Corporate Finance

Introduction to City Chic Collection

City Chic Collection deals in the retail sale of plus size women’s apparel, footwears and accessories. The company is having its 104 retail stores across Australia and New Zealand and is offering its product online across USA, Australia and New Zealand.

Company’s headquarter is in Sydney in the suburb of Alexandria. Its share is listed on Australian Securities Exchange and represented by symbol CCX.

Financial Statement Analysis

1. Calculations

  • Analysis of return on assets using the Du Pont System. The Du Pont Analysis break down return on equity into three parts i.e.

ROE= Profit Margin* Asset Turnover* financial Leverage

(Marshall Hargrave, 2019)

So, for calculating Return on Equity, following figures have been extracted from the annual report as follows:

Particulars

2019

Annual Report Reference

Net Income

15,978

Page 54

Sales

148,432

Page 54

Total Assets

84,980

Page 56

Equity

44,266

Page 56

Return on Equity calculated by using above formula is:

= 10.80% * 174.66% * 191.97% = 36.09%

This first part i.e. profit margin indicates that profit earned by the company on the overall sale.

The profit margin can be improved if costs are reduced or if prices are raised, which ultimately effect ROE. This is one of the reasons that a company's stock will experience high levels of volatility when management makes a change to its guidance for future margins, costs, and prices.

The Second Part i.e. Asset turnover it indicates the efficiency of the company’s use of its assets in generating revenue.

Presently, company is having 174.66% as asset turnover ratio, if this ratio increases, the company will be able to generate more sales per asset owned.

The third part i.e. Financial Leverage indicated the amount of debt company utilizes to finance its operations. If the company is using substantial amount of debts then its financial leverage will be high as the company has to pay interest on loan which is tax deductible while dividend payments are not tax deductible.

  • Price to Earnings Ratio (PE Ratio): It is a measure of share price relative to the annual net income earned by the company per share.

= Market Value per share/ Earning per share

= 2.16 / 8.3 (EPS taken from annual report page 55 & Market price taken from ASX website)

= 26.02 

This indicates that an investor is willing to pay $ 26.02 for $1 of current earnings.

This ratio also helps to ascertain whether the price of the share is undervalued or overvalued (Chris B. Murphy, 2020).

  • Dividend Per Share (DPS)

Particulars

2019

2018

Interim Dividend Per Share

1.5 Cent per share

Nil

Final Dividend Per Share

2.5 Cent per share

Nil

(data taken from page no 86 of annual report)

The City Chic company has paid dividend to its shareholders in the year 2019 while no dividend is being paid in 2018. Growing DPS over time is a sign that the company’s management believes that the its earning growth can be sustained. Moreover, investors are satisfied as dividend is the direct earning a investor gets on its shares.

  • Market Capitalization

Market capitalization is nothing but market price of shares multiplied by the number of shares outstanding, in other words, it can also be called as total market value of the company.

The market Capitalization of City Chic is 477.04m

The companies having higher market capitalization is considered to be more established and have captured more market than other.

2. Time Series Analysis

Return on Equity by Du Pont ($’000)

Particulars

2019

2018

2017

Net Income

15,978

-9,306

-8,389

Sales

148,432

131,870

125,054

Total Assets

84,980

196,105

202,545

Equity

44,266

37,101

44,075

Profit margin

0.11

-0.07

-0.07

Asset Turnover

1.75

0.67

0.62

Financial Leverage

1.92

5.29

4.60

Return on Equity

36.10

-25.08

-19.03

The return on equity increasing each year, this is a positive indicator that the company is growing and earning profit.

Let’s do a deeper analysis, since the company started earning profit in 2019, that increases the profit margin of the company and increase in profit margin increase the return on equity.

Also, asset turnover is increasing which shows that the company is efficiently able to generate more revenue from its assets while in the earlier year, the company was not efficiently using its assets for revenue generation.

However, the financial leverage has reduced this indicates that the company is relying more on shareholders funds to finance its assets. Company do not wish to borrow funds from the market.

 Extract from Annual Report ($ ‘000)

Particulars

2019

2018

2017

Borrowings

Nil

12,860

25,714

Company has brought down its long-term borrowings to Nil in 2019, which is leads to decrease in financial leverage as there is no interest expense as per statement of profit and loss.

Financial leverage allows the company to earn a disproportionate amount on its asset and also allows the company to take tax advantage on interest paid on loans while the city chic company is not taking advantage of the same, it prefers to pay dividend to shareholders which is not tax deductible.

(Cent per Share)

Particulars

2019

2018

2017

Interim Dividend Per Share

1.5

Nil

Nil

Final Dividend Per Share

2.5

Nil

Nil

Earnings Per Share

7.4

7.8

0.3

In the year 2019, City Chic company has delivered strong results and has laid the foundation for ongoing growth. They worked on their strategic priorities, which is to grow both, their Australian as well as International businesses across multiple channels.

The sale through online channel increased from 36% in FY 2018 to 44% in FY 2019 with the strong growth in both Australia and USA.

Company has also opened 9 new stores, out of which 3 large format stores performed ahead of expectations.

Also, the stock in hand at the end of the year is clear as the company was able to sale all its stocks.

During the year FY2019, the board of the company has declared a fully franked ordinary dividend of 4 cents, in addition to a fully franked special dividend of 2.5 percent per share. This depicts that the net cash position of the company is strong.

All these factors have laid to increase in sale of the company and company has preferred to distribute dividends to its shareholders which could not be done in the previous years due to lack of profits.

3. Cross Sectional Analysis

 The other company who is having similar scope of operations are:

  1. Accent Group Limited represented by AX1 on ASX exchange. It is a leading retailer and distributor of performance and lifestyle footwear.
  2. Kathmandu Holding Limited represented by KMD on ASX Exchange. It is transnational chain of retail stores, selling travel and adventure outdoor apparels.

Particulars

CCX

AX1

KMD

PRICE

2.310

1.165

0.735

MCAP

477.04m

639.76m

521.12m

YIELD

1.73%

7.73%

19.54%

PE RATIO

27.050

11.370

3.470

Sectoral Comparison as done by ASX is as follows:

  • Share Price: The share Price reflects the current price that stock is trading in the market. The share price of the City Chic is 2.310 which is more than the peers in the market. Share price ideally reflects the value of the company itself so, from the above table, we can see that the share price of CCX is comparatively higher than the price of AX1 and KMD.
  • Market Capitalization: Market capitalization in simple terms is the total market value of the company, which is based on the price of the company’s share in the market. The companies having higher market capitalization is considered to be more established and have captured more market than other. From the above table, we can say that City Chic has lesser market capitalization as compared to its peers (James Chen, 2020)
  • Yield: It refers to earning generated or realized over a period of time. From the investor point of view, the higher yield generating investment would be considered as more income generating and less risky investment. From the above table, City Chic company is giving less yield on investments as compared to its peer companies which investor may not prefer to invest in city chic.
  • PE Ratio: PE Ratio refers to the ratio of price of the share in the market, to the earnings per share that the Company is able to generate. This is, in other words, the price, as multiple of the earnings per share of the Company. While a company's stock price reflects the value that investors are currently placing on that investment, a stock's P/E ratio indicates how much investors are willing to pay for every dollar of earnings.

The higher PE ratio indicates that investors expect high returns on its investment.

Expansion Prospects

  1. Increase sale from Online Website: Page 5 of the Annual Report of the company reflects the areas from where the sales of the company are generated:

Particulars

% of Sale in FY 18

% of Sale in FY 19

Online Marketplace

31%

38%

Stores

59%

50%

Online Website

5%

6%

Wholesale

5%

6%

The company’s major sale is being done through its 104 stores which are situated across Australia and New Zealand. However, with online website products are offered in USA also.

The online website reaches across the world and products can be offered worldwide. Though the company is in its growth stage and finding avenues for expansion. Focusing on website and increasing sale through online market can be one of the avenues for company’s growth.

References for Corporate Finance 

2019 Annual Report of City Chic Collection , retrieved on 03-05-2020, retrieved from https://www.asx.com.au/asx/share-price-research/company/CCX

Marshall Hargrave, 2019, DuPont Analysis, retrieved on 03-05-2020, retrieved from https://www.investopedia.com/terms/d/dupontanalysis.asp

Chris B. Murphy, 2020, Using the Price-to- Earning Ratio and PEG to assess a stock, retrieved on 03-05-2020, retrieved from https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/

Sector Comparison, ASX website, retrieved on 03-05-2020, retrieved from https://www.asx.com.au/asx/share-price-research/company/CCX

James Chen, 2020, Market Capitalization, retrieved on 03-05-2020, retrieved from https://www.investopedia.com/terms/m/marketcapitalization.asp

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Corporate Finance Assignment Help

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