City Chic Collective Limited (CCX) Earnings Call Transcript

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

Thank you very much, and good morning, everyone, and thanks for joining us. I'm Phil Ryan, CEO of City Chic Collective, and I'm joined today by James Plummer, our CFO. This morning, I'm going to run through the presentation that we lodged with the ASX this morning, starting with the key highlights. I'll throw to James for a review of the year's financials, and then I'll discuss the outlook before opening up to questions. Moving on to Slide 2. Our $15 million EBITDA turnaround in FY '25, going from a loss of $8.5 million to a profit of $6.5 million is very pleasing and was driven by our strategic execution around customer and product and the disciplined reduction in our cost base. This year was a big step forward for City Chic, and we now have the platform to drive revenue recovery. The momentum in our Australian and New Zealand business has continued with sales up 15.2% in the second half and 8.3% for the full year. All channels are delivering results from the successful implementation of our strategic plan. We've executed on our product improvements, and I'm pleased with our progress so far. However, I know we still have work to do. We are consistently learning from her and making in-season improvements in our assortment to drive revenue. We've sharpened the focus on high-value customers with pleasing increase in customer numbers, and we are now concentrating on driving higher annual spend while maintaining the momentum in our customer acquisition. Stores momentum continued with comparative sales up 10.3% in the second half and online revenue up 17.8%. We delivered a 26% increase in website traffic in Australia and New Zealand, outlining the success of our strategic brand refresh. In what has been an unpredictable political and economic environment, the U.S.A. business is profitable. This is due to the strategic actions taken, which delivered us a lower and variable cost base that leverages [Technical Difficulty] operation to deliver the product to market. Sales of City Chic products were up 25% for the full year in the U.S., outlining the opportunity for our brand in the market. Our website grew 16.8%, driven by material average sell price increases through both starting price increases and reductions in discounting with City Chic partner sales growing almost 30%. I'm very pleased with the U.S.A. result given all of the tariff and other volatility we've seen in the market. As the U.S.A. is profitable, we've cautiously commenced purchasing the inventories into the market again, although we do plan a further reduction in inventory in the first half of FY '26. We are working with our suppliers to mitigate the impact of the current tariffs and anticipate a 5% to 8% cost increase. We've seen retail prices raised by all competitors in the market from 20% to 30%. And to offset the cost increase, we are following this trend. Our trading gross margin dollars were up 9.1%, driven by higher average sell price, which was up 14.2%. Across these two key metrics, we have driven improvements in all markets and in all channels. We've achieved our cost-out target of $22.3 million and that we have identified a further $1 million in cost out that we're targeting to deliver in full in FY '26. As I previously stated, we will continue to right size the business to align with the revenue, and we are now focused on driving revenue through our strategic actions. The momentum in ANZ from the second half continued into the first 8 weeks with sales up 8.7% and the U.S.A. continuing to trade profitably. We're expecting to be cash flow positive in FY '26, and this will commence in the first half. We have the liquidity to deliver on our strategic momentum and execute our growth plans. Moving to Slide 5. Revenue was $134.7 million, up 2.3% on the prior corresponding period. Trading gross margin was up 350 basis points to 59.7%, making strong progress towards our 62% goal, and this step forward in margin is very pleasing. Our customer base is growing. We now have 502,000 customers, 54% of which -- of which are high value, I'm sorry. We are focused on increasing annual spend through greater frequency. We only needed to return to levels we've seen just a few years ago to drive material revenue growth. She has stayed with us and will spend up when she's feeling more confident. We've stabilized the balance sheet with $8 million in cash and $5 million undrawn on our bank facility, and we have the liquidity the business requires. Our inventory controls and improved buying process have delivered with 12% less inventory while still delivering sales growth. Moving to Slide 6. In FY '25, traffic was up 14% on the prior corresponding period. We delivered this result through tactical advertising focused on winning back our high-value customers through all touch points in line with our strategy. The momentum in the key product metrics has continued with sell price up 14% and very pleasingly, the sell-through up 18% on the prior corresponding period for our product. I know we still have work to do, but it's great to see both of these metrics go in the right way. It takes time to make product changes and with our new team now having a full season behind them, they are crystallizing the learnings, and we are seeing the results. Our core and repeat assortment is now delivering almost 50% of our revenue. Our girl knows what fits her body and wants consistency and predictability in our range, and we're delivering on the shapes and fabrications she loves. As we increase the volume of key items and repeat shapes through listening to her, we will drive revenue growth. Moving to Slide 8. Our strategy has been consistent for 2 years and is what's driven the turnaround in profitability. Simply, the strategy is to focus on our high-value customer segment through elevating our product assortment while simplifying the business to drive down costs. We've executed on our plans and have seen strong results in all the key metrics with the momentum expected to continue in the product and customer pillars. I know we still have work to do, but we have a clear path to becoming cash flow positive. With three interest rate reductions and the highest consumer confidence seen in 3.5 years in Australia and New Zealand, we expect strong revenue growth through FY '26 as we continue to deliver against our strategy. Moving on to Slide 9. In Australia and New Zealand, online revenue continues to be the largest and fastest recovering part of our business at 52% of our sales. The per store revenue is the opportunity and with 8.4% comps in FY '25, we have strong momentum in our store base. We're still delivering 22% of revenue from the U.S.A. and due to our strategic cost-out actions, this is now profitable in the lower and variable cost base. We had a net increase of two stores in the year and opened six in the second half with some low turnover stores closing in the first half, and we will continue this discipline with underperforming stores as leases expire. Moving to Slide 10. Retail has evolved. Every touch point needs to represent who the brand is and be clear to customers on what to expect, then product, team and the store environment need to deliver on that brand promise. Stores seem to be an experience to be opened, refined and easy to shop with predictability in the lifestyles that are delivered to market. This page shows our new concept store in Wetherill Park and the customer response has been overwhelmingly positive. The concept contemporizes our store experience and aligns City Chic with best-in-class retailers. We've secured four additional sites in the first half of FY '26 in locations where we know we've traded very well historically. These include Highpoint in Melbourne and Garden City in Mount Gravatt, Queensland. And as I've stated, there is an opportunity for up to 120 stores in the Australia and New Zealand market. Moving to Slide 11. We've continued to receive positive reviews on our range improvements from our customers, and we're now getting this feedback regularly, and that's what's showing in the range sell-through improvements. The most pleasing aspect is that as we learn more what she wants from us, the learnings compound and we increase the revenue. The quote that I think best outlines the strategy and how successful it's been is from an influencer, Chloe Vic. She's the middle one on the right. You can read it. She said, I'm learning City Chic, they've had a massive rebrand and whoever the designer is, I'm obsessed. She's been on the journey with us and represents a shift in the perception of our brand due to the execution of our product and customer strategies. Slide 12 shows the continued evolution in our product and the extensions in our lifestyle mix. With over 300 styles launched every month, we cover so many lifestyles, and this is just a small cross-section of these. In stores, we presented contemporary and family lifestyles with trend, lingerie, denim and graphic tees and our occasion dresses. And what we've done with our new store environment, it really allows us to consistently have a home for these lifestyles all through the season and then for her to be predictable and easy to shop and know where to go in the store. Online gives our brand the opportunity to offer extended lifestyles to our customer. One example shown here is our wide footwear category. We had done this historically and it returned in the second half of FY '25 and has been doing much better than we thought, which is really pleasing. We're implementing many other lifestyle additions, the majority of these we've had success with historically and some new ones as we see important to our customer. We've refined our product mix in these lifestyles in line with our strategy, and I know this is what will drive our continued online growth. Looking to Slide 13, we have delivered the $22.3 million cost out and have reshaped the business. The entire team have done an amazing job, and I'm very grateful. On the FY '25 cost of doing business, there's a further $700,000 in savings based on annualizing the $2 million savings from FY '25. And as I said earlier, we're targeting another $1 million that we expect to achieve in full in FY '26. As I have stated, we will consistently review and align our cost base to the revenue levels and take all required actions. I'll now throw to James to discuss the financials.

Thanks, Phil, and good morning, everyone. As Phil has already touched on, we are very pleased with the $14.8 million turnaround in our underlying EBITDA, driven by our stronger trading margin, improved fulfillment costs and overall savings in our cost of doing business. In the first half, we were able to build on our margin, but the top line sales slightly declined. In the second half, we have been able to continue with the stronger margins, but also build good momentum in top line sales, lifting us to overall sales growth of 2.3%. The second half momentum was really driven by Australia and New Zealand, which grew 15.2%. In the U.S.A., it is important to note that the revenue from the City Chic branded product grew 25% across our own website and partner business. While overall revenue was down in the U.S.A., this was materially impacted by the partner business, which was comping the sale of Avenue branded product in the prior year. As we spoke about at the half year, we have looked to invest more in our marketing campaigns and to target higher-value customers. We have seen pleasing results, particularly in ANZ as we continue to transition from lower value discount customers to new high-value customers. While the marketing spend has gone up compared to the prior year, it continues to remain in the high single digits as a percent of sales for the period. Our cost-out initiatives have seen savings across almost all cost categories and brought our total underlying cost of doing business down by $11 million or 13% year-on-year. The most material savings were in wages, which were down 16.5%, saving was $5.7 million. The savings are a combination of better roster management within our retail operations and also the outcome of the various business restructurings we've undertaken over the past 18 months. Turning to Slide 16 -- sorry, turning to the balance sheet on Slide 16. You can see that the various corporate activities we undertook at the end of the last financial year helped stabilize our balance sheet and put us in a position to start to grow again. We have reduced our drawn debt by $12.5 million, and our trade and other payables have returned to more normal levels after being higher in the prior year, driven by the various corporate activities. We have managed our inventory and cash flow balances tightly over the past year and continue to build on our strong processes and controls. We believe we are well positioned to execute on our strategic plans and drive growth. I will now hand back to Phil to talk through the outlook.

Okay. Thanks, James. Our focus is to deliver profitable and sustainable long-term growth. We will achieve this through the continued execution of our product and customer strategies. In the first 8 weeks of the financial year '26, sales have exceeded our plans, which is very pleasing. This has been achieved with a continued improvement in our gross margin percent coming from further increases in our average selling price. Sales in Australia and New Zealand have continued the momentum from FY '25 and are up 8.7%, and this is expected to improve into FY '26 as the strategic execution compounds. The product is resonating with our customers, and this consistent feedback gives me the confidence we will continue this momentum. The U.S.A. business continues to be profitable due to the variable cost base we established this year. As communicated, due to political and economic uncertainty, we expect a reduction in U.S.A. revenue in FY '26 and accordingly, have reduced our inventory investment. In the first 8 weeks, we delivered significantly less styles than we did last year. And without this newness, our wholesale partner, Amazon decreased with our websites and marketplace partners holding the year, which includes Macy's, Nordstroms and some other, which is a very pleasing result. With the variable cost base, the USA business is leveraged, and we can profitably withstand sales volatility and be ready for future revenue growth. Our focus is now on driving revenue growth, especially in Australia and New Zealand. And to achieve this, we are not relying on just being better. We have multiple building blocks that we know will get us there. The first block is the growing comparative sales in Australia and New Zealand as our strategic actions drive momentum. Increased customer frequency will be driven through lifestyle and category improvements and new customers through focused advertising and reengaging our lapsed customers. This will be achieved in an environment where consumer confidence is back at a 3.5-year high and three recent rate cuts. The second block is new stores. With six to eight expected in FY '26, we already have four locked in for the first half. We will also annualize the stores we opened in the second half of FY '25. The third block is something that's very exciting, and our customer has taken to it much really, really well. We implemented our store-to-door across our retail network. This allows our in-store customers helped by our team to purchase from our full assortment online directly through our point of sale. Our store teams are incentivized to drive it, and they offer to ship it to the customer for free. In only a few months, it is driven the equivalent of 5 stores volume on a weekly basis, and that is truly incremental to our in-store sales and at no additional cost. I was in store, and I've seen two or three sales go through just this week, which is really exciting because as we make these process improvements and learn and then train the team further, we'll be able to continue this growth. The fourth block is our Australian partners. We launched on the Myer Marketplace in August, and we expect this to drive similar sales, maybe a little bit more than our current ANZ partner, the Iconic. On top of this, the Iconic will annualize its growth from last year. And finally, we're launching on the Belk Marketplace in the U.S.A., and we've secured the partnership and are targeting a launch through the second quarter. As all these initiatives annualize, I know we can deliver compounding increase in revenue, and we'll be able to identify further building blocks as we gain that momentum. It's really great to be back driving revenue opportunities. We will execute on the further $1 million cost out and annualize the additional $700,000 of cost out savings through FY '25. With the support of our lender, we've stabilized our liquidity position with $8 million in cash and a $5 million undrawn on our facility that's in place till December '26. The covenant is to make two clean downs on a yearly, and we made the first of these in July. With the revenue building blocks and cost-out initiatives, the business is on track to deliver positive operating cash flow in FY '26. I would like to thank the team for their work in driving this strategic turnaround. It's been so good to have seen the wins and to share the success of what we're doing together. Lastly, I'd like to thank the shareholders for their ongoing support. And thank you. I will now open up to questions.

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

Looks like you guys are making some serious progress since FY '26 so well done. Just looking at that outlook statement there, the first 8 weeks up 9% for ANZ. Can you maybe just break that down between online and I guess, offline?

Yes. Look, it's a little bit -- they're both around that, Owen. Online is a little bit better, 1% or 2%, stores are a little less. So they're both within one of that. So they're fairly consistent.

And just noticing the commentary around operating cash flow positive in FY '26. Just to understand around the free cash flow, like is the expectation that you guys will return given the cost savings, given the growth, given the margin benefits that you will be kind of cash neutral through FY '26?