2 small-cap shares I rate to beat the ASX 200 in 2023 (and beyond)

The ASX small-cap shares I’m going to share in this article have excellent potential to deliver long-term returns, in my opinion. I think they can outperform the S&P/ASX 200 Index (ASX: XJO) this year and beyond.

In most cases, it’s much easier to double a business in size from $250 million to $500 million than $25 billion to $50 billion. It becomes more difficult to grow a business the bigger it gets.

There has been a lot of volatility in the past 15 months surrounding retailers and how they’re going to perform in the coming period. All of the inflation and higher interest rates could impact things. But, there could also be longer-term opportunities.

Shaver Shop Group Ltd (ASX: SSG)

The small-cap ASX share describes itself as an Australian and New Zealand specialty retailer of male and female personal grooming products. It wants to be the market leader in ‘all things related to hair removal’.

It has over 120 stores across Australia and New Zealand selling a core product range comprising male and female hair removal products such as electric shavers, clippers and trimmers, and wet shave items. It also sells other items like oral care, hair care, massage, air treatment and beauty categories.

The company’s recent gross profit margin strength has enabled the gross profit to increase, despite the slight fall in total sales in the first month and a half in the second half of FY23.

Shaver Shop believes it operates in a “large and growing market driven by changing consumer preferences and new product innovation”. It thinks it can grow its market share, particularly in New Zealand, while generating good cash flow.

A key reason why I think it can outperform over the long term is because of how cheaply it’s priced. Using the Commsec FY24 projected numbers, the small-cap ASX share is priced at 8 times FY24’s estimated earnings with a grossed-up dividend yield of 14%.

City Chic Collective Ltd (ASX: CCX)

The City Chic share price has suffered around 80% over the past year. Many things have gone wrong for the business over the last couple of years.

Its FY23 half-year result was reportedly cycling a “strong prior corresponding period”, with sales down 8%. The company made an underlying earnings before interest, tax, depreciation and amortisation (EBITDA) operational loss of $3.4 million, while the statutory net loss was $27.2 million, with an additional inventory provision in the region of Europe, Middle East and Africa (EMEA).

But, I think the building blocks are there for a good earnings base in the future, with its presence in the US, UK and Europe.

The business says that it has strategic initiatives underway, targeting historical margins to deliver sustainable profit growth. That includes increasing the profit margin by lowering promotional activity in line with the “market improvement” and lower inbound logistics costs. It’s also expecting to have a positive net cash position by the end of the current financial year.

The small-cap ASX share is also aiming to scale its international businesses and leverage the customer base and operating structures to “drive profitable growth”.

Using the estimates on Commsec, the business is trading at 8 times FY25’s estimated earnings.