In the FY20 half-year result it reported that sales revenue was up 39% to $104.8 million with comparable sales growth of 11.3%. In that report it shows that online sales made up 53% – more than half – of its total sales. The northern hemisphere represented 29% of global sales.
Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 20.8% to $19.1 million. Reported profit before tax from continuing operations increased by 15.1% to $16 million. Normalised operating cashflow jumped by 17.1% to $17.1 million.
It was clearly doing well and its underlying cost of business was improving, down to 36% of sales (from 39.5% in the prior corresponding period).
How the ASX share as performed during COVID-19
Obviously COVID-19 was going to impact its FY20 result in several ways.
In terms of sales, the company reported that its trading improved after the initial lockdowns. Total sales grew 31% to $194.5 million, with comparative sales growth of 0.4% – the comparative number makes no adjustment for closed stores.
The reason sales were able to grow so much was because of online sales. US online sales contributed $65.2 million in FY20, compared to $10.7 million in FY19.
City Chic reported that its unaudited underlying EBITDA for FY20 was $26.5 million. That measure is before AASB 16 accounting changes and includes share-based payments of $2.8 million.
Why I think City Chic is a buy
The ASX share has managed to deliver a solid result despite some of the most difficult conditions a retail business has ever faced.
City Chic is now well capitalised after its recent $80 million institutional capital raising. The money will be used to potentially buy the Catherines business. I like that City Chic is looking to acquire plus-size retailers that are struggling but have the potential for a large volume of online-only sales with existing customer bases. The acquisitions will need to integrate well though.
The company can use their period to quickly gain market share. When COVID-19 is over it will have a much stronger market position and will hopefully be able to generate even more profit.
Retail businesses that are able to sell a high proportion of their products online deserve investor attention, particularly if profit margins are going to rise over the longer-term. I think City Chic perfectly fits that description.
The fact that City Chic is growing in the northern hemisphere at such a strong rate is exciting in my opinion. The ASX shares that are able to expand globally usually end up producing strong returns because the total addressable market is so much larger than just Australia (and New Zealand).
At the current City Chic share price it's trading at 23x FY22's estimated earnings. This seems like good value for a business with strong growth potential. However, I expect there will be volatile moments over the next 12 months.
