Even though City Chic’s share price shot up by 70 per cent after releasing its annual reading update on August 28, financial analysts at investment bank Citi believe “there is more to go” for the plus-size fashion business. Nearly two weeks on, City Chic’s (ASX: CCX) share price has fallen from its recent peak of $0.17 to $0.14, but Citi analysts indicate the effectiveness of the business’s turnaround will be seen at the latter end of FY25. The investment firm is projecting a $0.25 target price and upgraded its rating to buy, adding that it does come with a high risk.
We believe that the company is undervalued and that its growth potential is substantial.”
This statement reflects a bullish outlook on the company, CCX, and its potential for future growth. The investors are optimistic about the company’s performance and believe that its current valuation is too low. Here’s a breakdown of the key arguments supporting this bullish outlook:
“This means that the company’s profits are more sensitive to changes in retail spending than its cash position.”
This statement highlights a key concept in business finance: operating leverage. Operating leverage refers to the degree to which a company’s profits are influenced by changes in its sales volume. High operating leverage means that a company’s profits are highly sensitive to changes in sales volume.
A loss of a key retail partner could also impact City Chic sales, which comes as other ASX-listed fashion businesses report drops in wholesale demand, including Universal Store Holdings and Accent Group. According to Citi analysts, City Chic’s US market generates sales from its marketplace sales on department store websites. “If one of these department stores changes direction or range and delists City Chic, its sales and earnings could fall.” There is also risk in increased operating costs, including rental costs which represent a significant portion of operating costs across City Chic. Analysts said a rise in rental inflation could see margins deteriorate for the business.
Finally, there is also the risk of a slowdown in retail spending. “City Chic has a high degree of operating leverage,” Citi analysts claim. “Any slowdown in sales could have a material impact on profitability. “If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. However, should they be less than anticipated, the stock could trade above our target price.” Investment firm Jarden Wealth Limited recently shared in a note to investors that the consumer spending backdrop is improving thanks to easing inflation and discerning consumers, but added it is maybe not at the pace the market has expected. The firm then cited July retail spending figures from the Australian Bureau of Statistics (ABS) which showed that retail sales rose 2.3 per cent year-on-year in July, above expectations.
This trend has been observed across various retailers, from supermarkets to fashion retailers, and is likely to continue in the future. This trend is driven by the following factors: 1. Investor sentiment and market expectations. 2. The impact of inflation and cost pressures. 3. The evolving landscape of consumer behavior. 4. The role of technology in retail. 5. The impact of geopolitical events. 6. The ongoing shift towards sustainability and ethical sourcing. 7.
“CCX has repositioned itself to focus on its core ANZ region and demographic,” the analysts reported. “This gives management the best chance to execute on their targets. “We think there is upside potential given where the valuation is sitting and risks look manageable.”
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