Sosandar Plc (SOS) Earnings Call Transcript & Summary

Welcome to the Sosandar Interim Results and Trading Update Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Julie Lavington, joint CEO. Julie, over to you.

Good morning, everybody, and thank you for joining us today -- sorry, good afternoon, just it is 10:12. So here with me today is Ali, Co-CEO; and Steve, our CFO. So just to talk you through the agenda for today, we're going to kick off with our autumn trading highlights. Then Steve is going to do half 1 financials and some more financial detail on our autumn trading followed by Ali and I looking at our operational progress, just a conclusion, and then over to you for questions. We started in the second half of the financial year really well, with strong autumn trading in the months of October and November, which are our key trading months. This is both on our own site and through third parties, and we are on track for full year guidance. Revenue is up 16% year-on-year and both October and November are PBT positive. Our decision to reduce price promotional activity has delivered the positive results we anticipated with margin rising to 59.8% from 56.4% last year. We successfully launched with Freemans online and in-store with Sainsbury's. We are #1 or #2 brand in all of Sainsbury's 9 fashion concept stores. We've also executed our very first international third-party partnership with the iconic, which went live last week. They're the biggest online player in our demographic in Australia and the Bay in Canada will follow very soon in early 2024.

Good afternoon, everybody. We shared the news in October that we are moving towards becoming a multichannel retailer, which will significantly increase our addressable market. In preparation for becoming a multichannel retailer, we have reduced the amount of price promotional activity on our own website, which is a norm of the pure-play model. This reduction in price promotional activity was trailed in quarter 2 with the results reflected in our H1 numbers. So the revenue for the first half, which ended in September was GBP 22.2 million, which is up 6% versus last year. Our gross margin was up by 100 basis points from 54.4% to 55.4%. This increase includes a higher proportion of revenue being delivered through our wholesale channel, which has a lower price point and a lower gross margin. Excluding the effect of this, the like-for-like margin was up 200 basis points versus last year. The gross margin in quarter 2 on our own side was up 570 basis points to 55.1%, which reflects the reduction in price promotional activity during that period. Our overheads increased by 21% or GBP 2.3 million to GBP 13.3 million. This increase includes third-party commissions, which accounts for over half of the overall increase. The balance includes the strengthening of the Sosandar team, which was invested in, in the latter part of FY '23 and also an increase in the activity-driven fulfillment costs. We are on track to meet full year market guidance for FY '24, which is a PBT of GBP 0.1 million, which means that H2 will be PBT positive of GBP 1.4 million. In terms of the balance sheet, our net assets increased to GBP 17.2 million as at the end of September 2023 compared with GBP 10.6 million the year before. Cash at the end of September was GBP 7 million, which includes bringing stock in earlier for the autumn season compared with the previous year. Our cash balance at the end of November has increased to GBP 7.3 million. Our inventory level has increased to GBP 14.2 million, although it's always important to note that September is a peak month for stock as a large proportion of the autumn range will be with us already or in transit at this point. The balance reduces from September as we sell through the autumn/winter season. Receivables increased to GBP 3.8 million compared with GBP 2.3 million a year before due to the increase in revenue from our third-party partners, including the relationship with our new partner, Sainsbury's. There has been no change to payment terms with any of our partners who continue to pay in full and on time. Noncurrent assets increased by GBP 0.6 million to GBP 2 million. Investment in the development and launch of the Sosandar app and ongoing costs for our new ERP system results in our intangibles being GBP 0.4 million. Moving on to cash flow in more detail. So our cash position was further strengthened in February with the equity raise, which has allowed us to invest further in growing our distribution, in particular with third parties with the launch with Sainsbury's. The cash balance of GBP 7 million at the end of September is enabling us to self-fund the rollout of the multichannel strategy as we look to open our first physical stores from early in FY '25. It's worth noting that September is typically both a high point for inventory and a lower point for cash being a month before the peak trailing months of the autumn-winter season. If we move on to post-period trading, which covers October and November, revenue of GBP 10.2 million, which is 16% up on the same period last year. This growth is ahead of the 15% that is needed in H2 to deliver the full year market guidance revenue of GBP 46.8 million and significantly ahead of the 6% growth that we reported in the first half of the year. November was a record month for Sosandar, and gross margin continued to increase, which reflects the continued reduction in price promotional activity on our own website. Gross margin for October and November was 59.8%, which is 430 basis points ahead of H1. In addition, we continued to trade exceptionally well with all of our third-party partners, which seems to being one of the top selling brands included with Next and Marks & Spencer. Both October and November have been PBT positive, and we are on track to deliver the full year market guidance of GBP 0.1 million positive. This would result in a substantial positive suite in H2 compared with H1. PBT target, therefore, for H2, is GBP 1.4 million positive compared to the GBP 1.3 million loss in H1. On this slide are the core KPIs for our own website for October and November compared with the previous year. In addition, compared to quarter 2, as this shows how the KPIs have developed since we reduced the price promotional activity, which commenced in August. Traffic to our own site increased by 2%, which is a significant positive move since quarter 2 where we saw traffic being 8% lower. This is represented on the graph by the blue figures. This is significant given customers are not receiving the frequency or quantum of price promotional incentives to purchase. Conversion also improved with quarter 2 being 19% down year-on-year compared to 22% down in Q2. Last year, our conversion rate was extraordinary with our current level of conversion remaining really strong compared to market comparatives at 3.4%. Average order values increased 6% versus last year to GBP 116, which is a similar level of growth compared with quarter 2. The reduction in price promotions is all about improving profitability in the mid to longer term by improving gross margin and creating price alignment between online and physical stores. It is therefore really pleasing to deliver such a strong gross margin on our own site in October and November of 58.1%, which is up 400 basis points versus last year.

Key to our operational progress is the addressable market. So we thought we'd just take a moment to look what this is in the U.K. The U.K. fashion industry contributes $62 billion annually to the GDP of the U.K. It's a growing industry. It's the second biggest retail market in the U.K. after food and groceries and one in every 25 jobs in the U.K. is in fashion. In addition to this, the U.K. is the third largest fashion market in the world after the U.S. and China. And as an export market, British Fashion brands are highly coveted worldwide. So the size of our addressable market is huge. So with just a 0.2% share of the market in the U.K., we will achieve our medium-term strategic goal to be $100 million revenue business with a PBT of at least 10%. So in order to achieve that, we will continue to grow our own websites in the U.K. and international expand opportunities with our existing third parties, establish a multichannel model, which includes opening our own stores and we will also continue to expand internationally following the same model that has worked so well for us in the U.K. with third parties. And we are confident we can achieve these goals because what underpins our success is unique, differentiated, great product because we've tapped into the psyche of women and created a brand with a product aesthetic they craved, but couldn't get anywhere else. Our clothes are sexy, feminine, great quality and the flattery body shapes, they just make women look and feel great. So that is why our customers come back to us again and again. We could talk forever about our product to why it's different, but we thought we'd share a few very recent quotes from the customers themselves. I'll just give you a moment to read them. So just to summarize, we have a very wide product range. We cover everything from leather jackets to smart suits, to full length gowns, work clothes and jeans as well as shoes and accessories. In fact, the entirety of the items, any woman would shop. Other evidence of how good our product is, is the phenomenal success we've had with third-party brands. And to give you an example, we can look at Next.

Along with MNF, Next is one of the largest womenswear retailers in the U.K. They sell over 1,000 brands online. They sell every single womenswear brand of note, both U.K. and international. Brands such as Mango, Whistles, Hobbs, River Island, Mint Velvet and Rice to name a few. Sosandar outsells all of these brands on Next. In fact, Sosandar is the second biggest womenswear brand on Next by turnover. So let's just pause for a moment to taking what that means. Brands like these are all household names selling overall as businesses way over GBP 100 million in revenue. But when we put Sosandar in a like-for-like environment next to them on Next, we outsell all of them in terms of revenue. And all of these sales are organic, we are selling more than our peer brands as our product is wanted by the customer alone.

All of these brands that we outsell also sell through their own stores. And given that 60% of clothing sales are made in store in the U.K., it makes total sense to us to increase our addressable market significantly by launching our own shops as we're missing out on 60% of the clothing market. If we outsell every other women's fashion brand in a like-for-like environment online, then the potential to outsell Next store to them in high street makes logical sense and can only strengthen and contribute to scaling our own business driving profitable growth, which in turn will drive shareholder value.

There are many other benefits to having a multichannel business, stores enhance online rather than taking away from online. Also, it can't be underestimated what the effective is of existing in the real world and how this can enhance all of the channels of our business. There are many financial benefits to being a multichannel retailer. It will help us drive scale, we'll deliver higher gross margin, reduced marketing spend as a percentage of revenue, lower our customer acquisition costs and increase its frequency of purchase as well as lowering overall returns rates. The evidence of all of this can be seen across many successful multichannel retail brands and we've shown 3 of them here, which operates within our demographic. These 3 businesses turned over between GBP 100 million and GBP 325 million per annum. They all have at least 60% gross margin and a PBT in excess of 10%. And you can see here that brands 2 and 3 have really strong PBTs at 18% and 16%, respectively, and both have over 50 stores in the U.K.

I'm sure you've seen all the press and the mounting body of evidence that demonstrates the success strong clothing brands are having in stores on thriving high streets, every which way we turn retailers are expanding their portfolios. Rents have come down from pre-COVID prices. However, retailers are fighting for every store for their portfolio. So now it's about availability. From Marks & Spencers to Phase 8 to Mango, they are all expanding their store portfolio, even seeing the massive Chinese clothing company are going to be opening 30 stores in the U.K.

So let's look now at our routes to market. All of our routes to market are thriving. That's our website, our app and our third parties. Our own website is and always will be the bedrock of our business. And as you know, we launched at a few months ago, and it has exceeded all our targets and is a great success. Early sharp signs show that conversion rate is higher on the app and people are shopping more frequently. A few months ago, we launched internationally through our own websites, and we're now selling and shipping to 60 countries and we're seeing about 2% of our sales coming from international, which is fantastic organic growth as we haven't done any marketing at all internationally. We mentioned Next earlier and how we are our #2 brand, but the same is true of every single third party we work with, whichever way we turn, we are a top selling brand. And the same has been true with our recent launch with Freemans in September. We've also just launched with the iconic in Australia and were due to launch early 2024 with the Bay in Canada. So we're following the same successful strategy we've used in the U.K. choosing the biggest successful retailers in each country that target our demographic. We've also now successfully executed our first in-store experience with Sainsbury's, and we are #1 or #2 brands in each of the 9 stores. We're progressing well in our own plans to stores, and we're on track operationally to open a handful of stores for spring trading with owners in the pipeline for autumn. It's our expectation that we'll open between 6 and 8 stores in the 2024 calendar year. Opening stores will have a positive effect on all our other routes to markets, but in particular, our own website, offer an opportunity to click and collect and to return products.

So to summarize what will be the successful ingredient of store openings, firstly, the location, locating the right towns in the right street in that town with the right adjacencies is absolutely paramount. Secondly, is the actual store itself and how it captures the essence of the Sosandar brand in the physical sense and also the customer experience. We've employed a brilliant external design company who is working with us to help bring the concept to live. They've worked on a wide range of successful store designs, everything from Karen mill into Burberry. We've engaged experienced officers with lots of experience with women's retail, and we are at legal state at 2 stores. We have extensive experience right across our teams to execute our in-store strategy. Virtually everyone in our business has experienced both online, in-store and with third parties and it will be extremely important that the stuff we employ in store are able to give the best Sosandar experience. Therefore, we're confident in our ability to execute shops just as we have successfully executed anything else at Sosandar with a wide range of product that looks absolutely fantastic in the physical space. In fact, Sosandar clothes are the type of clothes you actually want the customer to see and feel as the quality is so good.

So in summary, the second half has started really well with strong autumn trading in our peak months of October and November, and this strong trading continues into December, and we're on track to achieve full year expectations. We will continue to grow our own website, both U.K. and internationally. There is continued opportunity to expand our existing U.K. third-party partnerships, and we'll take learnings from the Bay and the iconic to expand both opportunities with them and to expand internationally with other third-party partners. We've made our first successful foray into physical presence in store Sainsbury's, and we're now going forward towards opening our own stores in spring. All of this will drive our business forward to achieve our medium-term goal of GBP 100 million plus of revenue and at least 10% PBT. So we have very, very exciting times ahead. That's the end of the presentation. So we'll hand over to you now for questions.

[Operator Instructions] The first question, have you completed staff recruitment? Or is there more to come?

I start with that. I think staff recruitment, obviously, in a growing business is just an ongoing thing. We are very, very careful with staff recruitment. We only approved up at the right time when we absolutely need when we need that stuff in order to execute the next stage of growth. But I think for a growing business, then staff recruitment really never stops.

Can you talk us through the store dynamics? What does the typical store look like?

If we give a broader answer to start with and just talk about the plan with regards to physical retail. So as we say, we've got a target list of locations that are around 50 individual towns and cities. Now that doesn't mean that we'll be opening 50 next year. It's about targeting locations that have the dynamics, particularly around customer demographic, that are aligned to the customer that buys as today. So that gives us a line of sight as to what we aspire for over the mid- to longer term. And if we [indiscernible] on the types of locations, so they're generally speaking, more affable market towns or city center locations that we are looking at. In terms of the specifics of individual stores, it's probably we're saying, of course, no 2 locations or no 2 stores are identical. But if we look at the type or economics that are applying to the locations that we're looking at the moment, they're typically ranging from 1,500 to 2,000 square feet in size, always on one floor only for trading. We're looking at locations that will typically cost us in the region of GBP 125,000 per annum of rent, of course, rates, so combined costs. We're typically looking at 5-year leases with a break option midway through. We're looking typically our CapEx up to about GBP 200,000, although that value will be different depending on the handover date that we get the store in. And that's where [indiscernible] also comes into play because depending on the handover state of the store and other aspects of the search, we would expect to get rent free in the region of 6 months. Payback per store is expected to be in year 3, and we would expect each store to be profitable in year 2. It's probably worth saying, though, that these are modeling assumptions. They're not necessarily actuals because we're not yet live. But when we're modeling out what we expect the rollout to look like, that's gives you a sense of where we are. I think what's really important, though, I think Ali said, this is about the right location. So there are available stores, but they're not always in the right spot in a town. It's a paramount importance that we're seeking stores in absolutely the right spot. And not likely, whether it's on one side of the street versus the other, it likely where there are -- what the adjacencies are, we don't want to be around the corner because the footfall isn't there. So it's really important that whilst we're tilting a set number of stores, we will only take stores on if we believe they are absolutely in the right spot of town because one of the primary correlators between success and failure is the store location. So it's really important that we assess that properly. And that will dictate to a degree the speed of rollout because we're not wanting to just roll out store numbers or cost we're about getting the right stores in the right location because if we do that and execute well, then the expectation of success is much, much greater. So hopefully, that gives a lot more depth, a lot of depth to the store platform.

Sainsbury's in-store launch sounds promising. Will additional Sainsbury's stores be adding Sosandar.

So we've been told that Sainsbury's are planning to roll out more stores, and they do plan to have Sosandar in their stores. As of yet, we don't have any dates or times or time scales or how many stores, when. So at the moment, it's 9 stores, which we launched and started launching in October. We're doing phenomenally well in those stores. we are either #1 or #2 brand in each of those 9 stores. So yes, as a top sell in [indiscernible] Sainsbury's, as they roll out more, you can expect to see Sosandar in those.

Tremendous. What is it about Canada and Australia that made you choose them as your first international locations? Is it the English language making it easier to resonate?

Yes. The English language was definitely one of the reasons. We're also selling well organically through our own site in both Canada and Australia. So that was another good reason for us to start in those countries first. But as with the U.K., when we're looking at international partners, we're looking at partners that have -- that target our demographic that are successful within those demographics and have opportunity for us to scale with them. We also look at the logistics and how easy that is for us. And also the partnership itself, the relationships that we have with those companies to make sure that we can continue to grow and grasp every opportunity. So in the same way that we've looked at all the partners in the U.K. is similar to how we look at who we take on internationally.

Great. And when do you anticipate being able to sell through a third-party website in the U.S.?

I think we -- the opportunity was there to go into Canada, we felt that it was -- as Ali explained, it was the right partnership, the right country to launch. And I think we want to execute in Canada and then potentially, that then gives us the springboard for which to have more meaningful conversations, I would say with America. It's not quite as straightforward in America who the right partner would be. It's a much more complex country than it is working either with Australia or Canada. It was very obviously to get to work with in Australia and Canada. Less so, I would say, in America. So we feel we want to get some learnings internationally first before we have to in the water in the U.S. We are selling well on our own website in U.S., which is one of the top countries.

Great. And in the due diligence behind pursuing the bricks-and-mortar strategy, did any of the comparable companies you looked at also sell through the supermarket, say, the likes the Sainsbury's, et cetera?

They do?

No.

No.

Are the brands you talked about earlier, the type of businesses that you're competing against the store spaces.

In some circumstances, but less so really because the vast majority of the brands that we were talking about earlier on Next have already got large store estate. So the brands that I referenced have already got 50, 60 stores. So we tend to be going -- we're looking at locations where those brands already. The main thing we are seeing in some places, some of those brands will be up their upscaling sometimes. They're moving to a bigger store because those locations have been successful. So they tend to pick primarily view be already there rather than we're competing with them for the space.

Do you expect to be cash positive in half 2? And if not, when do you think that will happen?

Yes, we do. It will depend on our ways to do with the store estate, whether it's this side of the financial year-end on Next, but we certainly expect to be neutral in H2, maybe marginally positive. If we hit the numbers that we've got projected. The only change over in March, and it's the most [indiscernible] September actually is 2 things. One is roll out stores. And secondly is the time line on when we're bringing stock into the new season. But all things being equal, yes, we'll be at least neutral, if not marginally positive.

What's the timescale for the medium-term target of GBP 100 million and the 10% PBT, especially given the recent reduction in turnover.

We're not -- we won't put a number of years on, but we do think it's in the mid- to longer term. I think when we talk mid- to longer term, we're talking about 3 year onwards. I think the facet to that we need in place are, we need to build to scale not only through the store estate, but the successful execution of the things that we're doing. I think the foundations that we've laid through quarter 2 and now in October and November are so positive because the gross margin performance is so strong, very close to where a lot of the comparable brands that Julie shared on that slide are already at. So we're very close to being plus 60% margin. What we now need to do is continue to build scale, both through rolling out stores successfully, but also the brand awareness that, that creates, we think will be driving top line growth in other channels as well. And once we start to build that scale beyond the growth that we're already doing in October and November, then we start to make those numbers very much in our eye sight in that time frame.

When you need to raise funds for the bricks-and-mortar rollout.

No, we don't think so. So the balance that we got as at the end of November is GBP 7.3 million. We don't expect to need to raise funds. Actually, quite the opposite. We think all of the rollouts can be self-funded from existing resources or from a repatriation of profits once we start to become profitable. So GBP 1.4 million positive PBT in H2 and profitably into next year, which will be recycled in supporting the rollout of the stores as we move forward. So at this moment in time, now we are building our plan to be self-funded from our existing balances that we've got already.

Great. And how is your plan going? Is the cost all being capitalized? And when do you anticipate writing off the cost?

So probably worth giving a little bit more color on the ERP project. So the ERP project for us, we've chosen a system. The anticipated go-live date will be early in the new financial year. It's a system that is well used by lots of other industries and players within our sector. Why are we doing the ERP project, it's because we can improve processes internally, not least as we add further complexity, if you will, to our business model stores, internationalization and all it will do is make sure that we're streamlining our business processes right the way through from our buying and our merchandising teams through to finance. So we're on track, we're on budget. And in terms of -- it's all capital, yes, a partner in time that the existing team are investing into that project, that's operational expense. Beyond that, it will be phased over a 10-year period in terms of that investment and capitalized and then depreciated over 10 years.

Great. And as a fairly young brand, are you worried that your turnover in half 1 '24 has only increased slightly, even though you've opened up a number of high-profile retailer channels.

So no, actually, because the performance in half 1, a 6% revenue growth, but the margin growth really importantly. So part of the reason why it was 6% or not more is because of the managed change on our own sites in that period. So removing or reducing significantly the levels and frequency of price promotional activity means that we've managed the growth to be more modest than it would have been ordinarily. In terms of opening up of new channels, we didn't actually open up significantly in half 1. We've laying the foundations of Sainsbury's. So we do have some wholesale growth in half 1 because it's a wholesale business and the revenue is taken when you invoice the customer. But I think the foundation is like a much more substantial growth going forward. So quite a few of the other things, for example, the iconic, the Bay will yield value in H2 and onwards from there. So no, we're not disappointed. We see it as a really important foundation step for the next stage of our growth, which will include stores for next year.

Great. And how does selling Vara supermarket channel in line with high-end retail stores? For example, is this a different product range as you might expect it's a different customer?

It's the same product range that we're selling in Sainsbury's. I think customers that go into a supermarket are not different customers. Because we all shop in supermarkets. Every single human being shopped in a supermarket pretty much and what Sainsbury's are aiming to do with the launch of their fashion concept stores is to attract that part of their customer base who currently go to other places to buy fashion brands. So I think that -- I mean, it's obviously not for me ready to say what says we trust you, but my understanding of it is where they see the opportunity is to go after some of that department store business, people that would ordinarily go and buy their clothes in a department store or another place that may sell brands is capturing them while they are in the supermarkets, they've got a captive audience. They have a huge footfall. So it's targeting very similar people that want to buy products elsewhere. So it's not really a different customer as such. It's just offering -- it's a new market for us. It's a new outlook for us to get this underground in front of people that may not see it.

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

Just to say thank you all very much for listening today. Wishing you all a very happy Christmas, and we look forward to seeing you again next year.

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