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Here’s why the City Chic (ASX:CCX) share price is going nuts

The City Chic Collective Ltd (ASX: CCX) share price is up 14% after announcing a UK acquisition.

City Chic is a retailer of plus-size clothing for women in Australia, New Zealand and the northern hemisphere in places like the US and UK.

What’s the UK acquisition

City Chic is going to acquire the UK-based Evans brand from Arcadia Group. Evans is also a retailer of women’s plus-size clothing with a loyal customer base and a reportedly strong market position. It has been operating since 1930.

The deal is a binding asset purchase agreement to buy the Evans brand, its e-commerce business and the wholesale business for £26 million, or AU$46 million in cash. The acquisition will complete on 23 December 2020.

However, this transaction excludes the Evans ‘bricks and mortar’ store network of over 100 locations in the UK. The administrators are entitled to trade from the existing Evans stores until the end of March 2021 in order to liquidate existing stock in the stores. The franchise business, based primarily in the Middle East, is also excluded from the acquisition.

In the financial year to August 2020, the Evans website had 19 million visits and generated approximately £23 million of sales and the wholesale business generated sales of approximately £3 million. The overall Evans group generated annual sales of over £60 million before COVID-19.

Almost half of direct-to-consumer sales (stores and website) were made through the digital channel. The store network has been shrinking in recent years as customers switch to online shopping.

This acquisition is expected to add to earnings within the first full year of ownership by City Chic. The ASX retailer had a pre-acquisition cash balance of AU$121 million at 30 November 2020, with its debt facility remaining undrawn.

Management comments

City Chic CEO and Managing Director Phil Ryan said: “I have followed Evans for over a decade and seen how within Arcadia’s portfolio the brand has evolved from a dominant high street retailer into a more digitally focused business.

We had a successful partnership with Evans for many years which was a great channel for the City Chic brand in the UK. Evans gives us an excellent foundation in a new geography to grow our collective and is a brand which aligns with our existing product streams. 

The acquisitions meets our strategic objective of growing through global customer acquisition, digitally, and in the $50 billion curvy apparel market. In addition to providing a launching pad into a new market, we are confident we can deploy our lean, customer-centric operating model to drive revenue growth and cost efficiencies in the existing business. We have a great opportunity ahead of us to develop the third major region for the City Chic Collective.”

Summary thoughts

This seems to be a really good buy by City Chic. It’s a good way to diversify, City Chic is buying a financially distressed business and it can turn it into an online-only operator. People will need to keep buying clothes, even during a global pandemic. I’d be happy to buy some City Chic shares today after the acquisition.

Other ASX growth shares related to the retail space that could also be worth considering today are Tyro Payments Ltd (ASX: TYR) and BWX Ltd (ASX: BWX).

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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