Sosandar Plc (SOS) Earnings Call Transcript & Summary

Welcome to the Sosandar Trading and Strategic Update Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Ali Hall, Joint CEO. Ali, over to you.

Okay. Good morning, everyone. Thank you for dialing in today. I'm here with Co-CEO, Julie Lavington and CFO, Steve Dilks. We're here today to talk about our half year trading update and the exciting expansion of Sosandar's omnichannel strategy. So to look at the agenda for today. First, we're going to look at the Sosandar journey, so you can see the key stepping stones of what we've achieved so far that have led to this next stage in our strategy. Then we will talk about our key strategic goals of where this business is going to, then we will look in more detail at our nationwide store strategy. And lastly, we will talk about the investment program that enables us to execute our plan, a plan that we've got the cash headroom to self-fund.

Good morning, everyone. So when we launched Sosandar, we set out to target an underserved market of women over 30 who wanted quality, fashionable clothes at a mid-price point. And we've clearly proved that concept, going from start-up to a GBP 42.5 million turnover profitable business in just 6 years. What's driven our success, first and foremost, is a wide range of unique product that fulfills multiple wardrobe needs. And not only have we created a brilliant product, we've also built a really strong brand that customers emotionally engage with.

And not only do we have a thriving direct-to-consumer business through our own website and app but we've had enormous success through third-party channels online. Not only do we sell through these channels, we're a top-selling brand on them too. We already outsell multiple larger established brands such as Mint Velvet, Phase Eight, Whistles and Hobbs to name a few. We punch above our weight because of our products and our brand identity. So we've literally gone from nothing to GBP 16 million of turnover through third parties in 2 years. Sosandar has been a game-changing brand and now we want to bring that to the high street.

We've not only been in demand with third-party partners in the U.K., we found the same demand internationally. We said in our last update that we would launch with one international third-party partner in this financial year. And in fact, we're going to be launching with 2, the Iconic in Australia and The Bay in Canada. We did a huge amount of work and due diligence before deciding to work with these partners for our first international launches. They are each premium brands and market leaders in their own territories. They've got great reputations, large databases and excellent logistics. Our partnerships will be online and we believe our product is going to resonate really well in both Canada and Australia. Obviously, they're both English-speaking countries and British brands do incredibly well there. The plan internationally is to start online with third parties, which allows us to test into new territories at low cost and low risk. But clearly, the potential size of the prize internationally is huge. There might be a point at some point where the opportunity to work in stores overseas and department stores and potentially through franchise models. But all that would be in the future once we've established the blueprint of our stores in the U.K.

So everything we've done so far has got us well on the road to achieving our strategic goal, which is a business that turns over GBP 100 million plus and well beyond and then operates at a profit before tax percentage of at the very least 10%. The next pivotal moment on the Sosandar journey is the opening of physical stores nationwide. Our first steps to opening physical stores has begun with Sainsbury's. We now have product live in 9 stores. Sainsbury's objective is to roll out 50 stores over 4 years. To remind you, Sainsbury's is one of the biggest retailers of women's clothing in the U.K. and so this represents a fantastic opportunity for us to extend our reach. We've now had several months of optimizing logistics and visual merchandising to use these learnings when we open our own stores.

So before we look in detail at our own store strategy, let's just take a moment to look at where consumers are buying clothes in the U.K. We thought it was useful to give you some facts, as there is a misconception that people are not shopping on the high street for clothes. So 40% of the GBP 55 billion clothing expenditure in the U.K. is spent online. The remaining 60% of that expenditure is spent in a physical store. A small proportion of that is spent out of town, which is -- which our partnership with Sainsbury's enables us to tap into. But the really big opportunity is that half of the expenditure is in stores on the high street. So opening our own store enables us to significantly expand our addressable market.

So why will Sosandar work on the high street? Our audience was underserved online and that same customer is underserved on the high street. Our adjacencies on the high street will be upmarket brands targeted at our demographic, such as Mint Velvet, Hobbs, Phase Eight and Jigsaw. We are already outselling these peer brands on third-party sites. We also have a wider product range than them, with a more fashion-forward aesthetic and a much cleaner price point. Our high-quality product can easily translate to the high street, as in fact, it is a product you would want the customer to touch and feel.

So we're going to go into more detail now about the actual execution of stores. The same meticulous planning, risk mitigation and in-depth research that we've continually shown in the business has been applied to the store rollout. We're looking at affluent towns and cities and we're able to make informed decisions because we know exactly where our customers live. So for example, target towns are places such as Cheltenham, Gilford, Harrogate, Kingston and Chichester. These towns are absolutely thriving and we've identified at least 50 of them across the U.K. The biggest challenge is getting the right store in the right part of town. However, we've got agents working both in the North and the South and we've already identified a small number of prime location units. And just to be clear that we won't launch a store, unless they are absolutely in the right location.

In terms of the look and feel of the stores, we are going for stores in the region of 1,500 to 2,000 square foot. We've done the first stage of design work and the shop fitting is out for tender. The stores will have a warm welcoming upmarket feel and the training of the staff to give excellent customer service will be paramount. We'll have initial store openings in spring '24, which will be followed by phased openings across 3 to 4 years.

There are multiple benefits to being an omnichannel retailer. It will bring even greater scale because of increasing our addressable market to include the 50% of clothing shopping that's done on the high street. And gross margin will be higher because of deeper bias on product. It also increases brand awareness through having a profitable advert of our own brand on multiple high streets. As a consequence of this, typically, multichannel businesses spend far less on marketing than pure-play businesses.

Acquisition costs are lower because so much acquisition is done through the shops. There's an increased frequency of purchase, as there are so many more places for the customer to shop. And obviously, returns reduced overall, as customers try items on in-store. All of these factors contribute to a significantly higher profit margin than a pure-play business.

We have analyzed all of the omnichannel brands that target customers similar to ourselves. Here, we picked out 3 such brands and are showing information in their latest accounts as well as the number of standalone stores in the U.K. It's worth noting, none of these brands are listed on the market. There are some common themes across all 3, which are relevant to highlight. Firstly, they all have at least 50 stand-alone stores as well as their own website. They are all generating revenue in excess of GBP 100 million per annum and they are all delivering in excess of 10% PBT margins with a gross margin of 60% plus. This margin at a substantial scale of revenue that is driving their profitability. And that is at least what we can deliver to. So we're now going to a look at the self-funded investment required, the near-term results and how we see the long-term benefits. The store opening program will be self-funded from our current cash resources and will involve investing across the business, in particular over the next 18 months. This investment will be in people, the execution of the physical stores and our infrastructure, as well as supporting margin growth. As we move to being an omnichannel retailer, we are investing in moving away from price-led promotions, which is one of the key operating norms at pure-play retail. We will significantly reduce price promotions in order to grow our margin, while transitioning customer behavior to the non-promotion of our proposition, which we already operate so successfully across all of our third-party channels. We intend to operate in this way from now on, as we lead up to our first store's opening in Spring '24. This will enable us to deliver significantly higher gross margins, continues on a trajectory to deliver pretax profit margins of at least 10% in the medium term. We spent much of quarter 2 trialing the managed reduction in price promotional activity on our own website, in order to validate our assumptions on customer behavior and the associated KPIs. The trial has validated our belief that we can create significant longer-term profit through increased margin. The results of the trial can be seen on these next 2 slides, which show year-on-year performance on our own website. In the near term, we have validated the assumption that traffic and conversion will be lower. This has resulted in a short-term revenue change, which means a lot of growth which we can support from our existing cash resources. In quarter 2, traffic to sosandar.com reduced by 8% and our conversion, which is a measure of orders from this traffic, reduced from 4.4% to 3.4%. The reduction in promotions had exactly the positive result that we anticipated. Average item volume increased by 14%. Items per order is very marginally lower. And as a result, average order value increased by 8%. Ultimately, this led to gross margin on our own site being up 570 basis points, increasing from 49% to 55%. It is important to say that the price consumers are paying through our third-party partner websites is the full RRP and we are always a topflight brand, week-in and week-out, compared to numerous other brands, including those that we will trade next to on the high street. This shows that our RRPs are right and the demand for our products is incredibly high. Aligning our price point across all sales channels is a natural next step in advance of opening our own stores. We have therefore modeled and extrapolated the results of the trial over the next 18 months, which tempers the growth in revenue, which is supported from our existing cash balance. We remain in growth with our revenue expectation for full year '24 being GBP 46.8 million, which is an increase year-on-year of 10%. Our expectation for FY '25 is revenue of GBP 54.6 million, a further increase of 17% and an upward trajectory and profitability. Hopefully, you all had the opportunity to read through our trading update this morning. I wanted to summarize the numbers for the first half of the financial year, which very much reflects the trial that we carried out during Q2. Revenue for the period is GBP 22.3 million, up 6% year-on-year. Gross margin is up 140 basis points, up 55.8% and this includes a higher proportion of wholesale revenue, particularly through Sainsbury's, which is at a lower gross margin. Excluding this, our like for like gross margin performance is up 240 basis points versus last year. PBT is expected to be a loss of GBP 1.3 million. All KPIs on our own sites include and reflect what I've shown in the graphs of quarter 2 in the previous slides. Our cash balance at September is GBP 7 million, which gives us the headroom to invest in the next stage of our growth as presented here today. The pivotal developments that we have presented will propel us towards becoming one of the largest women's wear brands globally. And in the mid- to longer term, targeting revenue of at least GBP 100 million and with a pretax profit margin of at least 10%.

So in conclusion, the Sosandar brand is stronger than ever and we've had fantastic success wherever we've turned on whatever channel we sold through. Up market high streets across the U.K. are thriving and now is the time for us to take advantage of the fact that 60% of clothing expenditure is transacted in physical stores by launching our own stores. Cash is strong. We're in growth and we're profitable. The decision we've taken to reduce promotional activity is absolutely the right one. And if there was ever proof of this, then it was last week, when we had a record week with our highest total gross margin ever. We are on our way to becoming GBP 100 million plus turnover business with at least 10% PBT and ultimately, to becoming one of the biggest fashion brands in the world. So that's the end of the presentation from us and we'd love to take your questions now.

[Operator Instructions] So the first question, you had previously traded with John Lewis. Why has this come to an end?

So we've made a decision to not supply stock anymore into John Lewis in order to focus on the partners where we were seeing the biggest growth.

And what's the impact on sales been?

Immaterial. That's why we've not announced it. So it's an immaterial impact. And so third parties in its entirety as a totality is performing incredibly well.

Great. And what do you anticipate rent will be as a percentage of turnover in the new stores?

It very much depends, of course, in terms of locations. If we look at the investments that we are envisaging in an average store and the average store is caveated in many ways. It will depend on the location, et cetera, et cetera. But our investment level for each store has been modeled on, GBP 150,000 CapEx and an additional GBP 50,000 of working capital, which is stock. So that's what we modeled. So total investment per location in the region of GBP 200,000. But importantly, that will be caveated by the specifics of each town or individual location within that town.

Great. And without the move into physical retailing, would the business have struggled to maintain meaningful profitability?

No. The decision to do what we're doing is all about tucking into the 60% of our addressable market that want to purchase on the high street and particularly the locations that we will be targeting are thriving high streets. So it's a natural next step of what we're doing. So we would have been growing or any way but we think that the longer-term profit and the shareholder value that will be created by engaging with customers in all ways that they shop will propel us in the mid- to longer term, both in profitability but also value to everyone involved.

Great. [Operator Instructions] And we've got a question from Matthew [indiscernible]. Most people we have interacted with thus far understand the move to open stores given all the supportive data. The area they don't understand is the implied higher breakeven point on revenue, given the higher gross margin. Could you elaborate on the relevant moving parts here?

The decision to open stores is absolutely the right thing to do. The key thing that we're doing in the near term is managing the level of price promotion particularly around site. As we said in the presentation, price-led promotions is a facet of pure-play retail predominantly. It's really important that when we open stores, that the price the consumer is paying, whether that's on our own website, through a third-party partner or through our physical stores, it's the same. That is the underlined assumption on which the trial was based, to try to understand what the implications or impact would be of that change. We're really comfortable that whilst the revenue growth in the near term will be slightly lower, aligning that price point is really important. So in the near term, the revenue growth will be slightly tempered. We will deliver higher gross margin but it won't in the near term offset the number of orders, given the traffic will be lower than we modeled out based on that trial. As customer behavior, if you like, normalizes and gets used to that proposition, we believe that our own site will start to thrive into the mid-longer term, supported by stores. And an important variable about stores, a pure-play measure is also about how much you spend on marketing, both in terms of acquisition and retention. And as we start to get critical mass of stores, it means that the level of marketing investment that will be required will be lower, because your stores start to do some of that job for you. So the combined overhead structure will be reflective of that new way of reaching the customer, if you like, which in turn, with that higher gross margin, more effective and efficient overheads means that we'll start to see our profit percentage move towards the 10% target that we've set.

Great. And a question from [indiscernible] behalf [indiscernible] Liberum. Could you clarify for the 3 branded businesses that you compared your strategy to, what are the price positioning categories and online versus store sales mix compared to Sosandar?

So we chose those brands because they are all targeting customers in our broad demographic. So their price points are, one of them is about 20% higher. The other one about 30% higher. And the third one is broadly the same as we are. They all have substantial store estates, 50 stores minimum and they all have a strong website. In all cases, they are not POCs. So the available information doesn't always give you all of the answers. However, they've got substantial revenue coming from both their websites and through their stores. We think in the region of 50-50 but we're not 100% sure, that they're getting substantial revenue through both online and offline. And we think, having looked at those brands in both a financial sense and in how they interact with customers, that they are supporting each other. So their online are clearly supporting bricks and mortar and vice versa, which is strengthening their brand proposition, which is what we're seeking to deliver for our customers as well.

Great. And Leon has come back and said, "sorry but the question on rents as a percentage of turnover was not answered." Does management have a number on this?

No. If you don't, I'm going to ask the questions directly. However, the reason we're not doing that here is because it will depend on lots of variables. However, the key metrics that we are doing when we're appraising new locations, in addition to where the location is, is what the contribution that we will expect to deliver once we've been open for a period of time. We expect that direct contribution out of the store estate will be somewhere between 20% and 30%, which will mean that, that will enable us to propel towards 10% profitability and beyond, after all essential costs have been included. Rent is one facet. There were occupancy costs in totality, is one facet of understanding the proposition. So the staff costs, the location, the rates, et cetera, et cetera, are really important, not just the rent. But when we are appraising individual locations, rent is obviously a key part but it's -- rent is often representative of where the location is. So if you get prime location in prime town we are more than happy to pay slightly more rent, because the throughput and the customer flow will yield more revenue. So it's one element of a complex set of things that we're looking at when we appraise that location.

Great. And Leon goes on to say accommodation costs are key to evaluating the credibility of management's plans to move into retail. So rent is your biggest cost and is crucial.

We agree. Rent and people, actually, are the largest costs. So again, that store staff [indiscernible] right through our brands and the customer service staff, so it's both occupancy costs and the staff costs at store that is largest.

And will the mix -- sorry, will the move to bricks-and-mortar impact existing relationships with third-party retail distributors?

No, no, not at all. We don't see any impact at all, because we currently trade online with -- online only with all our third-party partners, so it's not going to make any difference. Probably one another thing is context that all the peer -- all the other brands that trade on Next and M&S -- I am using those because they are by far our biggest third-party partners -- the other brands that trade through those are all multichannel retailers.

And given the GBP 200,000 cost for opening a store, what time period do you envisage a store becoming profitable in?

Again, there are also variables to that question. And I'll answer in a modeling sense on what we would expect to -- remember the payback period would be between year 2 and year 3 and which wouldn't be abnormal but that's our expectation in the way that we've modeled. And that's our expectation when we're approaching new stores. The revenues that are expected from an individual location will enable us to pay back through that period. The variables will obviously change, depending on the size of the store, the location, the [indiscernible] state of the store, which may or may not mean that the CapEx or the upfront cost is slightly more or slightly less. But if we look at it in an average sense, we would expect between year 2 and year 3.

Great. And can you give some color as to what system changes are needed to support physical stores? For example, HR systems, stock control per store, et cetera.

We are, in any case, implementing an ERP system which is a Microsoft-based system and that will be able to support our store estate as well. We are out to tender at the moment, looking at direct EPOS systems, which will either be a complementary or an extension of our ERP or a standalone system that will be integrated into our ERP. Those changes or changing a system are things that we're doing anyway and they're modest in investment level and they're the right thing to do, not just for retail but to enable our business to grow into the future in a way that we're talking today. Beyond that, no material change is required. So we're a third-party warehouse and we already work with third-party transportation because of this no change is required. They already have multiple multichannel retailers with bricks-and-mortar stores. So the extensions into our provision of third-party support, particularly our logistics provision, no change. And in terms of our website platform, we are using Magento. And our expectation is that when we open stores, it will be a seamless customer interaction, so the [indiscernible] installed will know who the customer is and they'll be a seamless interaction on -- the customers' interaction with Sosandar by online or offline and that will be available. It doesn't matter where we make the sale. The key is to give customer experience, whether it's online or in retail itself.

So on HR, we are -- our Head of HR is currently recruiting someone to support her on the recruitment and management of store staff. And obviously, as the number of stores expands, then clearly, we would expand the HR support needed to support multiple stores nationally.

And what's the expected time line to your stated targets of GBP 100 million turnover and pretax profit of 10%?

We're saying the midterm. There are clearly some variables at play here. And importantly, we will not just open stores willy-nilly and it's important that we are in the right town but importantly in the right location within that town. So it will depend on how quickly we roll out the store estate and that will have a direct correlation to the answer to that question, which is why we're saying it -- if we open as we hope to, we think that through '27, '28 period is when we will start to see a significant uptick. Because at that point, we'll have critical mass. But it's important to say is caveated with an awful lot of variables that we're rolling just at the beginning of the year. So we need to start. We need to get some stores open, then refine the model, which we'll execute over the midterm. So it's important to recognize, it's very much caveated over doing the right things with the right stores in right locations. That's the pivotal thing that we're going to be driving in the near term.

Great. And is it right to assume that the 3 private company comparators represent a similar demographic of clientele and will you be looking for sites alongside their neighborhoods?

Yes, we definitely will. So yes, the ones that we're looking at have the same similar demographic to ourselves and they will be our adjacencies on the high street and the high streets that those adjacencies are in are really thriving high streets. So they're all upmarket brands and that's where we see ourselves sitting. But as we said earlier, we do have a more fashion forward aesthetic. We have a wider range and we have a cleaner price point than the people -- the brands that we'll be selling alongside. So we think there's a massive opportunity. And we're also out selling those brands on our third-party sites at the moment.

The reason we chose those brands is because when we have heat mapped where our existing customers live, there's a direct correlation to the locations that we are going to see stores in. But also, there's a correlation against where those brands are located, which also gives comfort as to how strong they're performing in thriving high streets with the complement of online.

Perhaps what we're saying there aren't just 3 as well, so 3 was just -- obviously, we could have gone on and on with a number of brands but we selected 3 as a representative.

Great. And how many sites have you identified in both the short term and also for the long-term plan?

In terms of actual towns, there are at least 50-town/cities across the U.K. that are on our total hit list, as it were. Then we've whittled that down to where we want to target initially, where we think the biggest return on investment will come at the beginning, pull offs, where there's availability. So it's -- because it's all about, it's not just about the town, it's about the right street in the town, the right adjacencies in the town. And so we've identified probably at least 10, I would say, that are what I would call hot leads as if there is a shop, we are looking at that shop. We visited that town. We won't be doing 10 initially but it's probably that that's in the region of kind of on the hot lead for Tier 1, I suppose.

And in the long term?

Well, in the longer term, there are 50. There are at least 50 towns that fall into, what we would call, upmarket thriving town/cities. So if you look at those 3 brands that we used as a kind of peer group and people to compare ourselves to, they all had at least 50 stores.

Great. And what turnover and growth contribution do you expect from the international partners?

In the near term, we are going to be sharing around 100 styles with each of the partners, which equates to about between 3,000 and 4,000 units. We need to let the trial commence. But in both cases, there is significant growth opportunity when we look at those businesses, what they turn over and how brands perform. In addition, The Bay in Canada has over 100 physical stores as well. So depending on how online performs and if we execute on both sites really well, there's an extension opportunity that we could tap into, which is partly why we wanted to work on something like, The Bay because they are such a strong brand in Canada. So we need to let the trial commence, if you like, start, which is in the latter part of this financial year. And then we will start to set targets about how we performed. But we've got really high hope and expectation for, not just those 2 partners but potentially more partners overseas could deliver for us.

Tremendous. And that's the end of questions. Oh, well, there's one more. Is international a wholesale deal?

In both cases, it's consignment. So it's very similar to the way that we interact with both M&S and with Next. And consignment means that we hold the stock in the warehouse of The Iconic and The Bay. And it's the best way for us to control the range, how we interact with their customer, also is very good for various interactions. But I think in those 2 cases, we think the best way to reach the consumers in those markets is by working with The Iconic and The Bay in the form of consignment, because we can manage the stock in play and the range profile working with them to maximize the opportunity.

Great. And that is the end of questions. Julie, do you have any closing remarks?

Just to say, thank you all very much for joining us today and we look forward to updating you again at half year results.

Thank you very much, Julie, Ali and Steve. And to everyone listening, you'll now be taken to a web page to give feedback on today's presentation. If you can't complete it now, you'll get follow-up e-mail later. We'd be really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.