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

Thank you for standing by, and welcome to the City Chic Collective Limited HY 2025 Results Call. [Operator Instructions] I would now like to turn the conference over to Mr. Phil Ryan, Managing Director and CEO. Please go ahead.

Thank you, and good morning, everyone, and thanks for joining us. I'm Phil Ryan, the CEO of City Chic Collective, and I'm joined today by our CFO, James Plummer. This morning, I will run through the presentation, starting with the business and strategic update. I'll throw to James for a review of the half's financials, and then we'll discuss the outlook before opening up to questions. Moving to Slide 2. Our EBITDA delivered an $8.7 million turnaround in the first half, going from a loss of $5.2 million to a profit of $3.4 million. This came from the strategic actions around customer and product and the execution of our cost-out program. Our trading gross margin dollars were up 8.5%, driven by our higher average selling price, which was 25% up. The performance of the summer assortment in Australia showed the impact of the strategy and given this is a large part of the U.S.A. summer range in the second half, we are expecting improvements in this market. The ANZ business is back to growth, up 2.6% with the second quarter up 8.9%. And our stores have turned the corner with comp sales up 7.5%. The U.S.A. business was down 22.5% with the slower-than-anticipated economic recovery. Our website was flat to the prior corresponding period and the partners were down around 26% as we are comping numbers with avenue products in those channels. Our City Chic product showed 25% growth in the U.S., and this outlines the opportunity in the market as we redefine our range, focus on the high-value customer acquisition and partner learnings to deliver the product that will drive the expected revenue. One key recent partner learning is that Amazon will require materially more than anticipated marketing spend to deliver the forecasted sales. However, it is still very profitable. We have an expert team to deliver this for us and initial reads have been very promising. With a strong team in place to continue the ANZ recovery, the U.S.A. growth will become my focus as we see this as a huge opportunity. The momentum in Australia and New Zealand from the second quarter continued into the first 8 weeks with sales up 30%, driven by a strong online recovery growing at almost 70%. This online traffic-driven recovery shows that the brand is strong and that she is responding to the new product, [ tone of voice ] and marketing campaigns. The U.S.A. was more challenging in the first 8 weeks with higher-than-planned clearance activity for slow-moving winter product impacting our margins and profitability. Given the U.S.A. January and February performance and the increase in spend for Amazon, which was partially offset by additional cost savings achieved, we think it is prudent to amend the guidance and narrow the range to $137 million to $147 million in revenue and $8 million to $12 million in EBITDA. As I said at the AGM, we will continue to rightsize the business to the revenue, and we have identified and are targeting a further annualized $2 million in cost out in the second half of FY '25 and into FY '26. Moving to Slide 5. Revenue was $69.5 million, down 3.6% on the prior corresponding period with Australia up 2.6%. We've stabilized the balance sheet with $12 million in cash and an undrawn $10 million bank facility and inventory is back to a more normal level. Our customer base is stable at 466,000 active customers, 53% of which are now high value. The challenge that we have now is to increase the annual spend through greater frequency. This metric is now at an all-time low, and we only need to see it return to levels seen a few years ago to drive material revenue growth. She has stayed with us and will spend up when she is feeling more confident and as we have the right product for her. In Australia and New Zealand, we can achieve this through our differential ranging and our endless aisle in stores and new lifestyles and category extensions online. In the U.S.A., we need to find more of her. Moving to Slide 6. We are growing the high-value customer base and is now, as I said, 53% of total customers. Our traffic is up 15%, and this trend is continuing. We delivered this result through a focus on winning her back through all touch points in line with our strategy and our NPS at 72 supports this. We are really seeing the new product range improvements and our key metrics of gross margin percent and average sale price support this, but we still have work to do. Our ANZ summer range performed 18% better than the FY '24 summer range. Our trading margin is up 6.6 percentage points, and our average selling price is up 25%. Winter product performance in the U.S.A. was below expectations, and this was the same in Australia as the season before. As we are now selling the ANZ FY '25 summer product in the U.S.A., we are expecting an improved performance in the market. It takes time to make product changes. With the new team and new processes we have in place, we are seeing the results. We have so many learnings on what she is demanding. However, what is really driving change is our return to a fully reactive supply chain. In Australia and New Zealand, we are getting in season styling done in 7 to 10 weeks. We are taking learnings into products already in production and to our new ranges, so we are moving with her demand in real time. To me, this is what a business dedicated to her looks like. Our cost of doing business is 54.4%, just over our target of 50%. And with the additional $2 million annualized savings, we will get closer. The logistics result of 12.3% is a massive improvement, and our wages are down almost 25%, outlining our new business structure. Moving to Slide 7. We have seen the positive momentum from the second quarter into the -- continue into the first 8 weeks of the second half, with total sales up 25% for the period and ANZ sales up 30%. The highlight is the recovery of our website in Australia and New Zealand, up almost 70%. ANZ Online has historically been a key driver of our profitability and to see this recovery is very pleasing. It was driven by traffic improvements, up 45%, not discounts, again, outlining the success of our strategy. The U.S.A. returned to sales growth, albeit below our expectations and due to the higher clearance. Margins were very low, and this materially impacted profitability in the first 8 weeks. Moving to Slide 9. Our strategy is 18 months in and what drove the turnaround in profitability. We still have work to do. However, I know we've taken big steps. At the results 18 months ago when we launched this strategy, I said we need to be an agile, cost-focused better dressing business with an emotional connection to her, adding elevated casual lifestyle extensions from our product learnings, selling high-value garments to a high-value customer. This has historically been our model. And to achieve this, we need to simplify our business and reduce our operating costs. This is still true now, and I believe we are well down the path on delivering on this. We listen to her now more than ever with constant customer feedback through our surveys driving our improvements. Our range has shifted to be better dressing and more [indiscernible] casual, and we are back to an agile supply chain with our costs reduced over $20 million and a further $2 million targeted. The measures of the 3 strategic pillars reinforced this in our first half. Our key measure in amplifying our focus on her was average sell price, and that is up 25%. In revitalizing the product assortment, we set a 62% [ GM ] target, and we're at 59.6%, with trading margin up 6.6 percentage points. And in simplifying our business, our cost of doing business is 54%, down 8 percentage points. As I've said many times, we have more work to do, but we are not standing still, and we are on the right path. Moving to Slide 10. The key thing on this slide is the opportunity that average annual spend is to our business. We're at $231 now. And historically, this has been over $300. As we come out of this economic cycle, I'm sure we can drive an increase in annual spend in Australia and New Zealand as she's not left us, and she is now more engaged in the brand than we have seen for years. All of our touch points, including social, are telling us this. And once she's ready to spend, I'm sure our annual spend can get back to historical levels. Our store count has reduced by 4 since the AGM as we've closed or are relocating some poor performing clearance stores. We expect this to be closer to 77 at the full year as we have secured [ 5 ] stores for the half, including 3 new full-price stores in locations we have historically traded well in and 2 clearances that we have relocated. Slide 11 shows the shift in our product direction to be more in line with what our target market is demanding. [indiscernible] and the postcard style prints have been a huge winner this summer, and we have repeated them into 2 or 3 times in some styles. And the customers, I can tell you, are loving it. One even said to us, thank goodness, there are no more [ Stefan Floral ] dresses. Looking at Slide 12, we've achieved our $20.3 million in cost outs. We had a target of a further $11.5 million in cost out in FY '25. And in the first half, costs are down $7.2 million already. Some of this is volume related. However, to be so far ahead is pleasing. Given the revenue forecast, we are looking at reducing our cost a further $2 million annualized, and these have been identified and plans are being put in place through the half. I will now throw to James to discuss the financial slides.

Thanks, Phil, and good morning, everyone. As Phil has already touched on, we are very pleased with the $8.7 million turnaround in our underlying EBITDA, driven by our stronger margin, improved fulfillment costs and overall savings in our cost of doing business. While top line sales were down 3.7% compared to the first half in FY '24, they were higher quality sales and delivered a 4.3 percentage point increase to our financial margins. Our fulfillment costs fell by 15.7% half-on-half and now only represent 12.3% of sales, down from 14% of sales in the first half last year. The key driver of these cost savings was our strategic shift to a new U.S. fulfillment provider at the end of the last financial year. Thanks to our team's efforts, the new facility is performing well and is much better suited to our more agile business model. As we spoke about at the start of the financial year, we have been looking to invest more in our marketing campaigns and to target higher-value customers. While the marketing spend has gone up compared to the first half last year, it remains in the high single digits as a percent of sales for the period. The most material savings in our cost of doing business was in wages, which are down almost 25% half-on-half, saving us $4.8 million. These savings are a combination of better roster management within our retail operations team and also the outcome of the various business restructurings we have undertaken over the past year. Our cost-out initiatives have seen a lot of other savings across various cost categories and brought our total underlying cost of doing business down by $7.2 million or 16% half-on-half. Turning to the balance sheet on Slide 15. And you can see that the various corporate activities we undertook at the end of the last financial year have helped us stabilize our balance sheet and put us in a position to start to grow again. We fully repaid our borrowings from year-end and have net cash of $12 million at the end of December. Our $10 million debt facility remains undrawn, and we have met all clean down requirements for this financial year. Our inventory position remains at normalized levels, and we continue to monitor our future buy plans carefully, looking to only replace [ COGS ]. Our trade and other payables have also returned to more normal levels at the end of December after being higher at June '24, driven by all the corporate activity that the business was undertaking at the time. I will now hand back to Phil to talk through the outlook.

Thanks, James. Our focus is to deliver profitable and sustainable long-term growth, and I've outlined so far the strategy that will achieve this and the big steps we've already taken. The ANZ business is expected to continue on its current trajectory as our strategic initiatives continue to pay off. The positive trends seen in average sell price and gross margin percent are expected to continue, and we are targeting a gross margin of 62% in FY '26. We have 5 new stores signed for the second half of FY '25 and more expected into FY '26. We have a network plan for around 120 locations over the next 3 to 5 years in the Australia and New Zealand market. The U.S.A. sales remain volatile with a slower-than-expected economic recovery and as we rebuild our customer base with all the reducing promotions. We do expect improvements as the summer range that was successful in Australia is put to market over the upcoming months and we are also improving our reactive supply chain in the U.S. to reduce the forward buying and follow the customer with expedited logistics options and small volumes from factories. My focus is now on the U.S.A. and the recovery and delivering on a path to future growth. I recently spent 2 weeks in the U.S.A. looking to build out a team on the ground to support our strategy. And potentially, we will be trialing a physical presence and looking to implement new partners and grow the current ones where we can. This will take time. However, I know that the product has resonated when we got it right, and I see a path to achieving that again with a more reactive supply chain. We will focus our marketing on brand engagement in Australia and New Zealand and targeting the acquisition of high-value customers in the U.S. We've learned that to drive the volume of sales we've had with Amazon, we'll need to spend more on marketing than we initially forecast, as I've already said, and this will drive sustainable growth in the channel. Given the profit impact of the higher-than-anticipated U.S.A clearance in January and February and the required increase in the Amazon marketing spend, which we were able to partially offset with cost savings, we think it's prudent to amend and narrow our guidance to sales of $137 million to $147 million and EBITDA of $8 million to $12 million. There is a large opportunity in the Plus market, and we are well positioned to take market share in what is a growing market. The turnaround in profitability for the half is really a highlight and to me, further outlines the success of what we've achieved with our strategy. I know we have work to go, but I'm very proud of what we've achieved so far. I'd like to thank the team for their commitment to our business over the half. It's really been great to have some wins and to see those things come to light. Lastly, I would like to thank the shareholders for their ongoing support. Thank you. And operator, I'll now open up to questions.

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

[indiscernible] execution on the turnaround. The question I have here is just to clarify the revision in the revenue guidance. Is that related to the slower ramp-up in U.S. sales?

Yes. And the volatility we've seen, Owen.

In terms of week-to-week or just in the last kind of couple of months?

Yes. The last couple of months have been very volatile for us. I think I said during that period, we were not only on margin, we haven't really seen the performance of the winter product clearance do what we wanted it to do. And from that, we're revising our guidance.

Got you. And then the second half implies kind of 10% to 27%, and then you guys have done kind of 25% in the first 8 weeks, so great result. Just talk through the variance there around there's a big range around around what to expect for the next kind of 18 weeks?

Yes. Look, Owen, we have been very happy getting the 25% in the first 8 weeks. And as we said, the U.S. -- Australia has really been the shining light and our online recovery at 70% has been very strong. We do -- I think you called the numbers of 10% to 27%, which is the revenue growth we're anticipating in the second half in the range. And a lot of that volatility again comes after what we've seen in the first 8 weeks in the U.S.

And then just around that 30% in ANZ, so online is running at 70%. Can you kind of break down what the store growth is underneath that 30%?

The store growth is about 7% for the first 8 weeks.

7%, is it?

Yes.

And then the step-up in marketing, is that targeted Australia? Or is that still targeting the U.S.?

No. The learnings I got, as I tried to explain, Owen, Amazon is a new partner for us where we're on a first-tier wholesale arrangement with them as we've learned more and more and the revenue sort of has gone and been part of the volatility, a big part of the volatility. We're learning new things every day. It is a high-margin channel for us. And what we're learning is that we have to allocate money towards the marketing of that product, even though it is a wholesale relationship for it to sell through and for then Amazon to drive more sales through that, and that is where the focus of the money is in the marketing.

And is that expected to step up in the second half then?

We don't expect it to step up. I think we see it being a little bit up on what it was in the second half last year, like 8% to 10%, but not materially.

And just a comment around the potential to open up physical stores in the U.S., I guess that's new information to me. Is that -- do you guys have a time frame in mind? Or is it more an FY '26 story? Just talk us through that anecdotally.

Yes. I think to start, what I've realized around gaining real foothold in a market is you need to sort of offer an omni experience to a customer. The idea of e-com being a growth channel forever, I think, has had [ it's say ]. I think a physical presence can take a lot of different states. We might go and put an activation installation or some way around markets. We see we have strong customer base, see how we can engage her and learn. We're not looking at rolling out stores in the next 12 months. I think it takes that longer period to really analyze and lease lead times in the U.S. for at least 12 months. So really, for me now, it's about how -- where she wants us to be when she wants to shop and how do we get a presence fast to sort of supplement what we're doing now online and with partners and then start to really review what stores in the U.S. could look like. And that is not -- that doesn't happen fast, Owen.

[Operator Instructions] Your next question comes from Chami Ratnapala with Bell Potter Securities.

Just on the guidance downgrade, I mean, I think I heard you saying the GP margin volatility is also a factor. As a follow-up, maybe perhaps just any sort of further explanation on how margins are tracking versus to first half? How much are they down by or sort of give us a feel for -- I mean, you did say that the U.S. is seeing that clearance activity. But overall, there are margins at roughly.

I think the headline is Australia is now 80% of our business, and it's on track at a margin level, and that's driving the top level of performance. The U.S., as we said, the winter product wasn't as strong as we would have liked, and we had to clear it harder than we thought through January and February, and that led to margin impact, and that's really where nearly all of it is, Chami.

Yes. The expectation for the U.S. summer product is to return to the normal margin targets. It was really that clearance in January and February that's affected us.

So what gives you less confidence for the next sort of less than 5 months to looking at the guidance range -- revised guidance range?

Look, the confidence comes from the changes we made in Australia and the growth we've seen in the first 8 weeks and currently in sales, especially online and continuing that with all parts of our strategy and more importantly, the results in sales, average sell price and gross margin percent in Australia. Then in America, we need to shift the product mix out of that sort of winter product that hasn't been good for us and resulted in the January, February period results and then move to the summer product, which has been successful in Australia and trade it back at higher margins.

That's great. And just in terms of the U.S. -- sorry, Australian stores, new stores signed, are these going to be like previously held sites, previously closed ones or new sites? Or just give us a view.

Yes, that's great, Chami. That's where my head is at. We're very lucky because we do have a network of store locations or centers that we had previously traded well and that we had closed during the last sort of crazy 5 years. And the ones we are opening are in those ones, I can say it because there'll be public information. It's Garden City in Queensland, Liverpool and [indiscernible] and they are all locations that we have historically traded well in. And more than that, there are areas where we are currently underrepresented.

[Operator Instructions] We're showing no further questions at this time. I'll now hand back to Mr. Ryan for closing remarks.

Yes. Thank you, everyone, and thank you for joining the conference call. I'll just finish by saying to be turned around almost $8.79 million EBITDA shows the strength of our strategy. The trading margin improvement and the comp stores getting above that 7%, followed by the good momentum in FY '25 with our Australian business up 30% and total sales up 25%, really gives me confidence into this half. Thank you for joining. And once again, thanks to our shareholders.

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