City Chic Collective Limited (CCX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the City Chic Collective Fiscal Year '21 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Phil Ryan, CEO. Please go ahead, sir.

Morning all, and thanks for joining us this morning. I'm Phil Ryan, CEO of City Chic, and I'm joined today by Munraj Dhaliwal, our CFO. This morning, I'm going to talk through what was a great year for CCX, given the market conditions in the pandemic. Munraj will talk about financials, and I'll come back to discuss the outlook. In what was an exceptionally volatile and challenging year for reasons I don't need to outline, we've managed to grow our revenue by 32.9% and our EBITDA by 59.6%. And these growth numbers are of a strong result in FY '20. I've been a CEO now during a pandemic longer than I was outside one. And from this, I've learned to be reactive and nimble, and we have found a way to continually grow despite the market conditions. It is our people that have delivered this, and I'm exceptionally impressed with the way our team has remained focused on delivering for our customers despite the many setbacks. She comes first in everything we do from product to customer experience. Our business is structured to make her experience the best it can be given the circumstances. Nothing outlined this better than the logistics situation in the U.S.A. this year. We shifted all of our parcels for months through express delivery to make up for the COVID-induced delays in our warehouse. Customer first is not just something we say at CCX, it's a core of who we are, and it drives all of our decisions. As you all know, our strategic vision is to lead a world of curves. In the last 12 months, we've taken huge steps towards this despite the impact of the pandemic. We've remained focused on the 3 strategic pillars of plus size, digital and global customer acquisition. And on these measures, we have delivered, We are now 73% digital with over 1 million global active customers in the plus market. And more than half of them are outside Australia and New Zealand. Our global website traffic is 58 million a year. We are a digital global retailer with an EBITDA percentage of 16.4%. We have strong digital store fronts and partner relationships in our 4 key regions of ANZ, U.S.A., U.K. and EU, and we've commenced partner trials in Canada and the Middle East. Our market-leading and consistently evolving product assortment, spanning varied price points, segments and lifestyle, continues to deliver strong demand wherever we put it in front of our customers globally. The core of our strategy is to find ways both organically through our digital store fronts and partners and inorganically remaining commercially disciplined to deliver our assortment to a $180 billion world of curves. Our assortment is broken up into 3 key streams within our business, fashion through, mainly through City Chic and CCX, conservative through the Avenue and Evans brand -- and Avenue and Navabi brands and intimates through all of the above brands, plus we do Fox & Royal for playwear and Hips & Curves for that more every day kind of lingerie. To design and produce the volume of assortment we do requires creative structures and discipline. That is where my background as a dressmaker comes to the fore. To get a creative vision for each of these lifestyles and opportunities, we use sub-brands within each stream to give the design team that creative direction. We utilize light shades and fabrications to deliver production efficiencies and give the customer the over 5,000 choices she has on our website now and all of the manufacturers margin. We are creating a global marketplace of our own brands for plus ladies or a world of curves. Talking through the regions. We continued to gain market share in Australia and New Zealand with 20% revenue growth with only the fashion and intimate stream of product available in the market. We achieved this through range expansion within these 2 streams and strong online growth of 45%, with online now 54% of our total revenue in Australia and New Zealand. To deliver the conservative stream in the market, we look to our learnings from City Chic's growth in the U.S. We did there -- what we did there successfully was leveraging the strong existing traffic streams of avenue.com and partners such as Macy's and Nordstroms to successfully acquire market share for City Chic. Transposing this to Australia, we are using the citychic.com.au website and partnering with David Jones to bring the conservative stream to market. Given these market conditions, stores have been pleasing at 12% comp store growth in FY '21. We've also opened 12 new stores. At the end of calendar '21, we'll have 45% of our full-price stores in the new gold fit-out, averaging around 130 square meters, so slightly larger than our older store, and we'll have 12 in a larger format above 230 meters. The results from these new stores and the larger stores has been very strong, and we will continue to refresh our portfolio. It's another strong year in the U.S. with 37% constant currency growth. We achieved this result in what was an exceptionally challenging year. The first half was pandemic and socially impacted, and we really didn't see a recovery until March, April. The result came from improvements we made with all of our 5,000 products across all of our brands now live on avenue.com, a website location. This has materially increased her assortment and drove both traffic and conversion increases. Avenue.com, the website, is trading consistently above pre-acquisition revenue levels. And Avenue branded sales on the location are also above pre-acquisition levels as we've expanded and improved the offering. And our fashion and intimates, mainly through City Chic streams have delivered the incremental growth. This has given me the belief that the world of curves marketplace strategy is the correct direction for our collective. She wants choice and she wants assortment, and we can give it to her around the world. The City Chic U.S.A. website has returned to pre-pandemic growth levels with a recovery in the dress category really in March and April onwards. However, CC branded sales on Avenue have driven material growth in the fashion segment in the U.S.A. We've also relaunched on both Nordstrom and Macy's websites with City Chic, and they are performing above pre-pandemic levels. To start a trial in the Canadian market, we launched a marketplace with Hudson's Bay Canada putting a pool of stock in there to dip our foot into that new market as we did in Europe and the U.K. over the last 3 or 4 years to make sure there is a next horizon of growth. There is so much runway for customer acquisition in the U.S. Avenue.com, the website location, has really only had 4 months of trading post-pandemic, and the results are exciting. We will continue to invest in marketing and reactivation strategies as I see years of growth in customer numbers in the U.S. FY '22 saw the next step in our U.K. market entry strategy through the acquisition of Evans. The first 6 months have been pleasing with the operation profitable over the period. The integration is now complete and inventories levels are back to a commercial level. Sales on the avenue.co.uk are above a pre-acquisition run rate, a lot faster than we achieved with Avenue. We launched all of our 3 product streams on evans.co.uk location and they've been received well by the customer base. This learning, I believe, is what got us above pre-acquisition much faster than in avenue.com. We took our learnings from the U.S., and we adapted our strategy to get market share as quickly as we could. Our U.K. and European marketplace strategy has been implemented with our brand launching Next, Freemans, Curvissa in the U.K. It's very, very small times months and the -- but initial results are pleasing. We've also commenced a partnership with Alshaya Group in the Middle East to stock world of curves in 23 Debenhams stores in the Middle East and all of the associated websites that they run. We took the next step from the Zalando wholesale trial to a market entry in the EU with the Navabi acquisition. The integration is going ahead of plan, and initial reads on the loyalty of the customer have been positive, but it's very, very early days. The inventory levels there are going to take some time to rebuild and we'll position inventory from around the world to try and get some market share in Europe. The exciting part of this is we're learning some new European lifestyles, including the lagenlook, which is a more relaxed longer line fit, quite European focused, and we're going to incorporate this into our assortment next year, and we'll sell it globally. Getting more eyes across more types of our product and offering her the choice she has voted for around the world. With strong banner brands in ANZ, U.S., U.K. and now Europe and strong global marketplace partners, we are positioned well to continue to grow our business and to lead a world of curves. I'll now throw to you, Munraj, to talk through the financials.

Thanks, Phil. Morning, everyone. I've included more commentary on the financials and the ASX announcement for this result. So I'll just hit the high points now. The full year result is in line with the unaudited sales and EBITDA announced in July last month. Sales of $258 million is up 33% on last year. And pleasingly, our comp sales growth, which excludes the additional weeks from the Avenue and Evans acquisition, was also above 30%. So comp growth in ANZ was 32%, with stores achieving 12% like-for-like growth and online growth in Australia achieving 45%. And that was off of what was already a high base for our online business here in Australia. Comp growth in the U.S. was 31%. Avenue.com grew strongly, as Phil mentioned, particularly in the second half. And whilst the City Chic website in the U.S. was down in the first half, given the impact of lockdowns on dress sales, it bounced back in the last quarter as the restrictions eased. So we achieved this comp sales growth of over 30% whilst also improving the gross margin quite materially. The gross trading margin was stronger at 61.8% versus 57.8% last year. This was driven by higher achieved sale price and lower levels of discounting, and that was across all websites and our stores. And pleasingly, the high gross margin was achieved despite the downward impact of the shift in channel mix to online and the lower gross margin Avenue business. The cost of doing business increased as a percentage of sales by about 1%. At the interim results, you'll remember I flagged higher fulfillment costs in the U.S. during the peak of the pandemic issues. And although they've moderated back to more normal levels in the second half, the overall impact on the full year cost was about 1% of sales. Whilst we did benefit from operating leverage of our cost base, we also increased our advertising spend to capitalize on the opportunity to grow our customer base and take market share from our competitors, particularly in an environment where a lot of them weren't as stable and financially back as we were through that period. We added almost 300,000 new customers in the year and over 400,000 if you include Evans. To sum up the financial performance, we've been able to take market share and grow our business around the globe whilst strengthening our earnings margins. And it was in a year of elevated shipping and fulfillment costs due to the pandemic and also higher Evans transition services fees post the acquisition for a few months there between December and March. The EBITDA margin increased to 16.4% and EBIT margin increased to 13.9%. EBITDA growth was 60% on last year and 70% on pre-pandemic FY '19. The business generated strong operating cash flows of $24 million on a normalized basis. CapEx of $4.7 million came in slightly under budget and really allowed us to rotate into more newly fitted-out stores and invest in our e-comm infrastructure. Going back to July, August last year, we raised $111 million to really strengthen the balance sheet and set us up to accelerate our growth. In December, we used $40 million of those raised funds to acquire Evans. And as flagged at the time of the acquisition, we needed to invest in inventory after buying that brand out of administration. And that investment of $8 million was made in the second half. It not only restocks the Evans brand, but importantly, it also includes City Chic and Avenue product that is now selling on evans.co.uk and to new partners in the region. We also use those raised funds to repay $17.5 million of debt in the first half. So we finished the year with $71.5 million of cash and no debt, which you'll see turning to the balance sheet on Slide 24. As mentioned, we have invested in stock for our expansion into the U.K. and Europe as well as for the launch of the conservative stream in Australia through Avenue and Evans, the launch of global marketplace strategy and strong organic growth with avenue.com. We've also built some additional buffer into stock lead times to mitigate against the current delays in shipping that Phil will talk about in a second. The rate at which our footprint is growing around the world means there is a stream of organic initiatives being executed and potential inorganic opportunities. And whilst we go through this phase, it makes sense to keep some financial flexibility and the Board has not declared a dividend for the period. Our dividend will, again, be considered at the interim results. And on that, I'll hand it back to you, Phil.

Thanks, mate. In the first -- I'll just give a bit of an outlook now. In the first 8 weeks of FY '22, we've continued to deliver strong positive top line and comparable sales growth. Evans and Avenue are trading strongly and are materially above what was pre-acquisition levels. The CC U.S.A. location is back to pre-pandemic growth levels, and our partners are also showing that pre-pandemic level in the U.S. With Navabi, it's really too early to make a comment. We haven't had any real time with them yet. In Australia, I'm pleased to say we're still gaining market share with online growing close to historical levels. Australia has been materially impacted by the temporary store closures with a loss of 33% of available trading days. Stores that are open are trading well, and that gives me the confidence for a bounce back like we experienced last year when we opened up again. The impact of the closures is approximately $1 million a month to our bottom line. There is still uncertainty surrounding the pandemic, especially around the Australian lockdowns and the timing we're going to come out. Our diversified global footprint helps us manage through this uncertainty as regions are at different points in their recovery from the pandemic. As I said earlier, we've taken the learning from U.S.A. City Chic market entry, and we use existing traffic and partners to acquire market share for our conservative stream, mainly the Avenue and Evans brands and get the product into the Australian and New Zealand market. Yesterday, we launched a world of curves on the citychic.com.au website. I'm sure you've all followed the e-mails and go on to the website today and had a look. I think it looks pretty good, and the customer response was strong at a sales level yesterday. That brings the conservative product stream onto the City Chic website. And today, we have 800 products now live with up to 2,000 launching pre-Christmas. As I said, the customer response is good. I would even say better than what we saw on our avenue.com with the City Chic product. To complement that strategy, we signed a partnership with David Jones in Australia for world of curves and Avenue and Evans and all of the sub-brands to go into a concession format in 14 stores and most importantly, onto their digital marketplace. This will launch in the first half of this year. The physical presence is really there to support the market entry and to drive awareness. We learned from our U.S.A. experience that this is the best way to gain market share, and we see DJs as the natural fit for this product range, and it's quite light in capital expenditure as well. As I've said previously, I see this segment, the conservative value segment of the Australia and New Zealand market as a key building block in our growth story. In September, we'll go live with many new partners around the world, Walmart in the U.S. eBay in Australia, Debenhams in the U.K. We have integrations underway for Very U.K., Zalando in Germany, Amazon in both the U.K. and U.S.A. We are dealing with them in wholesale, but we want to get it onto a marketplace and also Target in the U.S. We've expanded on the partnership with Alshaya, and we've moved towards a franchise model. We are now franchising to their 23 stores and associated websites that is happening now. As we're growing around the world, we've got to know a lot of the plus size businesses and we are putting ourselves in the right position should any become acquisition opportunities. We now have a 24-hour customer service and live chat with offices throughout the globe to make sure we are there to talk to our lady whenever she wants to interact like a strong global digital retailer would. Our shipping globally is increasing in price and delays are really consistent. That's where the pandemic CEO comes in handy, you learn to adapt. We built a couple of months into our lead time during COVID for many reasons, and this should mitigate shipping delays unless the situation deteriorates. In regards to cost, the scale that we've grown in production volumes at this stage has been able to net off the increase in shipping. Where rates are and factory costs are now, I can see that continuing, but this cost is evolving monthly. We've also built up our inventory across all regions for growth, and we were able to fill that to cause any delays we do with a late shipping. I'd just like to talk about ethical trading because I am very proud of what we achieved. This year, we published our first Modern Slavery Act, but everyone had to do that. On top of that, we achieved a green rating in the COVID-19 Fashion Report. We rolled out workers surveys to our top 24 factories and almost 7,000 workers, and we received an 89% worker satisfaction. We have worked on -- we are now working on tracing Tier 2 and Tier 3 of our suppliers, and we've actually looked to trace our first cotton to the farm, which is a big step for us. And we've updated and strengthen our cotton region bans, and we're looking to introduce cotton DNA testing, so we know the origin of that cotton to really, really tighten up the regions we're buying our materials from. The pandemic has taught me how important relationships are, the team and with our customers. We have to keep the business adaptive and always learn from our experiences and change our path to what the customer and environment is telling us. And I think we've been doing that quite well. I'll now open up to questions, please, operator.

[Operator Instructions] Your first question today comes from Naveen Patney with E&P.

Congrats on a great set of results for the year. First question I had was just in terms of U.S. sales. Obviously, this year, as you mentioned, there were sort of obviously strong growth, but obviously adversely impacted by some currency. But if we just do some quick back of the envelope calc and I might be wrong because of the time, but it looks like first half really, really accelerated. It looks like there's sort of in constant currency up 3% half-on-half in first half and sort of up -- it was up, I think, about 12% in the second half. So I was just interested, are those working roughly ballpark to you? And if so, is there just some seasonality in the business that we should be thinking about or any other factors?

Naveen, Avenue annualized 3 months without our acquisition in this financial year on the year before. That makes sense?

Yes. Yes. No, that does, mate. I was just sort of referring to the half-on-half rather than versus pcp. So yes, so the half-on-half, right? December half '21 on the prior half -- or on the half-on-half, so just not versus pcp, it was up 23% in the June half. On the December half, up 12% in constant currency. So maybe you can get back to me just on that.

Munraj, do you...

Yes. I think, sure. Look, we can, I can come back to you, Naveen. But at a headline, the second half in the U.S. from about March onwards, we saw a strong bounce back as restrictions ease. So we saw an acceleration of both Avenue and City Chic growth kind of in that last quarter. However, January through to March was still pretty heavily impacted.

Okay, great.

I think also the drop ship in wholesale business materially was down sort of $8 million, $9 million, and that would have impacted that as well, which is now back up and running.

Okay. Fantastic. And just on inventory, it was really helpful just in terms of -- you mentioned that there was sort of, I think you mentioned on the call, there was $8 million of bill relating to growth initiatives. So it looks like the percentage of sales has probably increased slightly over the year but not much. So reading between the lines, it sounds like you're pretty happy with your inventory levels at the moment in terms of not mean to discount or have markdowns. Is that fair?

Yes. We have a clean inventory bill. That is the comment I would make there.

Okay. Great. And I was just interested in whether -- also just lastly, whether you could provide some high-level comments as to how the run rate from a margin perspective for the various geographies are tracking obviously, Navabi is pretty early, but maybe from the Europe or in U.S. or U.K. and U.S. perspective, how from the margin run rate we should be thinking about things going into next year?

I'll let you take that, Munraj.

Yes, sure. The -- with the bounce back in the U.S. in the second half, gross margins returned to more normal levels. We've previously mentioned to the market that the City Chic product here in Australia sells at gross trading margins north of 60%, and our international business being primarily Avenue, but now also Evans trades in the 50s. That has -- the gross margin bounce back in the second half has continued into the first 8 weeks in the U.S. and also in the U.K. However, the U.K. was a few months behind the U.S. in opening up. And of course, in the U.K., we had an initial period where we're moving warehouse, and we're clearing some old stock that we acquired with the business. But overall, the Evans business actually achieved the gross margin higher than the Avenue business in the U.S. So going into this new year, it feels like the gross margins or the level of discounting is back to a more normal level. We've got the stock for growth. So we're not having to pull back on promotional activity, it's a more normal level.

Okay. Great. Very helpful. And sorry, just the last question to follow up from that one. That's helpful in terms of gross margins perspective at a high level versus at a geographic level. Are there any major differences there on the EBIT to EBITDA margin side of things relative to those gross margins? I imagine you're probably still in an investment phase in the U.S. on marketing and sales or what have you. So is there any extra color you could provide there to the EBITDA level margin?

That's exactly right. It's -- the digital businesses internationally at an earnings margin level are stronger relative to the omni business here in Australia if you exclude the marketing investment. But when you include the marketing investment in where we're driving customer acquisition and market share growth in those new markets, then that brings the international markets EBITDA margin more in line with the Australian business.

And your next question today comes from Marni Lysaght with Macquarie Capital.

Well done on another excellent result. I have a question around -- I guess another one around working capital. The payables have declined since the balance state in December, I guess, can you give us -- I understand that would have built up in response to building up inventories at Evans. Kind of what is -- as we build -- you've got to build up inventory this half sort of Navabi, what's a sensible kind of way of thinking about your payables? And have the trends of supplies change recently, just given some of the element and headwinds?

Look, I'll definitely say to get things through and fasten things. We've done some things with payment to really be the preferred producer and make sure we're using our working capital the best way to make sure we can secure the stock, Marni, would be my first comment. To say wholesale have the payables change. I would say, not really, and we'll see that more normalizing. But I've definitely gone and dealt with factories and where appropriate use payment terms as a big lever to get the product and put us to the top of the queue in many ways, especially as we've grown into new regions and new factory bases with a different type of product we use. We produce the Avenue around more knit garments than what we would see in the CC woven.

That's clear and there's 2 more for me. Just in terms of, I guess, DJs, that looks really interesting, obviously, 14 brick-and-mortar stores. Can you talk to the margins you'd expect to get out of it? Because in terms of like -- I'm thinking you probably have to put in some capital contribution for the fit-out. And in terms of...

Marni, the capital is immaterial in those. They're thousands of dollars, not even tens of thousands. It's not a material capital investment. Look, we are there -- they are there to drive market awareness and that is the key of the strategy. As Macy's did on a wholesale level with 150 stores in the U.S. for many, many years, driving so many people to learn about our new brands is what she -- was a new brand in that market and the amount of anecdotal people that told us on our customer line that they found at Macy's and then Googled us and came to us. As I said, over many years is phenomenal. But I do -- we're not looking -- I'm -- we are very aware of the department store situation in Australia. We think DJ are strong and are a good partner. But hopefully, we can even supplement at their online marketplace sales through having some physical presence with them. So really, I'm not -- that is the key to that strategy. It's not about a huge driver of level of growth. What I see is the conservative product streams in the Australian market is a huge building block. And for those of you that have been part of our story for some time prior to Avenue, the entire stream of product we started to do that in Australia because I saw opportunity, and that's positioned Avenue and then Evans in time. And it sort of this launch has got kicked down the road a few times, and now it's here. And I think DJs are a great capital light way to bring some physical presence into it and also launch with their marketplace and on City Chic we'll put it in other places we see correct, see appropriate online as well.

Yes. So just I understand that from the balance sheet perspective it's very capital light. But just in terms of the P&L, like is it a...

I don't see it as a big driving block, Marni. It's not there to be the building block is my comment. But I don't see it will go backwards, but it's part of a broader strategy to bring them to market. Those 14 stores are actually -- are trading is actually our City Chic stores if that's a more direct question.

Okay. Okay. And then with Refinitiv, that's quite a Scandinavian and conservative style, do you think there's obviously those both brands, both -- Refinitiv is a sub-brand, Avenue and Evans are new brands, showing there's a bit of synergy benefit there?

Yes, correct. We will be putting all of those products as we see fit to get some of the brands out to the market physically through DJs and then also through our world of curves on both our website, which will mold into a world of curves and also the big marketplaces and other places we feel are appropriate where the plus size customer is shopping..

Okay. And just one final one for me. Just on your tax rate, I can say that's gone down, what? 1.3 percentage points year-on-year. But just in terms of the trajectory moving forward, given you've got -- you'll have a full 12 months of Evans spend, then you'll have Navabi on the books as well.

I'm not even taking that one. Munraj, over to you.

Yes. So look, the tax rates in both the U.S. and the U.K. are lower than Australia at the moment. And as those businesses grow, the effective tax rate will come down. We expect it to settle somewhere above 25% to 30%.

[Operator Instructions] Our next question today comes from Wassim Kisirwani with Jarden.

Phil, can I just ask about your comments regarding avenue.com? I think you described the results as exciting. Can you elaborate perhaps on some of the indicators that you're seeing in customer behavior and engagement and kind of what's working really well and how you assess that Avenue opportunity now versus when you first bought that business?

Yes. I think the learnings for us -- I'll give a bit of background on that. When, obviously, the world hit a hurdle last year, we decided to move all of our warehouse to one place very quickly because Avenue is obviously bigger than CC at the time. We're at that stage where we had to very much keep separate sort of brands and put a little bit of CC on and try out how it's worked. But the way that customer has taken to the CC product is what is exciting to me. And the next thing I said it in my speech then, we've also not just beaten our pre-pandemic levels with the CC as the building block to get there, but the Avenue branded product has beaten what it was doing a few years ago. I think with our increasing assortment. And our increase in range and improvements, I'll say, and what they were doing, we've been able to drive better results through the conservative or Avenue branded products as well.

Okay. Great. And then second question for me, just on some of the growth initiatives. Obviously, you're well capitalized at the moment, and you've talked at inorganic and organic growth opportunities. Can you elaborate on some of those organic opportunities ahead? And then in terms of M&A, can you comment on the availability of likely targets that you're looking at, at the moment?

Yes. Look, I'll talk to organic and Munraj can talk to the inorganic. I think if I go by region like I did, the U.S., I think we've really just begun with a bit of a breathe -- bit of air and space. I'm very excited as to what that can throw. As our inventory normalizes, we get more product into market than we did this time last year because what I didn't say to Naveen, the first half in America has Black Friday, which is their biggest trading period, right? And last year, given all of the confusion and delay that happened at the beginning of 2020, we weren't stock the way we would like to be. We're ready for it this year and I'm really excited. That's probably the first and biggest organic block. I think the next one is bringing our conservative value stream to Australia, as I've just mentioned through to Marni or whomever else asked that question. I think that's probably very exciting. Then you've got maximizing the, Evans bringing her the full product range. I think there's 3,000 products up there now. So there's a lot more range. We haven't gotten to her yet, and Navabi hasn't got one of their garments yet. So if you look at those 4 key areas, there's strong levels of organic growth for a period, then we've got Middle East and Canada as our trials so that we can be sure that once that there's something else boiling in the background. So yes, we're really confident in organic and I'll throw to you, Munraj, for the inorganic.

Yes. Look, I mean, it was only a month ago that we were talking to the market about the new acquisition of Navabi. So the focus right now is absolutely on integrating that business, getting that really stocked, setting up the team with our operating structures. So a lot of that has already been executed in the last month, but that's the focus for now. Look, our approach to inorganic, it isn't an aggressive acquisition strategy. The strategy is the strategy, and we've seen inorganic as a way to accelerate that strategy. So our approach is -- and we're lucky that the plus size market is quite a small market in terms of the prominent players in each of the regions that we would do business. We know them. We're talking to them about trade, about trends. And if there is an acquisition opportunity in those discussions, then we'll be -- we're ready to execute. But look, right now, the focus is on bedding down Navabi.