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

Thank you for standing by and welcome to the City Chic Collective Limited FY 2023 results. [Operator Instructions] I would now like to hand the conference over to Mr. Phil Ryan, CEO and Managing Director. Please go ahead.

Thank you. And good morning, everyone, and thanks for joining us. I'm Phil Ryan, CEO of City Chic Collective. And I'm joined today by Peter McClelland, our CFO. I'll talk briefly on the results. And I'll focus on the strategy to return to profitability and then talk about our outlook. Moving to Slide 3. In 2023, our focus was on rightsizing the inventory and bringing the business back to a positive cash position in what was a challenging environment, and we've done that successfully. As outlined in May, we made the decision to accelerate the inventory clearance and are on track to have new and relevant product in our core markets for the key trading periods of Black Friday and Christmas. This has impacted our FY '23 results but puts us in a much stronger position into the second half of FY '24. We undertook a strategic review focused on our online and international businesses to assess the best way to return to profitable trading. This was a thorough process which included the assistance of external advisers; and confirmed, firstly, that the opportunity in Australia, New Zealand and the U.S.A. is substantial and that we will optimize our returns by focusing our efforts in these markets. Second, we need to go back to what made us great by focusing on 3 key areas of our business: our customer, our product and our operating model. Focusing on high-value customers and the emotional connection that drives loyalty is key. In order to do that, we need to reinvigorate our ranges through listening to her and anticipating her needs. We have already simplified the business model and are further driving down costs to rightsize the operation so that it can be agile for all demand scenarios and through all economic cycles. As a result, the first half of FY '24 will be a period of transition as we clear residual inventory; navigate what remains a volatile market; and implement our strategic initiatives and cost-outs, especially in the U.S.A. This will set us up to be profitable in the second half. Moving to Slide 5. Revenue was down 15.8%, excluding the 53rd week of trading; however, was up 7% on FY '21, outlining the strong performance in FY '22, especially in America. The underlying EBITDA loss of $24 million includes $22.3 million in provisions and write-downs. I'm not going to dwell on FY '23. It's been a year of balance sheet action. As guided in May, we accelerated the inventory unwind and did what was needed to get our inventory position right. From this action, we have now a much more commercial inventory level in the continuing business at $53.8 million, well below our target of $100 million. This was assisted by the sale of EMEA; and exceptionally strong clearance periods, especially in the ANZ business, in the second half. This has continued through July and August as we have even more aggressively cleared out residual stock to ensure we are in a strong position into the second quarter to reset our business, focus on our core high-value customer, refresh our product mix and deliver on our path to profitability. With the inventory release, we delivered a cash balance at the year-end of $10.9 million, with strong operating cash flows of $29.8 million to the total business. Accordingly, we adjusted our banking facility with new liquidity-based covenants in line with the business' future needs. At the year-end -- sorry. After the year-end, we sold the Evans assets for GBP 8 million or AUD 15 million. Accordingly, EMEA, which had an operating loss of around AUD 25 million due to the accelerated inventory clearance, is excluded from this result. EMEA was challenged initially with logistical issues, and over the last 12 months, we've seen a very tough trading environment. I will talk more later about the positive business impacts of the sale in the presentation. Customer numbers are still around the median mark, with Australia gaining 4% in FY '23. However, average spend is down, reflecting the economic conditions. She's not left us. She just pulled back her spend because she's feeling a little concerned. The U.S.A. saw a decrease in customer numbers; however, an increase in spend, as we really maintained what we see as our core customer in the U.S. Moving to Slide 6. The overall margin reduction was 18.7 percentage points, around half of which related to trading, and half to provisions. The trading margin was 48.7%, down 10.4 percentage points on the prior year, reflecting a challenging competitive landscape, especially in the U.S.A.; and our decision to accelerate the inventory clearance in the second half. We took $22.3 million in write-downs and provisions for the year in the continuing business. The final provision of $16.8 million includes $5.6 million relating to residual U.S. stock comprising of fragmented and aged lines that we didn't move to the new warehouse. The balance of the provision is reflective of the inventory profile. This reduced our margin by a further 8.3 percentage points. Our fulfillment costs were at 20%, and with further actions, we expect this to maintain at or around 19% of revenue, with the ability to scale with sales, especially in the U.S.A. Supply chain inflation, as already [ outlined ], impacted us materially through the first half and into third quarter of FY '23. Marketing spend was managed tightly with demand, especially in the second half; and for the year, dropped from AUD 19.5 million to AUD 15 million. In operating costs, there was $4.1 million FX-related intercompany benefit for U.S. dollar stock purchases. And this is a nonrecurring benefit that is embedded in the operating costs this year. Finally, on Slide 7, we have provided a cash flow bridge which shows how we went from a net debt position at the end of FY '22 to having cash of $10.9 million as at the 2nd of July 2023. With that, I'll move on to the work we have done around the strategic review and the outcomes which will steer us back to profitable trading in the second half of this year. And move -- please move to Slide 9. The strategic review confirmed that there is a large addressable market in plus that is growing. The U.S.A. is now a $54 billion market with strong future growth prospects. And within that, the channel we play in is the U.S. plus size online market, which was qualified at $6 billion. And we have very minimal market share. Not only that: It is projected to grow at 7.2% CAGR between now and 2030. The Australian market, where we are the major player and 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 the specialty plus size players are best placed to win on fit and styling that delivers an emotional connection, which supports our actions coming out of the review. Moving our strategy -- moving to our strategy and the path to profitability on Slide 10. Our strategic review also involved extensive market research on our customer. The results of this process delivered us a path that I know we can execute on. We need to be agile, cost-focused better dressing business with an emotional connection to her, adding elevated casual lifestyles from our product learnings, especially from our Avenue experience; selling high-value garments to a high-value customer. This was our model and we know how to deliver this to market successfully. To achieve this, we need to simplify our business and reduce our operating costs. And we are well into this process and we'll have this completed by the end of the first half FY '24. We have set measurable outcomes from each of the 3 key focus areas. The first is to amplify our focus on her and our emotional connection. Through the history of our business, we have always put her first. And with the focus on clearing inventory, we've put the needs of the business first and have now returned to focusing on her needs. I know we can turn that around fast with good, new products. We've known her for years and really understand who this customer is and how to talk to her. We need to continue to listen to her and anticipate her evolving needs. She is our most valuable customer and is already the largest part of our database at 45%. She has attractive economics with a higher sell price and basket size, from both the market research and our internal customer base metrics. To achieve this, we need to deliver a product [ which CC is ] valuing through fit and styling. We will focus our marketing investment in 2 areas: reengaging our large e-mail base through social, digital, e-mail and other marketing channels; and targeting look-alike audiences. This will deliver higher average order values, increase retention and drive profitability. The second focus is to revitalize our range and deliver products that delight her. We are simplifying our range to be around 3,000 to 4,000 products on our site that will talk to a City Chic lifestyle and price point and that have high value and fashionable styling. We need to lower the volumes per style and ensure that the products are right for our customers in the U.S.A. and Australia. We need to follow demand and be agile in our supply chain and focus on much faster lead times that can deliver product she is demanding, making sure we're engaging with her with new and exciting product on a weekly basis to drive traffic. When we acquired Avenue on the website, this was our strategy, to raise the sell price and deliver a high-value product to this customer to drive revenue. However, as lockdown-driven demand shifted towards conservative tops, footwear, lounge, sleep and other type of products, we moved with it; and in hindsight, overinvested in these areas to drive our growth. We're now tighter in our assortment management and option count and [ are buying on ] shorter lead times, with the ability to flex up fast into new product or repeat styles as the customer is demanding them. Through this, we will create products with increased sell price and deliver a better margin. Our target is to get to 60% gross margin; and beyond 3 stock turns, excluding stock in transit. The third focus area is to simplify the business and reduce costs. We achieved a lot already. With the exit of EMEA, we have materially simplified the operating model. We've streamlined the supply chain, reducing origins from 7 to 3 and factories from 101 to 61, with more consolidation expected in the next 12 months. We now have 2 global warehouses, down from 12. And we are also trading in 3 countries, where we were trading in 6. And all these changes are how we deliver the agility and the cost savings. We are back to a culture of cost containment where our key focus is delivering a quality garment at a great price through having an efficient business model that can drive lower prices and costs to increase margin. We have focused fulfillment strategy -- we have a focused fulfillment strategy and have already delivered fulfillment of 20% of revenue in FY '23, and our target is 19% for FY '24. Including these fulfillment reductions, we're targeting annualized $15 million in cost savings that will be implemented through the first half to implement -- to impact the second half and beyond. Yesterday, we implemented a $6 million annualized saving through wages, reducing the support office head count on the H2 FY '23 run rate by 35%. This is our path back to profitability and is what we have executed successfully for many years. That's a summary of the strategic review and the actions and targets that came out of it. I'll now talk through the more salient points on the next slides. Slide 11, that gives some great quotes from our customers, and this is a few of the many we get each week. Our extensive customer insights will only grow as we leverage our wealth of customer data, further enhancing our already strong customer satisfaction levels. Slide 12 shows how attractive this customer is and gives further market data on our target customer. She has a materially higher spend and a higher frequency than average -- and also identified that in the U.S.A. this is a large cohort of the online market and one that we can target to drive revenue growth. As I said earlier, she is already the core of our customer base at around 45% of the current base. And in quarter 4, we saw success in targeting her, with a 35% increase in new core customers on our Q3 run rate. This happened from focusing our marketing efforts, as I spoke about above. Slide 13 shows how specialty plus size retailers can win in what is an evolving and growing market. It shows that focusing on experience through product fit and driving an emotional connection is key to success. This data has confirmed what has driven our business for many years. Slide 14 talks a little more about the second focus area of reinvigorating our product mix through a more disciplined and targeted product range. The key addition here is that we will create one range for the world that will be more aligned with City Chic price points, lifestyles and product. We will create in-season ranges for both hemispheres but leverage this around 1 product stream, where in the last 3 years we've had 2. We are really minimizing the conservative value stream of products I've spoken about before, and is -- it is what has driven the lower sale price. In Australia, this has historically been our strategy and our operating model. And in the U.S., almost half of our sales are currently with City Chic product. And 49% of the Avenue website customers have already purchased a City Chic lifestyle garment. This product has also been the product demanded by all of our partners. This is not a big shift in mix in Australia and will be implemented in the second quarter FY '24 with new inventory for summer arriving in September. The U.S.A. has forward purchases in the conservative value product for the first half. And we'll transition mix completely in the second half as we deliver the right product mix that will engage our customer. And we are driving to achieve our targeted 60% gross margin. Slide 15 gives a view of what these products are and what additions came from Avenue to drive the value to her and increase the sell price. The first box shows the City Chic strengths that have driven our success for many years, namely that better dressing, event wear and better daywear. This is the product we know resonates with our customers in the U.S.A. and Australia. The second box shows the targeted additions to our range that come from the learnings of what we -- she sees value in from Avenue in the U.S. and has also been successful in the Australian business. This is a more elevated casual lifestyle with a greater trend focus and that makes her feel good, doesn't just clothe her; and from this comes that connection. You can see in the third box we highlight in red where we are really cutting the range and how we drove the customer away from the emerging purchase to the functional purchase. We've stopped this less-emotive, low-value product that has much higher levels of competition in all markets. We will reduce our option count from 8,000 to 9,000 styles to 3,000 to 4,000 styles on all of our websites. Although this is a shift in focus, it is not a major shift away from our core. And our initial reads in all markets are pleasing. Moving to Slide 16. By simplifying, we'll rightsize the business to deliver sustainable and profitable growth to withstand cyclical demand shifts in our core regions. The consolidation of markets, reduction in websites, simplification of supply chains and the reduction of our range is reducing the business activity, facilitating the cost reductions. As I said earlier, we have achieved a lot already in the area of supply chain. And additional to this, yesterday, we implemented a 35% reduction in head count in the support office in Australia and in the U.S., with an expected annual saving of $6 million on the FY '23 run rate numbers. We are also in the middle of a cost-out program targeting $2 million in annualized savings. And our logistics target of $10 million that we put out in May had $3 million in annualized savings from EMEA, taking our targeted savings for the U.S. and ANZ at current volumes to an annualized $7 million, of which around $2 million was achieved through the second half of FY '23. And this is how we can deliver a logistics-to-revenue ratio of 19% into the future. This gives us a target of $15 million in annualized cost savings for the continuing business, to be implemented by the first half of FY '23. Moving to Slide 17 and the exit of EMEA. This aligns with our strategy and enables us to focus on the high-potential U.S. and ANZ markets. In FY '23, the EMEA business had a loss of $25 million before stranded costs. Exiting has facilitated a lot of the office restructure through reduced activity and complexity that I outlined earlier. The strategic review identified that pursuing our core customer in EMEA would be expensive. And this was the key driver of the decision to exit, as we felt the investment in customer acquisition was better made in the U.S.A. or Australia and ANZ where we have a proven record [ with this customer and product ]. The Evans business was focused on our conservative value stream of products, and this was the global leverage that we thought would drive demand. As we are really minimizing and cutting back this product stream, the decision to exit the market was the right one for the business. Further to this, with the logistical challenges, EMEA was the focus of our inventory build. It has impacted the sales and margin of other regions, as we relocated inventory, in FY '23 and in the first quarter of FY '24. We've dealt with the inventory position and have sold the business to simplify our product purchasing. This simplification of our supply chain [ into ] 2 destinations and many warehouses and the reduction in websites and partners is a significant part of the cost reduction. And of course, the cash injection strengthens our balance sheet. Moving to the current trade update on Slide 19. The decision was made to further accelerate the clearance of inventory in July and August, having a material impact on both sales and margin. As previously outlined, we rebalanced seasonally appropriate product from EMEA to the U.S.A. and Australia and New Zealand in the fourth quarter of FY '23. This inventory has not performed to expectations and has needed heavier promotions to clear. Coupled with a challenging economic environment, this was the driver of our performance, so far, this year and will turn as we revitalize our product mix and realize cost savings. July and August last year were also very strong trading months compared to the 10 months that followed, with sales flat on FY '22 and the full year down 15.8%. Cycling this, sales are down 33% at the total level, 34% in Australia and New Zealand and 31% in the U.S.A. We've done what's needed to clear the inventory and get it to a commercial level. We had some work to do in the first quarter, and this has resulted in challenging trade, but we're now in a much better position and have seen strong results on the product that aligns with our future strategy. Moving to the outlook slide, 18. We expect to be trading profitably in the second half of FY '24 as we see the benefits of the strategic review and the cost-out program, with the transition of product in the U.S.A. starting in the second quarter but not fully implemented until the second half. We have new seasonal product in market for the key trading periods of the second quarter. And we'll have an improved inventory position in the second half focused on our high-value range and high-value customer. Slide 19 gives a focused outlook. We have taken the pain on inventory position and are ready to get back to focusing on our customer. We are focused on our key markets that have known brands and strong traffic growth, with large growth potential. We implemented the strategic plan focusing on her, delighting her with products and simplifying the business and reducing costs. We will have a focused and aligned customer base globally that can drive profitable growth. We will drive all of our targeted metrics: gross margin of 60%, logistics at 19%, 3 stock turns and $15 million in cost-outs, delivering profitability in the second half; most importantly, getting back to what made us great, an agile supply chain focused around her, managing inventory with discipline and data-driven decisions leading to strong unit economics. I'm very optimistic about the future for City Chic and have the right team around me to make sure we execute on the key focus areas I've outlined today which will set us up on a path to profitability. Thank you. And operator, I will now open up to questions.

[Operator Instructions] Your first question comes from Owen Humphries from Canaccord.

The first one, just around the inventory levels. I couldn't see it. Maybe it was an oversight, but can you talk through the inventory that was sold as part of the U.K. and EMEA transaction; and two, the levels of inventory as of the end of August?

[ All right ]. So in respect to the EMEA inventory, there was about $19 million of residual inventory that was being carried at the time or at the end of the financial year. All of that inventory was sold across. All of the EMEA inventory was sold across. There was an impairment taken on that inventory for -- as we sort of looked at the sale proceeds. So that $19 million is -- sort of goes as part of the sale process. There has been, as we've spoken about before, rebalancing of inventory out of the EMEA and across other parts of the world during the second half where we put seasonally appropriate stock. We moved that out because that's -- EMEA was where we have a high concentration of the inventory build. That's also [ doing ] the product that we traded heavily through the second half across the rest of the regions. In terms of August, we haven't given sort of specific guidance on that, but we have continued to trade down the residual of the EMEA and -- stock; and the end-of-season winter and summer -- sorry, winter and summer [ end of lines ], depending on the season, so that balance will have come down since August. And we start now to see the intake in around end of August, September for the new season inventory.

And Owen, what we've seen in the new season has been very positive -- and are looking forward to getting that all in and trading back to where we know we can, especially in Australia. I think that clearing through EMEA in Australia in July and August has really hurt. And as we've seen the new product ranges come in, we're getting great results, especially [ from our ladies ], as I said, here at home. And August, we have reduced the trading stock and there is a lot more newness coming through, and we're in a good position right now.

Good one. And year-on-year is tough with -- [ in that ] you're cycling a bigger comp. Can you just talk through month-on-month? How is that tracking maybe August versus July, versus, say, June? Have we kind of stabilized? I know growth is decelerating, but just to understand how the month-on-month is tracking.

Yes. I think, June, we put in the -- you can actually work it through [ given we gave ] our results. I think, from week sort of 52 -- sorry, 45 to 52, we were down 24%. And July and August: As we sort of look towards the end of winter, August has been a little more challenging, but as we've come out of all this and drop the new product, we're seeing better results.

Your next question comes from Craig Woolford from MST Marquee.

So can I just ask about the sales base? So the second half continuing business sales base looked to be $120 million. You've obviously talked about the year-on-year decline. Is that $120 million sales base a good yardstick to think about what a 6-month sales contribution to the business is? Or is it still parts of the businesses that are shrinking, excluding the discontinued businesses, of course?

Look. I think in the current environment, Craig, that's a reasonable assertion. I think we did $150 million-odd in the first half in the continuing business. July and August, as we said, were strong months last year, so we'd expect to be as far down in the first half. As what we've done in July and August, it would be more of that sort of closer to last year, but in the current environment with -- the second half is normally a little bit lower than the first half given you've got all of the promotional cycles and less northern hemisphere now with EMEA, so we think a little bit more in the $120 million. But in the current environment, that's about there.

Your next question comes from Chami Ratnapala from Bell Potter.

Just on basically the second half profitability or to clarify the 60% margins and the 19% fulfillment costs you've given. So that, we should start commencing or being sort of reflected from second half '24. Is that correct?

We sort of expect that the second half -- with the arrival of the new product, the new-season product and also the positioning of the customer with the marketing spend, et cetera. A lot of that work is being implemented through the -- through this first half. And you'll start -- and as the cost savings are also being implemented across the first half as well, we'd be expecting to see some growth, small growth, I would assume, in the second half of next year over the previous. And you'll start to see that margin improvement come through. The fulfillment costs were effectively running through this year, so you should be achieving that definitely in the second half. And then the cost savings, we've sort of outlined you'll have those being implemented in the first half, so your second half run rate -- it will be contributing into the second half run rate, so we'd be expecting to be trading profitably in the second half. And when you're looking at that cost base, you also need to take into account a couple of those one-off benefits to this year being the FX gain, et cetera, but that's where we're sort of expecting some top line growth and the second half margin improvement and costs contributing to be sort of a small profit in the second half.

[Operator Instructions] Your next question comes from Sam Teeger from Citi.

I just want to ask kind of 2 -- I want to ask 2 things. Firstly, do you think discounting actually drives more volumes in this category? I guess what surprised me is how weak the South have been, why you've been doing clearance. And then just in terms of the costs overall, we're just hoping you can step us through what the cost of business should be once all the restructuring is complete. I mean, should we take the underlying cost of the business of $132 million on Slide 6 minus the fulfillment costs of $54 million? Also on Slide 6, I mean, minus another $15 million for the cost-out, that gets you to the low 60s. Is that the underlying cost of the business after all the restructuring is done?

Let me answer the first question. And I'll let Peter answer the second question. I think that's the thing in this category. You don't necessarily drive more transactions with promotion. And what has hurt us in July and August is our taking a view to clear the product that's residually sitting there. And we've done an excellent job, especially in Australia. We are well and truly above our targets of stock turns in Australia. And what happens is, when you discount, you don't actually drive more top line revenue. That has been a -- something I've observed. I think I've said it to the market before. Since the start of our business in 2006, we have a tight customer base. I also think, when you're looking in Australia, that the customer volume increased a little bit. It was down a couple of percent from December, but really it's the amount she is spending. And I think that comes from how she's feeling at the moment. And what that says to me is she's just reduced that spend. And to grab what demand we could and use the product that -- really, as I said, that returned product didn't do the job it wanted. That has really impacted July and August. And that's why, as we come back in the summer, we'd expect to be getting back towards what was a tougher last year and hitting those numbers through September, October, November, December. I think -- does that answer that question, Sam?

Yes.

I'll pass it to Peter on the costs one.

Yes. And just in terms of looking at the [ Slide 6 where you're ] trying to extrapolate those numbers through, a few things just to caveat. And then I'll jump into the assumptions of improvements in a second. There is within the FY '23 cost base $4 million FX benefit which related to the settling of intercompany accounts, et cetera that you wouldn't expect to flow into the future year. And there was also about $1.2 million of reversal of prior year LTIPs released into the P&L, so you need to sort of adjust the cost base for those. Then in terms of the $15 million, breaking out fulfillment costs but just looking at the wages line and the other costs: There's about $8 million of wages and other costs benefit that will come from the full year impact of those cost-out programs, so you wouldn't expect to see them all throughout this year. That's an annualized benefit, but it will be reasonable to assume you'd get sort of 50% of that benefit, but the exit run rate will be reflecting the -- will be reflecting that $8 million of cost savings. Within fulfillment, it's there's a number of things happening within there. We sort of said that there's a $7 million worth of annualized benefits based on the current run rate. Now that's going to be impacted by inflationary pressures and also somewhat impacted by volumes as well. Of that $7 million, there was -- $2 million was already recognized in this year because of the changes that were put through and sort of effective the second half. And then you get an incremental benefit of $5 million for the following year.

Your next question comes from Sam Haddad from Petra Capital.

Phil, Peter, I just want to understand a bit better the cash position of the business. You've exited the financial year with $10 million net cash. That excludes proceeds [ from the sale of Evans, I believe ]. And can you also...

Sorry, Sam. Can you repeat that? Sorry, Sam. I didn't grab that. Can you repeat it, please?

Yes. I just want to understand the cash position of the business better just as we go through the first half. So you've exited the financial year with a net cash of $10 million. Then you've got sale proceeds to come through from Evans. Is that correct? And then can you talk about [indiscernible] in terms of seasonal product in terms of working capital investment as we go into Christmas?

So you are correct. The cash proceeds from the sale of Evans comes through in this first quarter. And then really -- but I mean the cycle -- as I mentioned before, we will start to see intake coming in the end of sort of July, beginning of September. We start to see -- sorry, end of August, beginning of September, for the new season. So that product typically lands over that period of time. And then you've got payment terms for when -- payment terms for the payment of those accounts, so generally what we'll find is your working capital needs are higher in the back end of the first half. And then as you're sort of generating those cash flows, inflows, that sort of brings the sort of cash position back down into balance.

Your next question comes from Craig Woolford from MST Marquee.

I'm back, obviously one question at a time. The other question, just to clarify with your measure of profitability for the second half '24. Is that on a post-AASB 16 EBITDA basis?

It's on post, but you can also assume it's there for pre as well.

Do you expect to be profitable on a pre-AASB 16 basis?

In the second half.

In the second half, okay. Great.

There are no further questions at this time. I will now hand back to Mr. Ryan for closing remarks.

Well, thank you all for joining us and for your questions. I'm very excited about what's in front of us. We have a clear path to what is really the way forward for our business and something that I know we can execute on. Thank you for your support over the last 12 months. And I look forward to catching up with many of you over the next few days. Thank you, everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.