2 top small cap ASX shares that might be buys

The 2 top small cap ASX shares in this article could be buys for investors looking for businesses with smaller market capitalisations.

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There are some small cap ASX shares that have much smaller market capitalisations compared to the typical blue chips. They could be opportunities worth thinking about.

The below two businesses are ones that are capitalising on the shift to online shopping by customers.

They have long-term growth plans and could be worth thinking about:

City Chic Collective Ltd (ASX: CCX)

City Chic is one of the world’s leading retail ASX shares that sells plus-size clothes, footwear and accessories for women.

It now has a large market presence in three regions. In the local market, the City Chic brand is well-known and has a large retail store network. In the US it has a large market presence through the ownership of the Avenue website. Recently it acquired the Evans business in the UK which added a lot of northern hemisphere exposure.

In the 12 months to August 2020, the Evans website had 19 million visits and generated approximately £23 million of sales. The Evans wholesale business, which City Chic also acquired, made £3 million of sales over that same 12-month period.

City Chic is currently rated as a buy by the broker Macquarie Group Ltd (ASX: MQG) with a price target of $5.20.

The FY21 half-year result saw a lot of growth and operating leverage starting to emerge. The first six months of FY21 saw online sales growth of 42%, with 73% of total sales coming from the online channel. Sales revenue increased 13.5% to $119 million, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 21.8% to $23.3 million and statutory net profit rose 24.8% to $13.1 million.

The small cap ASX share continues to experience “strong positive comparable sales” as well as customer base growth. City Chic’s gross profit margin has recovered and shipping and logistics costs are falling.

According to Macquarie, the City Chic share price is valued at 35x FY22’s estimated earnings.

Adore Beauty Group Ltd (ASX: ABY)

Adore Beauty was Australia’s first beauty e-commerce website. It has a broad and diverse portfolio of over 260 brands and 10,800 products. The business currently operates in Australia and New Zealand.

Broker UBS currently rates Adore Beauty as a buy with a price target of $5.60. It thinks the business can benefit from a long-term growth runway, grow customer numbers and increase customer loyalty. The broker thinks that Adore Beauty can achieve $366 million of sales in FY25.

In the third quarter of FY21, Adore Beauty’s revenue jumped 47% to $39.4 million and active customers went up 69% to 687,000.

The small cap ASX share revealed that there has been strong retention and re-engagement rates for new customers acquired during the COVID-19 period. To help these metrics further, a loyalty program was launched in March, with sign-ups ahead of expectations.

It’s on track to achieve full year FY21 revenue growth of between 43% to 47%. This would be faster than the pre-COVID revenue growth of 38.6% in FY19.

Adore Beauty said that given the predominately fixed nature of the business’ cost base, management expects scale benefits to increase operating leverage and deliver EBITDA margin expansion in the longer-term as the company continues to grow revenue. However, the company is focused on growing its market share with disciplined investment.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Adore Beauty Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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