Description

Summary – Long CCX AU (ASX: CCX)

City Chic Collective (CCX) is a best-in-class, fast-growing global specialty retailer operating in the very attractive plus-size apparel industry. CCX has a long growth runway ahead, thanks to a scalable global online platform, market-leading assortment, a net cash balance sheet providing optionality and a management team we rate very highly.  The global plus-size market is large, fast-growing, fragmented and is currently under-served and under-monetized.  We believe CCX will continue to grow well in excess of the industry, both organically as mass retailers and department stores are structural share donors to more nimble and digitally native operators like CCX, and inorganically via tuck-in acquisitions.  The recent pullback created by temporary external factors (market sell-off, rolling lockdowns, labor shortages, ongoing global supply chain disruptions, etc.) has created a compelling entry point and we believe CCX’s share price can more than double over the next 3 years, and continue to grow earnings in the mid to hi-teens for many years after that. 

All numbers are in AUD unless otherwise stated.

Business description

CCX is a global multichannel retailer specializing in plus-size women’s apparel, accessories, intimates and footwear. Brands include City Chic, CCX, Avenue, Evans, Fox & Loyal and Hips & Curves.  Online represents 78% of total sales (Oct ’21 figure), with the balance generated by 89 stores located in Australia-New Zealand (ANZ) and wholesale partnership agreements with leading retailers such as Nordstrom, Macy’s, Target, Amazon, Walmart, Zalando, Debenhams and David Jones.  While CCX has its roots in Australia, the U.S. is rapidly becoming its largest market. The U.K. and E.U., CCX’s newest markets, are off to a strong start. 

Source: CCX

Plus-size: A large, under-monetized addressable market growing high single-digit

Market size estimates vary widely due to the lack of agreed-upon definition of plus-size. While it is most commonly defined as women sizes 12 and up (CCX’s definition), NPD for instance defines it as sizes 18 and up while Torrid Holdings, another listed plus-size retailer, defines it as sizes 10 and up. CCX uses data from Credence Research, which estimates the size of the industry at $180bn. We will use Credence’s numbers for the purpose of this write-up.  

The industry has been growing high single-digit, 2-3x faster than traditional apparel, driven by an increasing number of plus-size women globally (see CDC stats on this), and improving plus-size product offering and availability.  Historically plus-size has been served by mass retailers and department stores selling extended sizing from their regular size offering. However, the assortment is usually very limited, and the merchandise provides a poor fit and little styling.  The other interesting market characteristic is the average annual spend per customer in plus-size is significantly less than the rest of the women’s apparel market (see chart from Torrid below).  With higher quality products, better assortment and increased distribution, there is no reason to believe that the spending gap won’t close.

Lastly, U.S. e-commerce for apparel is expected to grow in the mid-teens, well in excess of that of the bricks and mortar channel. Note CCX over-indexes to the online channel with c.78% of their sales mix, vs. c.30% on average for the industry. 

Source: Torrid Holdings' latest IR presentation

A few background articles on the industry:

https://www.voguebusiness.com/fashion/what-happened-to-plus-size

https://wwd.com/fashion-news/fashion-features/the-growing-plus-size-market-faces-itty-bitty-assortments-and-lack-of-options-1234881354/

https://www.cnbc.com/2021/08/18/old-navy-overhauls-plus-size-womens-fashion-in-32-billion-us-market.html

https://www.globenewswire.com/news-release/2020/12/08/2141448/0/en/Plus-Size-Clothing-Market-to-Reach-696-71-Billion-Globally-by-2027-at-5-9-CAGR-Says-Allied-Market-Research.html

https://www.buxtonco.com/blog/redefining-fashion-plus-size-apparel-takes-center-stage

M&A has played (and will continue to play) an important role in CCX’s global expansion strategy and CCX has a well-established playbook when it comes to acquisitions 

Australia is littered with domestic champions that failed to expand overseas. We believe this is due to a mix of overpaying for large acquisitions and more generally a lack of understanding of these local markets.  Australia has had a few amazing global success stories (Atlassian, Afterpay, Lovisa) but overseas expansion initiatives have largely been marred by spectacular failures and value destruction (Aussie banks, QBE, AMP, Westfarmers/Homebase, etc.).  CCX has a very different approach to M&A.  CCX not only doesn’t bet the farm on any single deal, but they seem pretty astute at acquiring assets at bargain prices in all-cash deals, and then turning them around. 

CCX Chairman Michael Kay said “It is easy to get around and communicate [in the Australian market] …The key is these markets [U.K., U.S., etc.] have a number of key similarities to Australia including customer demographics, and usage patterns of social media, online, and smartphones.  Despite competitive forces it makes these markets relatively logical and attractive for Australian companies to enter…. [however,] the biggest mistake companies make when they go global is overpaying for big acquisitions.  You then have to learn with a lot at stake. Mistakes can be very costly. If you can buy an asset at a good price, with a reasonable risk margin, you can afford to make a few errors, and there are always errors and unforeseen circumstances in acquisitions.”

During the pandemic, several plus-size retailers run into trouble (Lane Bryant, Talbots, Catherine, etc.) and CCX went shopping.  The company completed three strategic acquisitions that have provided beachheads in North America and Europe.  After acquiring Avenue in the U.S. in Oct ’19 for $24m, it went on to acquire Evans in the U.K. in Dec ‘20 for $40m and online retailer Navabi in Germany in July ‘21 for $10m. 

CCX paid very little for these acquisitions. Evans was acquired from the Arcadia Group (owner of Topshop) which went into administration in Nov ‘20.  CCX only acquired the Evans brand, the eCommerce and wholesale businesses, and the customer list and paid 1x online revenues (c0.3x total sales) for these assets.  The c.100 Evans stores and concessions were not part of the transaction and ended up being closed, giving CCX the opportunity to recapture a good portion of the brick & mortar traffic via Evans.com.  Same story with Navabi, which struggled during the pandemic and was under-managed and under-funded. Their websites had 6m visits in ‘20 generating €10m in sales. Pre-pandemic, online traffic exceeded 10m visits and sales were estimated to be over €15m.  CCX paid $10m in a cash deal, implying EV/S of only 0.6x.  Conversely, CCX bid $23m for the digital properties of Catherine after parent company Ascena (also the owner of Lane Bryant, Talbots and Ann Taylor/LOFT among other brands) filed for Chapter 11 in July ’20. CCX ended up walking away after another bidder emerged and drove the price up significantly. 

Growth levers are plentiful as CCX integrates acquisitions and scales globally

The assets CCX acquired over the last 3 years have provided CCX with a global online platform that the company intends to scale by expanding the current product offering (cross-selling and introducing the brands acquired to all CCX markets) and entering adjacent markets (Canada, France, Italy, etc.).  In addition, acquisitions and new wholesale partnerships (deals signed with Walmart, Target, Amazon and Debenhams in 1H22) will increase CCX’s scale, increasing its bargaining power from a sourcing perspective, and get some of the brands more exposure.

·         Wider assortment:  this allows CCX to cover a much wider audience as CCX was initially primarily geared towards younger, fashion-forward products, as well as intimates, and had no presence on the conservative segment. CCX is now introducing its U.S. brands to Australia (via a partnership with high-end department store David Jones) and will continue to push its Australian brands in the U.S. and Europe. 

·         Geographic expansion: the U.K. operations will support Germany-based Navabi for a push into continental Europe. Similarly, City Chic brands will be introduced to widen the assortment and range of clothing, which in turn will increase basket size, repeat traffic and customer engagement on social media.

The average annual spend per customer currently achieved in the U.S. ($180) and Europe ($110) remains well below that of CCX ANZ ($337), and we believe CCX will close the gap over time.

Excellent management team

CCX is led by a seasoned management team with deep expertise in plus-size and brand building.  Since 2018 and the restructuring of Specialty Fashion Group (SPG) and focus on the City Chic brand under the leadership of CEO Phil Ryan and Chairman Michael Kay (https://www.asx.com.au/asxpdf/20181109/pdf/4404ksx1cwqrq6.pdf), CCX has grown revenues at nearly a 30% CAGR and increased EBITDA margin by nearly 300bps.  Management’s execution during the pandemic has so far been impressive (see next section for detail) and all the building blocks are now in place for CCX to become a dominant global player in the plus-size industry. We believe CCX is just getting started.

·         Phil Ryan: Phil was appointed CEO in Sep ‘18 and joined the Board in Feb ‘19. In ’06, Phil led a team that created the City Chic brand as part of a portfolio of apparel brands owned by the now defunct SPG.  Phil was promoted from City Chic Brand Manager to CEO during the SPG restructuring. More than 60% of Phil’s remuneration is variable and CCX needs to grow EPS at least 20% for him to get 100% of his comp package. 

·         Michael Kay: CCX Chairman is a seasoned director of ASX listed companies, former corporate lawyer, and former CEO of McMillian Shakespeare (ASX: MMS). Before CCX, Michael was most notably Chairman of Lovisa, another successful small-cap Aussie retailer with global ambitions. 

In addition to the acquisitions and brand expansion initiatives, management has since ‘19 right-sized its store fleet in ANZ and completed an equity raising of $111m in 1Q22 to strengthen the balance sheet and accelerate the company’s global growth ambitions (read M&A).

·         The store count was reduced from 104 in FY19 to 90 and mgmt indicated the entire store fleet will be converted to the new format within 2 years (essentially fewer, but larger stores in A locations). CCX also negotiated rent reductions during the pandemic.  CCX CEO: “We will continue to close stores where the right rents cannot be achieved.”

Recent results and progress made on the integration of recent acquisitions (sources: FY21 AGM, FY21 earnings & 1H22 trading update)

·         1H22 Trading Update (26 weeks to Dec ‘21)

CCX reported better than expected results with solid sales outperformance in all regions against a challenging backdrop (rolling lockdowns, labor shortages, ongoing global supply chain disruptions, etc.). Market expectations heading into the release had also been tempered by an earnings downgrade from direct competitor Torrid Holdings (CURV US) earlier this year.  Management’s decision to invest in additional inventory and diversify sourcing away from China paid off with sales growing 50% y/y in 1H22, which is further evidence of strong execution. North America, which is now CCX’s largest market based on active customers, was particularly impressive with 62% sales growth vs. CURV expecting to grow sales by only c8% (for the 6 mths to Jan ‘22).

Other key points:

• Total sales grew 49.8% to $178.3m (c.6% beat vs. cons’s) with comps +44%. Sales growth was broad-based, driven by a 23% increase in active customers, higher purchasing frequency and higher average basket size.  Online traffic increased 22% to 70.6m while lead conversion also improved.
• ANZ sales grew 14% to $80.8m, a strong result from CCX more mature market considering the impact of store closures during the period and rolling lockdowns.  ANZ online sales grew 40%, benefiting from the addition of Avenue and Evan’s conservative product stream.
• 1H22 EBITDA is expected to be $22.5-23.5m, largely flat y/y, impacted by ANZ store closures (-$4m), acquisitions (incremental EMEA revenue was only EBITDA break-even) and a normalization of marketing & adversting costs after CV19 related cost-saving measures last year).
• CCX said they expect supply chain pressures to continue and they’ll further build inventory levels in 2H22 to secure stock for the summer season 
• Cash balance was $40.5m at 1H22 with no debt drawn

·         Progress made on acquisitions:

On Avenue:

CCX Chairman: “Avenue has proved to be a very good acquisition. Not only has it given us a higher profile in our biggest market, but also it has allowed us to introduce our other brands to US customers. This has been extremely well received and we are delighted with the way our business is developing in the USA. We have only just begun and we see a very substantial runway of growth opportunities in this USD49bn market. Continuing to develop our US business both organically and inorganically are key priorities for us”.

CCX indicated Avenue was trading strongly at above pre-acquisition levels.  Avenue was generating c.US$27 in online revenues before the acquisition, and CCX was generating c$30m in sales in the U.S. via citychic.com and a few wholesale partners, totaling c$67m in North America proforma sales in 2009.  The Americas segment reported $130m in LTM revenues to 1H22, just 2 years after the Avenue acquisition, and this despite headwinds from the pandemic.  CCX has yet to bring its full assortment to the U.S. market and has barely scratched the surface in Canada.

On Evans:

CCX CEO: “We commissioned a third party to survey the plus-size market in the UK, to better understand customer perceptions. In this survey “Evans” had the highest awareness amongst all respondents, however, the preference to shop and purchase dropped off due to assortment, not dissimilar to our experience in Avenue. This is exciting for me as I know we can fix the assortment in time, and the market know Evans, something much harder to achieve.  

On Navabi:

CCX CEO: “Pleasingly the integration of Navabi onto our systems has been completed in full, ahead of schedule, and we have moved to a larger logistics facility to allow for growth. It is too early to get a fulsome read on the customer, as we learnt from Avenue it really takes 3 seasons to know who she is”.

Decision Tree

In order to help frame the opportunity for CXX and illustrate the long growth runway, the high-level TAM analysis below suggests CCX will be a multiple of the size it is today if it continues to deliver on its growth initiatives. We also expect CCX to go after larger acquisitions as the business scales and broaden its assortment further (activewear, teens, etc.).   

 Source: Credence Research, CCX 

If CCX were to achieve a 5% share in North America and Europe (similar to its share in ANZ today – note CCX continues to grow very nicely in its home market), this would translate into an additional c$8bn of sales, or more than 25x current sales levels.  At a 25% contribution margin, this would yield c$2bn of pre-tax profit, or over 50x CCX’s FY21 EBIT of $36m.

Catalyst

• Trading and earnings updates showing continued share gains, margin improvement and strong strategic execution 
• Additional acquisitions broadening TAM and accelerating profitable growth in North America and Europe