Sosandar Plc (SOS) Earnings Call Transcript & Summary

Welcome to the Sosandar Trading Update Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Julie Lavington and Ali Hall, joint CEOs; and Steve Dilks, CFO. Julie, over to you.

Thank you, Tamzin. 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 9:00 a.m. We're delighted to be talking to you at such a pivotal moment in our development. In the last 2 months, we've opened our first 3 stores with strong trading in all 3, coupled with a demonstrable uplift in traffic to the website in the areas where the stores are located. The period under review reflects the strategic decision we took in the second half of last year to significantly reduce price promotional activity outside of the major scheduled sale events on sosandar.com. The strategy is to focus on driving margin and profitability as we started the transition of becoming a true multichannel retailer and commenced our store rollout. Whilst revenue has been impacted, as we've discussed previously, the uplift in margin and PBT we are now seeing on a sustained basis clearly demonstrates that this was the right course of action in order to drive sustainable profit over the long term. And it's evident that the strategy to focus on margin is paying off as customers become used to paying full price on sosandar.com. Trading in October across all channels has started strongly with revenue being ahead of last year, which represents a substantial positive swing compared with half 1.

Our decision to become a multichannel retailer will enable us to capture part of the GBP 60 billion per annum clothing market transacted in physical stores in the U.K. as well as accelerating profitable growth. We're delighted to have opened our first stores in Marlow, Chelmsford, and the Metrocentre in Gateshead, and we are opening soon in St. David's Center Cardiff. These locations were carefully selected for being affluent thriving locations where Sosandar customers over-index. We are pleased with the progress of our store portfolio thus far, with sales tracking in line with our expectations. The feedback on our product range and store environment from both new and existing customers has been fantastic, which shows the power of the Sosandar brand. We've hit the ground running with strong footfall and conversion and have also seen an uplift in traffic to our website in the areas where our stores are located. We're incredibly proud of seeing the Sosandar brand on thriving high streets and are delighted with the reception we've received so far. As a reminder, we believe that having our own stores will deliver multiple benefits, both to our total addressable market, profitability and to the brand as a whole. It will bring increased brand awareness, drive higher margins, result in more efficient marketing and deliver overall lower returns rates. The strength of our brand and unique product range remain the key drivers of our success and keep our customers returning to us for their wardrobe needs. We're incredibly proud to see the success that our Sosandar clothes are having across all our different routes to market. Sosandar.com remains the bedrock of the Sosandar hub. Trading with our well-established third-party partners has continued to be strong with the success of our product resulting in Sosandar being one of the top-selling brands across all third-party partners, including Next and M&S in the U.K. and the Iconic in Australia. In September, we also launched in store with Arnotts in Dublin, Ireland after initially selling online through Arnotts' website. We've seen strong demand from customers in Ireland via our own website. So this was a natural next market for us to move into. Being in store with Arnotts, the oldest and largest department store in Ireland is also helping to cement the brand's presence in the country.

Moving on to the financials. As we have stated already, our focus has been on the prioritization of margin enhancement and profitability, and the numbers reflect that. We've delivered revenue for the first half of GBP 16.2 million, which reflects our continued focus on full price sales and transitioning away from price promotional activity on our own website. Our focus on gross margin is delivering, with gross margin for the period being 62.2%, up from 55.4% in the prior year. Our focus on margin plus ongoing cost management has resulted in a substantial positive swing in profitability. In the period, we have improved by GBP 0.6 million to a GBP 0.7 million pretax loss compared with a GBP 1.3 million pretax loss in H1 last year. We expect to deliver another substantial swing in profitability in the second half of the financial year. We have a robust net cash position of GBP 7 million, whilst down from the GBP 8.3 million at the 31st March '24. This reflects the timing of inbound stock for the autumn/winter collection, which is earlier than last year and the capital expenditure requirements for the rollout of our own stores. As a reminder, the store rollout is being delivered entirely from our existing financial resources. Looking ahead, due to our continued prioritization of profitability at this stage of the company's development, we are moderating our FY '25 revenue expectation to GBP 40 million. Our FY '25 profit expectations are, however, unchanged in the light of continued strength and upward trajectory of our gross margin, significant reduction in price promotional activity, selective use of marketing and careful management of other overheads. On that note, I'll pass back to Julie for a quick overview of our current outlook.

The opening of our first 3 stores marks such an exciting point in Sosandar's development as we move towards becoming a true multichannel retailer. Trading in October has started well across all channels with revenue being ahead of last year, which represents a substantial positive swing compared with half 1 and a continuation of the strong gross margin as we head towards our seasonal peak. Looking further ahead, we are increasingly informed by our learnings from the rollout of our own stores and reduction in price promotional activity. We continue to focus on margin, which is the key building block to drive sustainable profitable growth. Our strategic goal remains to deliver a pretax profit margin of at least GBP 10 million derived from the previously disclosed 10% of GBP 100 million revenue. We look forward with great optimism, and we are incredibly excited for what lies ahead for Sosandar. So over to you now. We'd be happy to take your questions.

[Operator Instructions] The first question, do you expect to open in Cardiff before Christmas?

Yes, Cardiff will be opening imminently. The store has been fitted out. It was actually handed over to us this week. So we're anticipating opening within about 2 weeks.

Fantastic. And what have you learned from the first few stores you've opened?

Well, we've received really positive feedback from customers on the full experience really of the Sosandar stores. They've commented on the great customer service, the feel of the stores, the way the stores are laid out, the product. And obviously, through the process of opening stores, we've learned a lot and had things that we weren't expecting. But we feel as though the fact that we came from an online business first, which requires agility, speed of action, nimbleness that stood us in good stead really for when we've had to move or respond to something really quickly. In terms of product, the product has been really well received. And what we've learned is that best sellers online and best sellers in store, but there are some product categories that will sell better in a specific area given the demographic there than in other stores. So -- but that's very easy for us to adapt the range to suit each store.

You mentioned licensing in results. Is there any update on that?

Not at the moment. We are in active conversations with a number of potential partners, as I think we outlined when we spoke in July, and we will update the market as soon as we can.

And the change in promotional strategy relates to your own site. The third-party sales have always been more full price. Did we continue to see growth there where the promotional strategy was more like-for-like?

Yes. We've seen growth across all of our sales channels and the performance of our third-party partners has remained broadly unchanged or unaffected by what we're doing on our own site. With reference to the reduction in price promotional activity on sosandar.com, one of the key building blocks that we've been focused on is improving the gross margin and thus the profitability. And we're really delighted with how that's going so much so that there's almost no differential now in the gross margin that we're delivering on sosandar.com versus through our third-party concession partners, which, of course, was the objective that we had. It also has the added benefit of creating a really clean baseline on which we can judge the impact of our stores without many or any other variables in play at the time. So for example, if we were doing price promotional activity on our own website, but not in store, it's not a like-for-like comparison. So by now selling the vast majority of items at full price, we get a really clear picture as to the uplift that we're getting not only from the physical store sales, but also the halo effect that exists on our website from orders coming from customers that live within the vicinity of the store. And we've been delighted in all 3 locations that we're currently trading that we've had quite a significant uplift in orders on our website in addition to the orders in the physical store in those areas. So always good really in terms of what we plan to do and also the results that we're now seeing.

Tremendous. And revenues were ahead of last year in October '24. Did you see any evidence of improved trading in August and September, leading to the good performance in October?

Through the second quarter, we started to see an improved performance. It's -- July and August are not necessarily always the best months on which we judge performance because they are towards the end of the summer season where it's normal, not just for ourselves, but other brands as well or the market generally to be an end of season sale. The best barometer is what trend you start to see through September as the autumn/winter ranges land both in store and online. And what we saw towards the latter stages of quarter 2 is a significantly improving trend through the month of September. And it's that trend through September that we've seen continue into October as well. Of course, what we're also will be seeing is comparatives year-on-year that start to become closer in terms of how we were interacting with customers through the latter stages of last year. So the comparatives are getting closer. But I think most importantly, we've seen that upward trend in revenue as well as a continuation of the significant upswing in gross margin through our own site as well.

Great. And has the gross margin percentage improvement all come from change in promotional strategy? Or has improvement also come from other areas?

The majority has come from how we've been trading on our own site, but it's also right to point out that there are other things going on. So we continue to benefit from cost efficiencies and also the major one into the autumn/winter season is the strengthening of sterling. So where we're buying products in dollar, the buy prices have improved. But the vast majority of the upswing in our margin is to do with what we -- actions we've taken internally on price promotional activity on our own sites.

And the question says, they visited your store in Chelmsford, which is impressive. The design in your store in Marlow looks quite different. Why is that?

The design of the 2 stores is exactly the same. I think it probably only feels different because you're dealing with a physical space that's different. So because you design each store to fit exactly the location of that store. Probably what's different is the outside. So we're using a black and white color scheme in all areas. In Chelmsford, it's black with a white logo. And then in Marlow, it's white with a black logo because that's what really suited the environment in the particular town. Also, you have to agree with the landlord what the outside of the shop is going to look like. The inside of the store is pretty much identical in both. The only thing that's a bit different is the ceiling is very high in Chelmsford and the ceiling is very low in Marlow. So it probably feels a little bit different. But all the fundamentals, the same color scheme, the swoosh behind the cash desk, all the fixtures and fittings are the same. The videos are the same, all the tables and so on. So they are identical. They obviously -- they probably feel a bit different because of the different spaces.

Great. And the questioner goes on to say, I note your products were priced lower than neighboring Oliver Bonas and Mint Velvet. Why is that?

Our prices are just the price that we are online. That is our price point. And it's one of the key things about Sosandar is very high quality at good mid-market prices.

And Sosandar still appears on discount sites such as BrandAlley. Will this now end given the reduction in discount offers?

Not necessarily. I think it's right and proper that we always have ways in which end of season or fragmented sizes of products, we have exit vehicles, of which BrandAlley is one example. But there are other ways in which we make sure that our sell-through is really good. Obviously, the key KPI for us internally is we maximize sell-through at full price. That's the key thing. But it's also right and proper that if we've got a small amount of fragmented stock towards the end of the season that we have ways in which we can gain some value from that. So BrandAlley and a couple of other ways are part and parcel of that, not just for ourselves, but for many, many brands. And the key is that we get a really efficient push through of stock so that we free up peak phases in our warehouse and also turn all product into cash, including items that have come to the end of their natural life. So we don't foresee that it will stop happening necessarily, but it has to be said that the use of someone such as BrandAlley is actually really, really small in proportion of our overall revenue, but it's just part and parcel of being a brand of our kind that you've got to make sure that you turn every item into cash.

Great. And are stores being used for click and collect?

Yes, they are. So that was something that was really important to us and the number of customers that have taken up that as the delivery mechanism for themselves is probably broadly in line with expectation, I think. So it's relatively large numbers that are happy to come into store to pick them. That's brilliant because they -- it's an opportunity for us to interact with that customer when they're picking their goods up. They also have the opportunity to return online orders to their local store. So that's also something that's been offered from day 1.

And if your range is wider than you can share in store, then how do you decide which items to stock in stores?

Well, I mean, a lot of work goes into what items we're going to stock in store. And as we said earlier, as we learn the nuances of each location as well, we adapt our ranges for the kind of things that are selling in different stores. So for instance, some stores may sell more casual products, some stores may sell a bit more party product, et cetera. So as we learn, we adapt our ranges. Obviously, the things that we know are genuine best sellers will go in. But in terms of the mixes that we put into store, how many dresses versus tops versus trousers, et cetera, we take that from online sales as well. But also some garments just work better on a hanger, some work better on a model. So we take that into consideration as well. So we look at the range as a whole, but we do individually look at each store and look at those nuances as well.

How are your partners, for example, Next reacting to your store openings? Do you avoid any areas where your partners operate?

Our partners are really pleased that we're actually opening stores because for them, what they've told us is that when they see a store opening in an area, just as we've seen our sales online in that area go up where we have a store, the same happens to our partners. So someone like Next, for instance, will see an increased sale from that area on the online in the same way that we do. So it's a positive for them.

And what costs associated with the opening of new stores are being capitalized on your balance sheet?

There's 2 types really. The primary one that is a capital expenditure item is the fit-out. So the physical shop fit that is being done in each location is spread over the life of the lease typically, so let's say, 5 years. So that will be depreciated. The other element that is to a degree, capitalized, but it's not really -- it's to do with IFRS 16, which is how rents are now shown on your balance sheet and then amortized over a period of time. So they're not, what I would call true CapEx in the traditional sense, but rents now subjected to IFRS 16 are balance sheet items. So they're working broadly the same way as traditional capital expenditure would.

And have the initial fit-out costs of the stores been in line or higher than your initial costings? And how long before each breaks even?

So broadly in line. I think, as Julie said, there's slight nuances to every location depending on the handover state or the type of work that we might want to do. But I think broadly in line. In terms of profitability and payback, if we talk profitability first, the key element is for each individual location to make money. From an internal planning assumption, we're always planning cautiously. So we think that we'll exceed our expectation, but we've been cautious on year 1, and then we expect to deliver substantial contribution growth -- contribution returns out of each location. The added element, a really important added element profitability-wise is the halo effect that an individual location gives you on trading on your own website. And that is starting to show the significant signs already. And that's the broader benefit of the strategic change that we're making that stores start to become the primary marketing vehicle, whereas in a pure-play sense, you're always having to spend money on marketing in a recruitment or a retention manner, which can be expensive. But over time, we start to see that reduce and stores become the primary element. So making a profit out of an individual store in its own right is really important, but the stores and the part they play in the overall strategy is also a really important dynamic for us. So just measuring it just on the own store is not the whole of the story. In terms of payback, our expectation is that through year 3, we'll be seeing payback. But I think that's a broad-brush comment around planning assumptions. We think that -- we hope that, that would be a lot quicker. But I think the really important part is how stores give us the kind of whole benefit that we're starting to see both in margin and underlying profitability and how they work in conjunction with sosandar.com.

And 2 related questions. Are there any areas of your range where you're wanting to improve? And are customers in store asking for new categories?

I think developing product is an ongoing thing that never stops and you're constantly -- not really, improve is not really the word. It's just to keep developing because fashion changes constantly. So what's important is to keep the product range fresh all the time, while at the same time, delivering best sellers. So we have a very well tried and tested model of doing repeat styles, doing repeat styles in new colors and new prints and then doing completely brand-new styles. And that is a model that we've really very much perfected over the last 8 years, and it's been very easy to transition that into store. I think the beauty of in-store, even though as somebody mentioned earlier, it's a smaller range in store because you can order anything, and we're obviously seeing that halo effect of online sales going up in the area where stores are, there's clearly a correlation between people going in store. And even if they buy something in store, they're then going online as well to look at the wider range.

And are they asking for new categories in store?

We're actually -- we're across all categories. So we cover every single category in the women's -- main women's market. So no, they haven't been asking for more because really, we're giving them already what they want.

Great. And how do you decide what fabrics to use for a design? Does ease of manufacture come into it? And the question says they noticed a lot of polyester in designs. Is that popular with customers?

So the fabric use really depends on the design of the garment. So for example, whether you're designing something structured or whether you want something fluid, what you want the handle to feel like to the customer. So the design would be the first thing. Obviously, then we send our garments out to different areas of the country depending on what type of garment it is because different countries have different specialisms. In terms of polyester, it's a really, really popular fabric, one of our most popular fabrics. Our customers really like it, and it's used across categories, but we also use a wide range of fabrics depending on the design.

And although it's early days, do you receive more feedback and a closer relationship with customers by being in physical contact in the store?

Yes, without a doubt. I think, yes, because -- I mean, we have a customer service call center here that is in our office. So we do have a very close correlation with our customers anyway of people constantly phoning in day in, day out. But I think to actually -- for the team to be able to see customers in situ, actually see them in real life has been absolutely brilliant. And many of our team have already visited the stores and spent quite some time there and just being able to have a dialogue with our customers in real time has been brilliant.

And if an important part of the strategy is to use local stores to build support for sosandar.com, won't this take a very long time to achieve given your tiny physical footprint at present?

Of course, it will take time. And I think one of the key elements, though, is that it will take as long as it takes us to find the right location. So we've always spoken about stores in terms of the key point that we're fixated on is right town, right location. So we won't compromise on that. That said, we've got some really good traction, both in terms of the store number that we've already opened, those that are also in pipeline that we hope to have open into the next financial year as well. So without putting numbers on to it, the target location list is in the region of 40 to 50 U.K. sites. Then obviously, beyond that, there is opportunity overseas that is for another day, if you will, but that's something on our road map. I think the -- is that too quick, too slow? I think it's really important to get learnings. It's really important that we make sure that before we get a location that it's the right one. But our capability internally would be to open up to roughly 10 a year. That's not to say we will or should. It's just what could we open internally without -- from a bandwidth and from an external support perspective. Now if all locations were open, that's quite quick in terms of a rollout plan. So say in 4 years' time, we could be up at 40-plus stores. But as I say, the number one thing is to make sure that right location and then the right street or the right spot on the street in that town or in that center because you can't change that easily. So it's really important that we don't compromise on that because typically, you regret it if you don't get the right spot.

Great. And drilling into that a little bit more. Having opened 3 stores and with the fourth coming up, are you pleased with the execution? Or have there been things you could do better? And will you be able to open 8 a year? Or could that be a stretch?

I think we're really pleased actually. I think it's quite a moment when you've only ever existed online and your brand has never been in the physical space. To bring a brand to life has been -- it's been a big challenge, but it's been an exciting challenge to figure out what we wanted those stores to look like. And I think we're all absolutely delighted with how they look. They look contemporary, modern, but they're warm, they're inviting. They look completely different. Nobody else has sort of shopped quite the same. So I think generally, we're really, really pleased with how they look. Will we keep adapting things as we go? Yes, certainly. So we're constantly looking at how the fixtures are laid out, how the clothes laid out, the outfits shown in store, what goes in the window. So it will be an ongoing iterative thing that will never stop. We will just keep working to improve. But I think for the first 4 we couldn't be more pleased, I don't think, with how they've turned out, the design company that we've used and the fit-out company that we've used to deliver the stores.

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

Just to say thank you all very much for dialing in today. Thank you for your questions, and we look forward to updating you again in due course.

Many thanks, Julie, Ali and Steve. And to everyone listening, you'll be taken to a web page to give feedback on today's presentation. If you can't complete it now, you'll get a 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.