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Why one of the best perfoming ASX retailers is on the nose today

The City Chic Collective Ltd (ASX: CCX) share price tumbled even after the plus size women apparel retailer issued a positive update to market this morning.

The CCX share price dropped 3.6% to $1.76 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.2%.

But City Chic isn’t the only apparel retailer on the nose though. The Noni B Limited (ASX: NBL) share price and Premier Investments Limited (ASX: PMV) share price are down 1.4% and 3%, respectively.

Full year earnings guidance

City Chic said that independent experts hired to calculate the working capital adjustment relating to the sale of a number of its brands, including Rivers and Millers, to Noni B have found in City Chic’s favour.

The adjustment, along with other non-recurring expenses associated with the divestment (back when City Chic was called Specialty Fashion), will be reflected in the group’s full year results in August under net profit from discontinued operations.

More significantly, management said that full year underlying earnings before interest, tax, depreciation and amortisation (EBITDA) from the businesses it still owns will range between $24 million and $25 million, which is in-line with consensus forecasts.

This perhaps explains why the stock is underperforming the sector today. Given that the City Chic share price has surged over 80% since the start of the year – far outstripping the 2%-odd gains by Premier and Noni B – investors might have been hoping for an upside surprise.

Why City Chic is out of fashion today

Having a bigger than expected profit is important as the stock is currently trading on a FY20 consensus price-earnings (P/E) multiple of over 18 times even after today’s fall.

That’s a little rich in my view, particularly given the volatile consumer spending environment that we are stuck in.

I am generally avoiding retail stocks, particularly those who pay for inventory in US dollars given the weak outlook for the Aussie dollar.

The exception is Premier Investments given the strong track record of management and the traction from its Smiggles stationary business. Even then, PMV shares are trading at a discount to City Chic’s stock.

I prefer ASX stocks in the mining sector or industrial stocks that have large overseas exposure like James Hardie Industries plc (ASX: JHX) and Aristocrat Leisure Limited (ASX: ALL).

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Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd., James Hardie Industries plc, and Premier Investments Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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