Sosandar Plc (SOS) Earnings Call Transcript & Summary

Welcome to the Sosandar Half Year Trading Update. [Operator Instructions] I now hand over to Julie Lavington and Ali Hall, Co-CEOs; and Steve Dilks, CFO. Julie, over to you.

Good morning, everyone, and welcome to the call. As with previous trading update calls, today, we'll be providing a short summary of the update, followed by a Q&A session ending at 9:30. We are very pleased to be reporting a strong performance for the first half of the financial year, trending in line with market expectations for full year growth. We've delivered continued revenue growth across all channels, resulting in revenue of GBP 20.9 million for the 6 months to the end of September, which is a 72% increase against the same period in the prior year. We've also achieved a substantial positive swing in profitability from a loss of GBP 1.1 million last year to a positive profit-before-tax figure of GBP 0.1 million for the 6 months to the 30th of September 2022. Our well-planned approach, together with our distinctive product range and effective communication strategy, has enabled us to continue to deliver for our customers.

This strong performance that Julie has highlighted is testament to the relevance of our strategy, unique product offering and ever-increasing brand awareness. Our broad product range with new styles available daily and highly effective marketing continues to drive strong growth with both new and repeat customers. At the time of our full year results in July, we stated that we plan to fast track development in categories where we knew our customers would be likely to spend, specifically in occasion wear, beach and swim and tailoring. Pleasingly, this has been extremely successful with all identified lines meeting or exceeding expectations. Across the period, every single product category was in growth with holiday and beachwear, formal tailoring and party wear performing exceptionally well throughout summer and into September. Trading on sosandar.com and through our concession partners has been very strong as the greater depth and breadth of stock made available across all product categories has resonated with consumers. Alongside this trading update, we are also excited to announce a new third-party partnership with JD Williams on a wholesale agreement basis. This will allow us to increase our reach among our core target demographic and deliver incremental revenue and PBT. We are pleased with the promising start that this partnership has made. And together with our other partners, M&S, Next, John Lewis and The Very Group, we're very excited by the significant opportunities for further growth through this channel. Given the current external landscape, we thought it would be useful to spend some time talking around the economic backdrop in which we're operating. We now have another set of very challenging circumstances to navigate. I think it's important to note that we've just gone through over 2 years of extremely challenging trading conditions during the pandemic where consumers have had little actual need for clothing and have spent vast amounts of time at home, yet we've still thrived as a business throughout that time. Despite the challenging environment, we've once again been able to mitigate against the headwinds that we faced. We've continued to expand and diversify our supplier base and we've also used our agility and detailed planning to monitor the business effectively, and we'll continue to take appropriate mitigating actions in response to the environment in which we're operating. We expect consumers to become more selective about where they spend and also more demanding of those brands with which they spend. And we are confident that Sosandar will continue to benefit from this shift in behavior as our fashion-forward, high-quality, unique product proposition clearly differentiates us from the rest of the sector. I'll now pass over to Steve to pick out some of the highlights in the financials.

Thank you, Julie, and good morning, everybody. As Julie said, we're very pleased to report a net revenue of GBP 20.9 million for the 6-month period ending 30th of September 2022, a 72% increase against the same period in the prior year. We're proud of our performance, which has resulted in our second consecutive 6-month period of positive PBT. Our PBT of GBP 0.1 million is a substantial positive swing versus the GBP 1.1 million loss we reported in H1 FY '22. The financial highlights of the period, a testament to the success of our strategy in accelerating sales growth by identifying and fast-tracking the development of key product lines. The number of orders increased by 43% year-on-year to 347,000, of which 81,000 were from new customers and 266,000 were repeat customer orders. Our conversion rate increased to 4.5% from 3.9%. Average order frequency increased by 8% to 2.41x per annum. And website visits were up 25% to over 7.7 million. Gross margin for the period was 54.4%, reflecting a more normal post-COVID trading period with a planned end of season sale in August. Our net cash position of GBP 4.2 million as of the 30th of September 2022 reflects our decision to get stock in early for the autumn/winter season to ensure that we can meet significant demand across all of our sales channels. A large proportion of this stock was also brought in by sea freight, which means that we take receipt of the stock a number of weeks earlier than we would have had we used air and thus accelerates the use of our cash. We're comfortable with the position that we have. On that note, I'll pass back to Julie for a quick overview of our current outlook.

Thank you, Steve. This has been a very positive 6 months for Sosandar, and we are delighted with the progress we've made, which is all down to the hard work and dedication of every member of our team. We've remained focused on executing our strategy, which is shown in our performance to date. There's no doubt that the current economic and political backdrop is bringing with it many challenges for businesses and consumers. What we can be confident in is our ability to continue to navigate tough times and to take mitigating actions as appropriate. We have a brilliant brand, highly differentiated product that's in demand across all our channels and we have a great team who constantly execute our strategy well. Despite the external environment, we've had a very strong start to October across all sales channels with high demand across all our product categories, which gives us confidence as we go into the second half of the financial year. And now over to you, we'd be happy to take your questions.

And the first question here is, "I see that there are now over 1,000 Sosandar options on the Next site following the launch of Next Plus. Do you still find that increasing options on third parties, like Next creates a proportionate increase in sales, maintaining the very fast covers you've previously highlighted?"

I'll take that question. Yes, we do. So there is -- what we see is a direct correlation, as we've said before, between the amount of styles and the depth of styles that are available on third-party partners. So what we are continuing to see is as we expand the range with all our partners, particularly with Next, obviously, because we're now on Platform Plus is we're seeing a corresponding increase in sales, which is great news.

"Please, could you elaborate on the net cash position and what the influence of earlier investment in stock and working capital is. Should we consider the reported position to be at a low point that quickly builds back up over the season?"

Steve, over to you for that.

Yes, you can see that. If we look at what's changed over the last 12 months in our business and how that's impacted cash, we took the conscious decision over the last 12 months to increasingly use sea freight, particularly from China, in order to further improve our margin into the longer term, but also to significantly reduce the environmental impact of using air freight for the majority of our stock coming to the U.K. So our cash position at 30th of September is GBP 4.2 million. That is [indiscernible] in terms of our balance, and it represents the vast majority of stock for the autumn/winter season already been on our balance sheet and in receipt. And so what we now start to see is minimal start landing into the warehouse because it's already recognized, and then we start to benefit from the sales that we make through October, November and December.

"Congratulations on another great quarter. I noticed compared to the prices in the September catalog that you put some prices up in mid-September on the main site, maybe a GPB 3 to GPB 5 increase. For example, quite a few dresses rising from, say, GBP 69 to GBP 74. Could you give some color why you put through the price rises then? What effect it had, if any? And as much as you feel comfortable talking about whether you expected further price -- whether you expect further price rises going forward?"

So I'll start with that and then, Ali or Steve, please add. So we are constantly looking at our price architecture and how much we charge for our products. And really, we saw an opportunity to drive prices a little bit higher for -- as we went into October, because looking at our pricing compared to the market, it felt that we were probably underpriced, if anything, on our party wear. So that gave us an opportunity to push prices, particularly on dresses. And we've seen absolutely no resistance at all to price rises, which is the same that we've had in the past. So in the past, probably about a year ago, we pushed denim a little bit higher because we were seeing such strong sales in jeans, and we've pushed those about GBP 5 higher at that particular point. And again, we saw no resistance at all at that point. So it is really just an ongoing constant monitoring of our pricing and where we sit in relation to the market.

"So you'd expect potentially further price rises going forward?"

I think it's just something that we constantly monitor and look at right across product categories.

"And how do you see your 2 most recent third-party partnerships, Very and JD Williams, adding to your customer reach and profile?"

Ali, do you want to take that?

Yes. I mean both The Very Group and JD Williams are performing really, really well. JD Williams is very recent, but we've already seen a really good take-up from them. I think they've got a slightly different customer profile from the other third-parties that we are with at the moment. So for us, that creates another pool of customers that we weren't -- we didn't have access to before. It also makes sure that the brand is out there even further to different customers. So we choose very carefully the partners that we take on board in the U.K. and later on internationally when we look at international, and we make sure that we work with partners where we can see a big impact and also get close to a customer base that we haven't had access to. So we're very pleased with both of those new partners and how they're performing.

"Tremendous. And whilst you have an affluent customer, could you give us some color on Q2 return rates and into Q3? Is this rising as consumers maybe get more discerning with the cost of living concerns, et cetera?"

I'll take that question. So what we've seen post COVID, which I know we've reported on in the past, is we've seen returns rates normalized back to what they were prior to the pandemic. And then since then, so really over the last year, we've not seen any change at all in returns rates. They're very stable. And the only thing that really changes as an average, it depends which product categories, the mix of the product categories that are selling in any given period, which slightly increases or decreases overall average returns rate. So for example, in a period where knitwear or Jersey would be strong because it's stretchy garments, they tend to return lower, we'll have slightly lower returns rates in months where those categories are particularly strong. So very pleased with returns rates and very stable. So nothing has changed at all in returns post the economic challenges that we are seeing externally.

"Tremendous. And I understand the point about summer sale being planned this year, being different to last year. However, I imagine that the change of sourcing towards more sea or road would be a huge positive factor. Is that benefit more weight to the second half, underpinning the margin percentage forecast from N+1, which you expect gross margin percentage should be level on last year?"

Steve, over to you for that?

It's one of many factors that plays out when we look at the margin projection for H2. So sea freight or China origin product in particular, which is more heavier garments like outerwear. So those are obviously the big benefits using sea freight versus any other method. So there's a big benefit there. But there are other aspects that drive margin improvement into H2. We've touched on some price increases that were implemented in September. That will bear fruit through the balance of the year. And there are other actions that we're taking all the time around delivery methods, how we deliver product to customer, so on and so forth that all are borne out in the projection into H2. At the moment, there's no -- we're not planning to do an end-of-season sale for the winter season in the way that we did for August. But of course, that is always subject to change, but that's also factored into the projection into H2.

"And another question regarding time to delivery. Why does receiving by sea freight mean you get it weeks earlier than transport by air?"

Steve, one for you as well, I think.

So generally speaking, when we buy products, we're buying on almost FOB terms. What that means is that we're taking legal title of goods in country of origin, which is very normal. So it's then our responsibility to move the goods via our own freight forwarders. So if we look at a typical shipment from China as an illustration, if that came by air, we would take receipt today and it would arrive in a matter of days into our warehouse. The legal title is still in China. If we then use sea freight for that same garment, we're taking receipt onto our balance sheet, something like 60 days prior to the date as if we brought it by air. So the handover date triggers the payment term, which means we're accelerating the use of our cash, but the trade-off against that is that we get the substantial benefit on margin as we move forward. So it's a trade-off really between timing, use of cash and then the benefit of margin that comes following when you start to sell the garments.

"Great. And then another question, expanding on that. Could you explain a little more about the difference in cost of using sea freight versus air freight and the impact upon timelines for delivery to third parties?"

Steve, for you as well.

Yes. It's significant. But it's a quite hard question to answer really because it very much depends on what product categories we're talking about and also what kind of fill, of a boat, a vessel, container or plane that you have. But if we look at the extreme end of the spectrum, if you look at outerwear padded coats, for example, they're heavy, they're very expensive to transfer to the U.K. via an airplane for the obvious reason that they're bulky and heavy. They're much better to come via a boat. They could cost anywhere from GBP 10, GBP 15 per unit by air, and they'll -- compared to sea maybe GBP 3 to GBP 4. But that's an illustration at the extreme end. You wouldn't extrapolate that across all of our product categories, but just to illustrate the point. The objective here isn't to move everything to sea freight. Sea freight is very -- is prominent from China in particular because it's the distance and also the type of product that we purchase from China, which is typically heavier product with a longer lead time. If we're buying lighter product or a product that's closer to home, maybe from Turkey, then the need to use sea freight isn't there because you can truck from Turkey within about 2 weeks total end-to-end or lighter product out of India, for example, can still be air freighted really economically. So it's about having the right strategy in place for different categories, different country of origin, so on and so forth.

"Congratulations on an excellent half 1. We've witnessed considerable foreign exchange volatility in the period. Can you expand on how this has impacted Sosandar and any mitigations you're taking?"

Steve, for you as well, I think.

Yes, we've seen some impact from the weakening of sterling, although, of course, nicely rebounded slightly over the last week or so, which is good. It's important to note, we start have a really high proportion of product that we purchased is purchased in sterling actually. So our exposure is almost mitigated straightaway because we're negotiating PO prices in sterling in a majority of cases. However, we are exposed to movements in sterling to dollar and also, to a lesser extent, sterling to euro. The mitigating actions around that are we covered some of them already, which is about freight strategy, price architecture, the way we engage with our customers to do with delivery options, and there are other actions that we're always taking. So it gives you a flavor of where we stand.

"Tremendous. And a related question, what trends are you seeing on cost of goods sold? I note that raw material prices like cotton and wool are materially lower than a year ago, which is good. However, sterling is weaker."

Steve, for you again as well, I think.

Yes. And obviously, it depends on the category of product that we're purchasing. I think from our point of view, the other thing that we would always add to the equation in that question is scale. Scale brings opportunity overarching all of the above, which helps you either to mitigate increases where they exist or to buy better than maybe where you were previously because we're able to commit to larger volumes over the selling season. So there's other variables that play here. Net-net, in some cases, there is a bit of upward pressure. But in other cases, there's downward pressure as well. The other thing that we're doing on an ongoing basis is onboarding more suppliers, both for newer categories, but also to cross cost and to further reduce the risk profile of our supply chain. So we're able to cross reference prices or cost prices that we get from an existing supplier with others and also to improve overall our supply chain because we can then pick and choose the best suppliers with the best lead times or the best prices to be able to balance all the variables that are at play.

"Early autumn party wear ranges have clearly performed really well. What is the pipeline like for new products and collections over the remainder of the season?"

Ali, do you want to take that?

Yes. I mean in terms of products and how that's performing in general, I'll just talk about that a little bit. I mean, the first 6 months of the year, we've seen really strong demand for smarter clothes in general. I think really is a reaction to post-COVID, everyone wearing casual clothes, so people returning to the office and going out on occasion. We've seen a massive demand for smart clothes as well as the demand to beach and swim to go on holidays. Smart Tailoring has been a really successful category for us as our larger occasion wear party offer. And all our categories, both formal and casual, are in growth and all have lots of opportunity going forward. As we've moved into autumn, demand for knitwear, outerwear and anything sequin has been really, really strong. I think knitwear largely because people want to be cozy and warm. And outerwear and also sequin when everyone's -- even in COVID, we found that sequins we sold those well because women tend to buy close to cheer themselves up as well as a need for wearing. Trousers have made a massive come back with flares being back in fashion. And I think really for us going forward, even in difficult economic climate, the demand for our products both on our own site and through third parties is really, really strong, which is testament really to our own product range that we keep getting this high demand on all our channels.

I'd probably just add to that about the specific question about the pipeline of new product coming. So it's our strategy to land a brand-new product daily. And so right way through the next 6 months, you will see constant influx of new product landing because that's very much what inspires the customer to keep spending, to keep coming back to site, and driving the extremely high conversion rates that we see.

"Could you elaborate on the customer profile of your new third-party partner, JD Williams? Will the range supply reflect the more mature customers understand JD have?"

I'll take that. I think what's interesting is that we find really across all our third-party partners that the best sellers that we have are also their bestsellers. There are nuances with each of them, but generally, I think the reason for that is that we've spoken about in the past is the opportunity that we identified for Sosandar was about the ageless generation and about how women, as they age in terms of the actual number of years, she's actually not changing how she wants to dress. So the opportunity that we identified for Sosandar was that as women go into their 40s, 50s, 60s and beyond, the women no longer dressing that old-fashioned concept of dressing for your age. So really, it doesn't really matter what age you are. Our clothing is right for you. So actually, now the product range that JD Williams has bought, even though they do have a probably a slight -- they do have a slightly older demographic than would be on our own site, they've bought generally the product that are bestsellers for us on our own site and with our other third parties.

"And what are your plans for international sales?"

Ali, do you want to take that?

Yes, we are considering international opportunities, and we're considering them both through our own site as a means and also through third parties. At the moment, nothing is imminent as there remains lots of opportunity for growth in the U.K. As we said, we've only just launched another third-party in the U.K., and there's absolutely loads of opportunity within the partners that we've got as well. So opportunities to expand internationally are definitely there and to be executed really when the timing is right.

And that's all we've got time for. Julie, do you have any closing remarks?

just to say thank you very much, everyone for dialing into the call today. And we look forward to updating you again in early December with our full half year results.

Many thanks, Julie, Ali and Steve, and to you all for joining. This is the end of the webinar.