Investors are selling down the City Chic Collective Ltd (ASX: CCX) share price again on Monday.
At the time of writing, the plus sized fashion retailer's shares are down over 23% to a multi-year low of 76 cents.
This means the City Chic share price has now lost 45% of its value in just two trading sessions.
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Why are investors selling down the City Chic share price?
Investors have been heading to the exits in their droves following the release of a dismal trading update at its annual general meeting last week.
Financial year to date, City Chic reported a 2% decline in revenue to $128.6 million. This was driven largely by a very poor performance in the United States despite the benefits of favourable currency movements.
As a comparison, Goldman Sachs was expecting 18% revenue growth for the first half.
Management revealed that this poor performance was driven by "the consumer is looking for promotion as a reason to buy." This has led to the competitive landscape intensifying as retailers promote aggressively to capture the limited spending. This is also putting significant pressure on margins.
Another area that could be causing alarm for investors is the company's inventory position. Management's decision to load up on inventory in order to combat supply chain issues appears to have backfired spectacularly.
City Chic expects its inventory to be in the range of $168 million to $174 million at the end of the first half. That's almost as much as its market capitalisation. Following today's decline, City Chic now has a market capitalisation of approximately $185 million.
Broker response
According to a note out of Goldman Sachs, in response to the update, its analysts have retained their neutral rating but slashed their price target by almost a third to $1.10.
Goldman commented:
Both a weaker top line and gross margin pressure were key risks we had flagged in our initiation, particularly around US/UK/EMEA; however, the quantum of the downgrade was more severe than we had factored in our numbers. As a result, we revise our FY23/FY24/FY25 EPS down by -101%/-26%/-17% reflecting both revenue and gross margin downgrades and lower our 12m TP by 29% to A$1.10. With this offering 10% potential upside, we remain Neutral rated.
Despite the attractive long term growth opportunity, we believe there is near term risk around (1) elevated inventory levels; (2) the macro environment for the middle-income consumer in the US and Europe which has proven to be weak; and (3) discount intensity with the competitive landscape highly promotional.
