Built up savings during the pandemic contributed to an 18-month period of robust growth in early 2021 for online fashion but the fall from those highs have since brought online retailers to their knees. Inflationary pressure, reduced discretionary spending and depressed customer sentiment carried over to 2023 have pushed the fashion industry over the edge. Not even the plus-size women’s fashion segment could climb back from the fall, though once it was named one of the fastest growing fashion segments in Australia.
As one of the dominant players in the plus-size industry in Australia which was worth $1.2 billion in 2022 according to market analysts IBISWorld, City Chic (ASX: CCX) is among those taking the biggest hit. Group sales for the 45 weeks to 14 May 2023 are reported to be down 15.2% to $262.2 million compared to the prior corresponding period (pcp), and this is translated to gross margin which decreased by 18.8 percentage points of revenue on pcp.
The US segment impacted the revenue decrease as it transitioned to a new third-party logistic facility in March that resulted in more than anticipated reduction of promotional activity to avoid a backlog and excessive delivery times. Partner activity was also impacted during the transition period as available product lines were reduced.
As all markets entered new seasons in Q4 FY23, City Chic reduced promotional activities in the UK and ANZ with the hope of generating organic sales from seasonal clothing demands, but consumers are not responding as expected. Promotional activity in April was back to a normal rate and had improved ANZ sales, however, the Company cites UK operating conditions have remained exceptionally challenging and heavy discounting is required to drive demand.
City Chic is currently undergoing a strategic review focusing on its online and international businesses with the assistance of GNG Partners as external advisers to determine the most efficient pathway for returning to profitable growth.
Commenting on trading, Phil Ryan, Chief Executive Officer and Managing Director of City Chic said: “Operating conditions have remained challenging, resulting in the continuation of strong promotional activity across the market.
“We responded to drive demand and clear excess inventory lines, focusing on converting inventory into cash while reducing costs. After the disruption to our supply chain in March it is pleasing to see revenue improving through April and May especially in the US.”
Comprising 90 stores across Australia and New Zealand (ANZ) and websites operating in ANZ, the US, the UK and Europe, City Chic is a collective of fashion retail brands such as City Chic, Avenue, Evans, CCX, Hips & Curves, Fox & Royal and Navabi.
A part of its strategic review outcome, City Chic has decided to accelerate its inventory unwind, focusing on Europe, the Middle East, and Africa (EMEA) markets given the high number of excess inventory in those markets. This inventory reduction plan is expected to drive cash flows and reduce the inventory balance at the end of FY23 to less than $100m. Though so, margins are likely to remain soft through H1 FY24.
City Chic also plans to simplify its logistics by closing down seven warehouses with two further closures due in the next 3 months, simultaneously completing the transition to an automated third-party logistic facility in the USA in March. These initiatives are expected to deliver annualised savings of approximately $10m, helping combat inflation and return fulfillment costs to 19-20% of sales.
City Chic’s strategic approaches have yet to convince its lenders to keep the faith in the business, as an unnamed lender has begun calling in the retailer’s debts. City Chic announced a staged reduction of its debt facility from $46.5m to $21.5m by the end of FY24 together with the extension of current covenant requirements through Q1 FY25. It has put City Chic in a limited funding position compared to when the Company had a $60m debt facility in FY22.
With cash at bank of $22.1m, statutory NPAT loss of $27.2m and inventory provision in EMEA worth $19.1m as reported on its H1 FY23 result, free cash flow won’t be enough to meet lender demands without adverse effects on City Chic’s business. As at 1 January 2023, it had drawn $35.5m under its debt facility which it will need to be addressed most likely through third-party financing or raising capital.
Clara is a Business Reporter for The Sentiment.
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