A standout amongst small caps this earnings season to date was specialty apparel retailer, City Chic Collective (ASX:CCX), which reported 21 per cent growth in 1H20 underlying earnings before interest, taxes, depreciation, and amortization (EBITDA) to $19 million, well ahead of market expectations and triggering solid upgrades to consensus forecasts.

The result reflected management’s strong execution of the global e-commerce expansion strategy with online sales growing 100 per cent (more than 50 per cent penetration), largely driven by the US where sales tripled (now a third of the business). Early signs of the Avenue acquisition are encouraging, further increasing our confidence in CCX’s long growth runway.

Key 1H20 result highlights included:

• Sales grew 39 per cent to $105 million (includes 11 weeks from Avenue);
• Comparable sales up 11.3 per cent (cycling 11.4 per cent in the prior period);
• EBITDA (pre-AASB16) up 21 per cent to $19.1 million (18.2 per cent margin);
• Store sales flat (marginally negative comps) against tough Australia and New Zealand conditions;
• Online sales grew 100 per cent to 52 per cent penetration (36 per cent in 1H19);
• Australia and New Zealand sales grew 10 per cent to $70 million on the back of market share gains;
• US sales tripled to $35 million driven by online expansion and acquisitions;
• Active customers now over half a million globally; and
• Encouraging early signs from Avenue – restocked, average price lifted, trading profitably.

CCX is an Aussie small cap which appears to be successfully exporting its business model offshore, capitalising on the e-commerce structural growth trend and controlling its own destiny. We remain happy investors and look forward to the continued growth story.

By way of background, CCX is an ASX-listed specialty retailer of plus-size women’s apparel with a market cap now approaching $700 million. The company’s trading brands are City Chic, CCX, Avenue and Hips & Curves. Speciality Fashion Group acquired the City Chic brand and its 21 stores in Australia and New Zealand back in 2007. In 2018, Mosaic Brands (ASX:MOZ), formerly Noni-B Group (ASX:NBL), bought Speciality Fashion’s portfolio of lower growth brands (Autograph, Millers, Crossroads, Rivers and Katies) for $31 million. This deal recapitalised Specialty Fashion and paved the way for the City Chic management team to take over and execute against an exciting online global growth mandate (Specialty Fashion was subsequently renamed City Chic Collective).

CCX is strategically targeting an underserved market opportunity estimated to be worth north of US$50 billion globally. Australia and New Zealand, which represented two-thirds of CCX’s 1H20 sales revenue, has a plus-size women’s market valued at around $1 billion (implies CCX has c.12 per cent Australia and New Zealand market share). The US prize is significantly greater, worth in excess of US$25 billion (US was roughly one third of 1H20 sales, so CCX’s share is well below 1 per cent).

The company has adopted an omni-channel retail model, selling its products via physical stores in Australia and New Zealand (107 stores as at 31 December 2019) and online globally. To a lesser extent, CCX also sells through marketplace and wholesale partnerships with major US retailers, Macys and Nordstrom, and through wholesale partnerships in Europe with ASOS and Zalando. Online now accounts for more than half of total turnover and should increase further in prominence as the global e-commerce expansion strategy gains momentum.

In October 2019, CCX bolstered its US expansion strategy with the US$16.5 million acquisition of Avenue’s e-commerce assets. Avenue was a US-based speciality retailer of plus-size women’s apparel which entered bankruptcy in August 2019 and has since closed 250 stores across the US.

CCX has identified real strategic value in Avenue’s online customer base. Having restocked the business ahead of the busy Black Friday/Cyber Monday sales period in November, CCX will now turn its attention to improving the product offering, lifting the average sale price, reducing heavy discounting and promotional activity, internalising the supply chain and cross-selling existing brands into the network. Early signs have been encouraging with less revenue leakage reportedly occurring relative to management’s previous predictions.

With the US platform now set, we expect CCX to push further into the UK and Europe over the coming 24 months. The beauty of the e-commerce model is that it scales very well and requires significantly less capital than a store roll-out program. We acknowledge that global expansion strategies are not without risk, however CCX have executed well and we like their focused approach to an underserved market segment.

On valuation, CCX is trading on 13.5x FY21 EBITDA which we view was undemanding for the growth profile (32 per cent 3-year EBITDA CAGR) and upside risk to consensus forecasts.