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

Thank you for standing by, and welcome to the City Chic Collective Limited FY 2021 Results Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Phil Ryan, Managing Director and CEO. Please go ahead.

Good morning, everyone, and thanks for joining us. I'm Phil Ryan, the CEO of City Chic Collective. I'm joined today by Peter McClelland, our CFO; and James Plummer, who will be taking the role of Interim CFO on the 18th of October, as we've separately announced today. I'll run through the presentation, starting with the business and strategic update and then a brief look at the FY '24 financials and then moving on to our outlook. Looking at Slide 3, we had strong, positive momentum through the second half of FY '24 and have taken the necessary steps to get the business back to profitability in FY '25. This slide shows the 4 key takeaways. We outperformed the pro forma underlying EBITDA forecast for FY '24 that we gave in mid-June by 10%, driven by margin improvements, showing the success of our strategy. In FY '24, we have completed the business transformation. This includes a City Chic brand and product refresh, a shift to focus on high-value customers that deliver strong margins. We reduced our inventory to normalized levels, purchasing only around 80% of the cost of goods sold. We have evolved our product to more versatile lifestyles. We divested of Avenue and Evans, moving on that low-value customer and the products associated with that. We've rightsized our cost base with $20.3 million in cost-outs, including a 50% reduction in support office headcount, delivering a 17% employee expense reduction in FY '24. We have implemented the additional $1.1 million headcount savings outlined in June, and we expect a further $11.5 million, or 14%, annualized cost of doing business savings in FY '25. Our customer is responding well with our NPS at 72, and we did all of this inside 12 months. The third point outlines that the strategy is working and the actions are paying off. In the first 8 weeks of FY '25, we delivered 28% growth in trading gross margin dollars, driven by a 58% uplift in average selling price. These are the 2 key strategic measures, and we're already on an upward trend through the second half of FY '24, hence our strategic confidence. Lastly, we set the targets of $142 million to $160 million in revenue and $11 million to $18 million in EBITDA. On current ASP trends, we can hit these revenue and profit numbers selling materially less unit volume than FY '23 and even less than we did in 2019. We do expect the second half to be bigger than the first half as conditions improve with the U.S.A. recovering faster than Australia. Moving to Slide 5, FY '24 was a year of transformation, and we are now set up to return to profitability. Our underlying loss was $8.4 million, which is 10% better than the pro forma forecast from June. This was predominantly due to an increase in margin from 56.3% to 57.3%, showing stronger achieved margins than anticipated, which was pleasing. At a cost level, there was a variance in fulfillment due to an allocation of AASB16 adjustment between continuing and discontinued business. However, with the warehouse move in the U.S.A., we are now on track to have fulfillment under 12% of revenue, and we have a variable cost base to work with any level of demand we're experiencing. We also had lower-than-anticipated employee costs due to headcount actions. And as I've said, we announced today that the further $1.1 million outlined in June has now been completed. Revenue was down 28%, which is a store performance by spot and showed the strength of our brand in Australia. Our comp stores in the fourth quarter were down 5% and are now achieving growth in the year-to-date, or the first 8 weeks of FY '25, up 10%. There were 3 key factors impacting demand globally. Firstly, the cost-of-living pressures on our customers led to a much smaller annual customer spend. She is hurting. However, she stuck with us. Second, we didn't deliver product in the structures we would like until the end of the second quarter in Australia and into the quarter -- third quarter in the U.S.A. In FY '24, we purchased around 80% of cost of goods sold as we finalized the sell-down of old inventory, replacing our COGS this year with purchases, and the additional newness this provides will have a huge impact on demand. Third was the USA warehouse move in the fourth quarter, which led to almost no product drops in May and June and then limited in July, impacting all channels materially through the busy summer period. Our net cash is $3.9 million with $15 million from Avenue and $3.1 million from the equity raise coming in after year-end, and inventory is at a normalized level. Moving to Slide 6, our strategic business transformation initiatives have been the key focus of the business as we look to drive revenue growth. This slide outlines the FY '24 operational highlights. There are 4 key areas: customer, product, costs and balance sheet. We're focused on the high-value customer that can deliver the margin needs of the business. In the customer focus, our achievements are we have refreshed our brand and are talking in a different tone of voice to our customer. We have over -- we have 481,000 customers spending $226 annually with that average annual spend becoming a key metric as we have more customers now than we did in 2019. And back then, she was spending around $340 a year, and I know we can get back to those levels. We have targeted digital marketing efforts to further engage the high-value customer. We've increased our social media presence with the focus to be where she is when she wants us to be there. Our high-value customer numbers are up 11% in FY '24, showing the success of our strategic focus. As this continues, we will decrease the number of low-value customers that are brought into the promotion. We moved the majority of those low-value customers on through divesting of the Avenue business. But most importantly, we've continued to delight her and exceed expectations with our Net Promoter Score now at 72. In the product area, we've revitalized our product assortment to move with what our customer is demanding from us through category and lifestyle planning and making our range more versatile. We have listened to her, as she told us she's looking for more elevated essentials. Accordingly, we've grown this part of our range to meet our needs. We are back to a culture of [ a pace ] and following the customer demand in season to maximize revenue and minimize promotional activity. To facilitate this, we have shifted our supply chain back to historical partners, allowing flexibility and reduced product costs. We have also reduced the per-option volume, further minimizing promotion. We are operating a more flexible open-to-buy and are moving spend in demand -- with demand, sorry, in season. From all of these actions, we've increased our gross margin percent and average selling price materially with the second half gross margin trading at 59% and average selling price up 49% on the prior corresponding period. The discounting, promotion and inventory clearance has stopped. We've simplified our business, reshaped the entire cost structure to align with demand. In FY '23, the cost of doing business was $132 million in total and $101 million for the underlying business. In FY '24, we brought this down to $84.2 million, or 17%. These actions include the changing of our U.S. fulfillment partner to make fulfillment variable to sales in the U.S. and facilitate the return to under 12% of revenue, impacting FY '25 mostly, our headcount reductions, which are now finalized, and our headcount below our FY '19 numbers with just over 75 people in the office, and this was over 150 in FY '22, a circa 50% reduction. We have set a target to cut costs of doing business by $20.3 million with 85% of this already achieved. This would mean a further $11.3 million annualized of our cost base to get it to 72.9% plus inflationary pressures. We've strengthened the balance sheet by normalizing inventory, selling Avenue, implementing a $10 million debt facility and an equity raise. Moving to Slide 7, in the first 8 weeks of FY '25, the positive momentum we saw in the second half of '24 has continued as the strategy delivers a further uplift in gross margin dollars and average sell price. Our focus on new product that the customer is demanding and strong marketing ad campaigns with a refreshed tone of voice are working. Total gross margin dollars are up 28% with trading margin above 61%, a huge 17.7 percentage points up on last year. Revenue was down 9% as the first 8 weeks of FY '23 was a period of high discounting to clear stock that drove unit volume and revenue, but not profitability. That is our goal now. At a gross margin level, comparative stores were up around 13% with total stores’ gross margin up 8%, even with the 11 closures. We're focused on stores and getting their recovery, and we're seeing material improvements in the per-store revenue. However, they still have a way to go to return to what I would say is acceptable per-store sales. The ANZ Online business has driven large margin improvements, up 68% in gross margin on the prior corresponding period as we stop the inventory clearance. Revenue was only down 13% as the activity last year drove revenue. It will take time to recover customer in this channel. However, it's positive to be so close to revenue at materially better margin and outlines the future opportunity. Traffic in the first 8 weeks is up 25% as we implement our brand refresh, new tone of voice and focus marketing efforts on the high-value customer. Conversion is more challenging due to cost-of-living pressures. However, this will come back. The U.S.A. gross margin is up 20% with revenue down 13%, outlining the recovery we have made to trading and getting back to the CC USA business that was leveraged and very profitable. Our website in the U.S. is up 68% in gross margin dollars as we stopped the outlet and clearance that plagued FY '23, and partners are flat in both revenue and gross margin dollars as they were a little impacted by the warehouse moving deliveries in July. This recovery was driven by an increase in average sell price of 58% in the first 8 weeks and is now back above ‘22 levels. This shows the customer sees the value in our products, and we'll keep this momentum going. The average sell price is increasing in all regions and channels with ANZ Online the highest. We have rightsized the business for the current demand. Our cost-out program is on track. July and August achieved the cost targets. The new U.S.A warehouse arrangements, mixed with higher average sell price, have bought fulfillments in line with target in July. Wages are already at the required levels and [ with ] other costs of doing business, we have plans to implement the further reduction required. Our focus now is on driving demand through reacting to customer-led learnings around product in-season that our more reactive supply chain [ facilitates ]. We can make money at the current sales levels. Then, as we recover revenue in FY '25 and beyond, there is huge upside with the opportunity to drive store numbers to 120% -- 120% to deliver growth. Moving to Slide 9 and a strategic update, Slide 9 articulates our strategy in a consistent manner that shows the team metrics we are looking to manage and what our targets are. Most of the strategic highlights are aligned with the operational highlights, as a good strategy should, and I'm glad that the metrics and actions are performing so well. As a recap, we are targeting 62% gross margin, which we have historically achieved greater than with the [indiscernible] [ garment ] business and cost of doing business at 50%, including 12 -- including logistics at 12%, sorry. Moving to Slide 10, the business is dedicated to the 481,000 hers that we have in our [ EQ ] system and the many last high-value customers that we are targeting now. Total customer numbers decreased in June as we didn't drive -- sorry, July and August, as we didn't drive discounting. From that, we have lost some of the low-value customers with more of this to come as we focus on the higher-value customers and drive a higher ASP. This customer number, as I've said, is up 25% on '19, when she was spending $340 a year. In FY '24, her spend was $226, and this speaks to the opportunity for us to listen to our lady and deliver on her many lifestyle needs to drive average annual spend back to historical levels. Moving to Slide 11, this shows the positive trends in average sell price and margin are not recent. From the fourth quarter of FY '23, we'll have -- FY '22, we're able to gradually lift ASP 62% and gross margin percent from 43% to 58%, and we achieved this through the strategic implementation of our product and branding refresh. We still have a long way to go. However, we made material progress on what will turn this business around. In line with strategy, we are focused on a higher-value customer, which is impacting unit volumes. However, it is at the higher sale price and margin. Moving to Slide 12, this just shows a snapshot of the elevated essentials and some customer testimonials. In our research, through the first half of '24, we heard a lot that this was the lifestyle she wanted. And when we delivered it to her in April, demand was very strong. Slide 13 outlines the cost-outs I've talked about a lot. I'm committed to driving the cost base of the business to the correct levels, and we've now achieved this and we'll continue our work. Today, as I said, we announced a final reduction in headcount, and we have almost 85% completed the cost-outs needed through FY '25. Slide 15 outlines the financial results on a continuing basis against FY '23 and the pro forma adjusted FY '24 numbers outlined in June. We are now 10% up on that June forecast due to the higher trading margin, which shows the strength of the brand refresh and product changes with fulfillment costs increasing due to the allocation of AASB16 between continueds and discontinueds that I spoke about earlier. But really, there is no increase in ongoing costs. Actually, with the move, it will decrease. This all shows the strength of our actions and the big line is labor costs were $900,000 less than we expected, delivering us a lower cost of doing business. I've consistently said that our path to recovery includes gross margin and logistics recovery and improvements. In FY '23 to '24, we saw huge uplift in those measures. Margin went from 46.3% to 57.3%, an 11 percentage point increase. Logistics went from 33% to 17%. And with the new U.S.A. warehouse arrangement, I'm confident we'll hit the 12%. We're below that in July. Moving to 16, inventory has normalized, and we are in a positive net cash position with $15 million from Avenue and $3.1 million from the equity raise received in July. In FY '24, we only purchased around 80% of COGS for City Chic with the balance sheet -- with the balance of sales [indiscernible] delivered from the old inventory. As I've said, we will be doing this, and it gives me confidence in getting back our revenue and volumes. We have the continued support of our lender with our multicurrency debt facility of $10 million extended to December 2026, and financial covenants have been replaced by 2 cleandowns, one of which we have achieved and the other is within our budgeted cash flow in all scenarios. Moving to Slide 18, we are focused on delivering profitable growth that is sustainable in the long term. We have a brand that has done this for 16 years, and we'll get there again FY '25. I expect the trading conditions to remain volatile. However, there's been a lot of commentary that interest rates will [ leave ] in the U.S.A. in the first half and Australia early in the second half. We expect to continue the very positive average sale price and gross margin trends through FY '25. As I've said, I think it's key that we replace COGS, as it makes a huge difference to our demand. She loves the newness. And more importantly, we're able to respond to what she’s telling us in-season. With this and the continued successful implementation of our strategy, we set financial targets of $142 million to $150 million in revenue and $11 million to $18 million in post AASB16 EBITDA. With the recovery in the second half, especially in the U.S.A., the revenue is expected to be greater than the first. In the mid- to long term, we see the plus market as a huge opportunity to drive revenue in what is the market is expected to grow. All of our teams and our channels are focused on this higher-value City Chic product and customer in this market. And really, we're going to drive her annual spend. As I've said many times, I do see a store portfolio of around 120 locations within the next 3 to 5 years. To finish, on Slide 19, I want to reiterate the key points. We've outperformed the forecast from June by 10%. We've completed our business transformation, including a brand and product refresh, inventory reduction, divestments and right-sized the cost base. And the first 8 weeks of ‘25 have been strong, up 28% in gross margin dollars, and our targets are $142 million to $160 million in revenue and $11 million $18 million in EBITDA. Before I finish, I want to acknowledge and say thank you to Peter for his contribution to us at City Chic over the last 3 years. You have seen us through the most tumultuous and volatile retail environment imaginable. With the restructure now complete and a much leaner business, I support his preference to look for the next challenge. Peter, you've worked so hard and achieved so much with us. Culturally, you’re an amazing presence in the office and a great support and partner to me. I know you'll be successful in whatever you put your mind to. Also, I would like to welcome James Plummer, who will be taking the role when Peter leaves. James has been with us almost 4 year -- just over 4 years, I should say, and recently as Deputy CFO. He comes from a retail apparel background, working in Europe with brands such as Tommy Hilfiger and Calvin Klein. He knows our business inside-out and has the ability to drive a leaner finance team that will deliver outstanding results. James has been driving the cost-out for the business and delivered an excellent result, as you've heard today. I look forward to working closely with you, James, to drive us back to profitability. Lastly, I would like to thank the shareholders for their ongoing support. Thanks, and I will now open up to questions.

Thank you. [Operator Instructions] Your first question comes from Craig Woolford with MST Marquee.

Can I just start with a question about the sales outlook? It's quite a wide range from the top to the bottom. What are the things that will influence each in the bookings of that sales range?

Yes. I think the recovery in the second half is probably the larger one, correct, and how that plays out, especially through the U.S.A.

And I guess related to that, though, so what should we expect on store movements then in FY '25?

Yes, there'll be some [indiscernible] but we're not looking to open a whole lot or to close a whole lot in this year. There's 1 or 2 clearance stores still that need to go. But -- and then I think they might be replaced, right, but we’re not going to look for a big store rollout in ’25. I think it's recovering the continuing -- recovering the partner business in the U.S., recovering our website business in the U.S. and recovering our online business in Australia to more normal sales. I mean the stores will get better, Craig. As I said, they're already at 10% comps now with margins better than that. And I expect that level a bit more to continue, but they do get a little easier comps over the next 10 months of the year. And Craig, really, what we've got to do is cement our brand positioning and our [ trends ] tone of voice that's going to deliver this. We've already seen huge success in the 2 key measures. Keeping them going is what will drive it. I said traffic is up 25% on our website, really showing how much I think we've come back to being a fashion authority in plus. I think we went down a path of the marketplace being every to everyone. I mean, we lost a bit of that fashion edge, and we're really trying to bring that back into both markets in Australia and America. And that really performing is where that range comes from.

Thank you. Your next question comes from Chami Ratnapala with Bell Potter Securities.

I think, as a follow-up, maybe just in terms of that, your expectations for second half to be bigger, maybe how is the online performance stacking for the first 8 weeks and then that gives you confidence that U.S. online turns around faster than Australia in the second half?

I think, look, yes – look, online in Australia has been -- I think I said in my speech it was 13% down, but up 68% gross margin year-on-year. We had a challenging year online last year as we really used it as a main clearance channel, and it did a great job for us. And I think our product delivery through quarter end of quarter 2 and even to winter, I think we're probably not fashionable enough. We are holding onto a bit of the chiffons and the floral prints and we're being a bit [indiscernible] bid to market. As we've changed that and moved into the more versatile pieces, we've seen her responding well. I think the pleasing part is that traffic, in talking Australia, Chami, is up 25%, and we're focused on that and driving that and more importantly, the right customer, not just customer traffic. So I'm very confident Australia can get back to a much stronger level than last year. The comps do become a lot easier because we drove a lot of revenue in the first 8 weeks. Secondly, the U.S. really to be almost the same as 68% up in margin, 70%, it's really done a huge amount of heavy lifting in the first sort of 8 week -- last year and to be able to turn it around, to get that customer spending at the right amount and only just be down in revenue, to me, it shows, once we're in the full swing and we've got marketing working with the product, that online in America would hopefully go back to sort of at least historical levels, if not more, through the second half.

Thank you. [Operator Instructions] Your next question comes from Owen Humphries with Canaccord.

Well done on executing on the guidance statement. Just can you just talk through the pro forma cash balance of your business? I know there's a lot of moving parts just when the money from Avenue came in when there's money coming through from the capital raising. Do I have it right that the pro forma cash balances at June 30, including those things, are at around $22 million net cash?

No. I mean the net position at 30th of June was $3.9 million with $17.5 million drawn. And then post that is the recovery of the further capital raise of about $3 million and then the proceeds from the sale of Avenue that flowed in post year-end balance. So that's sort of the cash flow that sort of [indiscernible] transpired, which is your $18 million plus $4 million, so yes.

Which gets the $22.

Yes.

Yes. Good one. And just around just the discounting, obviously, the margin growth is strong, and we shouldn't extrapolate that for the full year and you guys have given guidance on that. But just when did the veracity of the discounting kind of slow down? My understanding was around the AGM is when you started to see positive signs in the margin from last year.

Good one. Yes. Australia was a little earlier, America around then -- America really didn't through the first half last year. We continued it there and it really didn't [indiscernible] the second half. It was do- Australia -- ANZ was -- definitely July and August were heavy, but it sort of continued to be in September, and it sort of normalized as we headed into summer last year. So the AGM is a good midpoint of those 2, saying Australia is a little bit earlier and America’s probably in the second half. But the second half includes January and February, which were, in both markets, fairly heavy discounted months last year. The other point to that, and I'll give you some more color, mate, we -- as we drop more ranges through Jan and Feb, they really landed in March. April is America and sort of February in Australia, that's when we started to really see recoveries, but we did go pretty hard in that Jan/Feb time as well.

Good one. And just around the working capital balance, obviously, inventories, payables I'm looking at here, just how that will play out if you fast-forward 12 months? Obviously, $31 million in inventory with $37 million in payables. How does that play out when we roll forward 12 months?

Look, we're not giving a cash guide. What we will say, Owen, is that our inventory is fairly normalized, and with the way we've received these payables there or thereabouts, we don't see major shifts.

Good one.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Ryan for closing remarks.

Thank you. It's great to see how we performed in the first 8 weeks and really through the second half of FY '24. I'm very confident, with proper product deliveries and really the shift in the tone of voice and then the fashionability and, more importantly, in the brand as a whole in Australia and getting back to not trying to sell low-priced products all around the world, selling what we do well in Australia and New Zealand and America, that we've done since 2010 in America, 2006 in Australia, I'm very confident we’ll turn this business around. I want to say, finally, thank you again to Peter, good luck to James, and thank you again to all the shareholders for your ongoing support.

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