Why Catherines is a great fit for City Chic

Dominic Rose

Montgomery Lucent Investment Management

City Chic Collective (ASX: CCX) has been nominated as the ‘stalking horse bidder’ for the e-commerce assets of Catherines, a US women’s plus-size fashion chain. The Montgomery Small Companies Fund is an investor in CCX, and we like what we see in this latest move by the company to execute its global digital growth strategy.

Catherines is a well-established plus-sized women’s apparel retailer in the US which will deliver significant scale across the existing US online platform, should CCX’s US$16 million bid succeed.

Going after a $50 billion+ addressable market which remains relatively underserved, CCX has a substantial global growth opportunity ahead. Further, the pandemic is providing strong tailwinds for structural winners like CCX, accelerating the migration towards online at the expense of debt-stricken bricks and mortar retailers…so expect more distressed asset sales to come to market.

To best position itself to take advantage of market dynamics, the company has strengthened its balance sheet with a $90 million equity injection. In addition to assessing M&A opportunities to fast-track the digital growth strategy, management have also been busy mapping out a European expansion plan. And the e-commerce platform by design accommodates rapid growth – it is nimble, capital-light and globally scalable. As investors, we remain excited about CCX’s growth potential.

Key details are:

  • After a competitive process, CCX has been nominated as the ‘stalking horse bidder’ for the e-commerce assets of Catherines from the US-listed Ascena Retail Group Inc. (NASDAQ:ASNA) which has filed for Chapter 11 bankruptcy.
  • Catherines is a US-based speciality retailer of plus-sized apparel, targeting mature value-conscious women. Founded 60 years ago in Memphis, Tennessee, the network comprises 300 physical stores located across 44 US states – all to be closed through the bankruptcy process.
  • Over the 12 months to April 2020, the business generated online sales of US$67 million, representing around one-third of total sales, and online traffic of 22 million. Online has been growing strongly during COVID-19 restrictions, however, the bankruptcy process and store closures are expected to materially reduce digital turnover.
  • The sales process involves an auction to be held in around two months’ time. To secure the assets, CCX’s ‘stalking horse bid’ of US$16 million must be the highest offer. Note, the company may have to increase its offer if another party emerges with a superior funded bid. Otherwise, CCX takes the prize and the deal completes in late 3Q or early 4Q 2020. Stalking horse bidders typically triumph under this process considering they benefit from more time to work on an ownership transition plan and have access to a break fee.
  • The strategic rationale for the acquisition is to materially expand and broaden the US plus-size customer base and to fast-track digital growth. With higher customer penetration in the South and Mid-West, Catherines strongly complements the Avenue deal (October 2019) which is North-East focused. Additionally, CCX sees cross-selling opportunities across the portfolio of brands.
  • CCX’s successful Avenue acquisition provides a blueprint for further e-commerce M&A and in comparison, Catherines is expected to be a relatively seamless integration exercise. Key elements of the integration plan include restructuring the target into a leaner operating model, stabilising the brand as e-commerce only, integrating the supply chain, logistics and digital platform, and improving customer experience. Lots to do, but following a similar path to Avenue.
  • Assuming 25 per cent sales leakage implies Catherines contributes approximately A$70 million sales revenue and $13 million EBITDA at 18 per cent margins – this boosts FY22 EBITDA by roughly 25 per cent (based on pre-deal consensus estimates).
  • CCX also pre-released FY20 results, with sales revenue of $195 million (up 31 per cent on the prior period & 0.4 per cent comparable) and underlying EBITDA of $29.3 million (pre share based payments), 5 per cent ahead of consensus at $28 million. Online sales grew 96 per cent to $127 million, representing 65 per cent of total sales (even higher annualizing Avenue). This is solid result against a challenging macro backdrop, highlighting the strength of the omnichannel model.
  • The equity raise comprised a fully underwritten $80 million institutional placement and a $10 million SPP, priced at $3.05 per share (4.7 per cent discount to prior close). This placement increased shares on issue by roughly 13 per cent. After funding Catherines (A$24 million), the company would have in excess of $60 million capacity for growth initiatives.

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Portfolio Manager
Montgomery Lucent Investment Management

Dominic is Portfolio Manager of the Montgomery Small Companies Fund – a small-cap Australian equity fund investing in 30 to 50 high quality, undervalued small and emerging companies with strong growth potential. The fund invests outside the ASX100.

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