Sosandar Plc (SOS) Earnings Call Transcript & Summary

Good morning, and welcome to Sosandar’s Full Year Results and Trading Update. Today, we are joined by Alison Hall and Julie Lavington, joint CEOs; and Steve Dilks, CFO. [Operator Instructions] I will now hand over to Julie Lavington to begin the webinar.

Thank you. Good morning, everybody, and thank you very much for joining us today. So what we're going to be presenting to you today is in 2 halves. First of all, we're going to cover the full year results for year ending March '25. And then in the second half of the presentation, we're going to talk about current trading for Q1 FY '26 and the outlook for the full year. So to begin with FY '25, it was very much a year for strengthening the foundations for profitable growth. We reduced price promotional activity on our own website by over 90%. And as a result, as we expected, revenue was lower than the prior year. As a consequence, our gross margin improved significantly from 57.6% last year to 62.1% this year. On less revenue, bottom line PBT year-on-year was still improved. So the business is now operating more efficiently and at a much higher margin going forward. We've had strong cash throughout FY '25, and we were able to fund our store rollout from our existing resources. We finished the year with GBP 7.3 million of cash at the end of March. We've also made strong operational progress across all our channels. Our website is now operating with minimal price promotional activity and at a much higher margin. We've retained our top position with our third-party partners for the fifth year running, and we've become a multichannel retailer opening our own physical stores. We've also signed our first licensing agreement, a homeware collection with Next, and at the end of February, we moved to a brand-new third-party warehouse provider who are better suited to enable our growth ambitions going forward. And we also finished the year at an inflection point with a return to revenue growth in Q1 FY '26.

Good morning, everybody. And looking at our financial KPIs in more detail. Our loss before tax narrowed to GBP 0.1 million compared to a loss of GBP 0.3 million last year. This loss is after the exceptional costs relating to our warehouse move. Excluding these costs, we report an adjusted profit before tax of GBP 0.2 million. Our PBT delivery is below the GBP 0.5 million that we expected to report as advised in our trading update in April. This is due to a write-down of stock relating to our concession channel, which was agreed during the audit process. This adjustment is within our gross margin and does not affect cash. Our EBITDA improved by GBP 0.8 million to GBP 0.8 million. This is inclusive of preopening costs of GBP 0.3 million relating to our 6 retail stores, which opened during the year. Of particular importance is the improvement in our gross margin, which improved 450 basis points in the year to 62.1%. Net revenue for the period is GBP 37.1 million, down from GBP 46.3 million in the previous year, which reflects the move away from price promotional activity on our own website. Looking at the gross margin in more detail. This chart shows our reported gross margin over the last 4 years, rising from 56% in FY '22 to 62.1% in our last financial year. This improvement has been a key strategic focus since we announced our intention to move away from the price promotional activity. Improving the gross margin to in excess of 60% and then onwards to 65%, whilst also returning to revenue growth, is critical to delivering stronger and accelerated profitability from now on. Looking at the financial statements in more detail, starting with the income statement. To summarize, we're reporting an improvement in profitability despite the near-term fall in revenue. In the year, we have a drag on profitability as a result of opening the first 6 retail stores, where we have absorbed GBP 0.3 million of preopening costs. Ali will provide more detail with regards to our retail stores later in the presentation. In the year, the move of warehouse to our new provider called Torque Logistics will allow us to provide improved service and efficiencies into the future. This move was successfully managed without any disruption to our customers. Overall, our admin expenses reduced by 17%, which in part reflects lower variable costs due to the revenue drop. It also includes much lower spend on marketing, which has allowed us to balance profitability and cash retention during the period, whilst also rebaselining natural customer behavior ahead of reintroducing greater marketing activity in spring '25. With regards to our balance sheet, it remains robust. We have net assets of GBP 17.9 million, and cash at March '25 of GBP 7.3 million. We continue to have 0 debt. Stores opening means that our balance sheet now has substantial noncurrent assets in the form of increased right-of-use assets for the store leases and CapEx relating to their fit-out. Our inventory has been well controlled to align with the fall in revenue. It's marginally up in the year. However, this also includes stock landing earlier into the warehouse ahead of the spring season to ensure that stores and our concession partners, in particular, have a compelling range for the new season. Ensuring we land stock early has enabled us to take advantage of what was nice weather as we arrived into early spring. Payables increased by GBP 2 million in the period. This reflects stock landing earlier and also improved terms with our stock suppliers. We now average 70 days on average with our stock suppliers compared with 60 days average a year ago. Our buying and sourcing teams continue to do an excellent job of managing our relationships with our key suppliers. Receivables increased by GBP 1 million in the period. This is in part due to receipts from our concession partners being just after the year-end rather than just before. In general, our third-party partners have continued to pay us on time and in full during the period, and they average 30 days for concession partners. Moving on to cash flow in more detail. As we've said, we've retained a really strong cash balance despite the reduced revenue in the period as well as self-funding the store rollout program. Our cash balance of GBP 7.3 million at March is down from GBP 8.3 million a year ago. Store CapEx was GBP 1.7 million in total, which equates to about GBP 275,000 per store, which includes the design, the fixtures and installation of each of our 6 locations. During the year, we have successfully implemented Stage 1 of our new ERP system, which is Microsoft Business Central. Stage 1 covers all integrations between our web and store systems with our warehouse. Stage 2, which is the final stage, will go live during this year, which will be the finance processes. Excluding the investment in CapEx, we were cash generative in the period, which has continued into the new financial year, where we now have GBP 8 million of cash at the end of June '25.

Good morning, everyone. So now we're going to move to the second part of the presentation and discuss current trading together with the outlook for FY '26. So we've had a great start to the new financial year. From April to June, the revenue is back in growth at 15%. Our own website has returned to growth and is up 15% year-on-year, and the margin has continued to improve even further to 65%. This strong performance has been despite the challenges we've had with the M&S website not trading since mid-April. M&S is our second biggest third-party partner and the effect of having no revenue from them since April is not small. It equates to GBP 800,000 less revenue than we expected, which equates to GBP 300,000 PBT. As well as being in growth, Q1 has continued to be cash generative with the cash balance now standing at GBP 8 million at the end of June, up from GBP 7.3 million at the end of March.

This chart shows our net revenue performance year-on-year for the last 5 quarters, including the first quarter of the new financial year. We can see how the performance improved in the second half of last year compared with the first half, with March '25 being the first month of growth since our focus on trading at full price on our own website. We are up 15% in the first quarter of the new financial year. Critical to this growth is being up on our own website, which is also up 15% year-on-year. This is key to our near-term financial performance, which has been delivered with a further improvement in gross margin, up 160 basis points in the quarter. This chart shows the revenue growth in Q1 with our net revenue for the quarter being GBP 9.5 million. Overall, we're up by 15%, and this is despite the impact of the cyber incident at M&S. The impact year-on-year is a drop of over GBP 600,000 compared with the previous year. All other channels were up by a combined GBP 1.8 million. And therefore, we would have been ahead by 22% had M&S been live for the whole quarter. Following the cyber incident, we have been cautious and anticipating lower revenue through M&S for the rest of FY '26. We are, therefore, taking a prudent view for the rest of this year and are therefore revising our guidance for FY '26, where we now expect revenue to be up 18% at GBP 43.6 million with an expected profit before tax of GBP 0.4 million.

We have a thriving multichannel business reaching our consumers through our own website in the U.K. and internationally, our own stores, our third-party partners, which include all the biggest womenswear retailers in the U.K. and we are about to expand into new categories through licensing. We will now look at each channel in a little more detail. So looking at our website, first of all, sosandar.com. Our own website is our single biggest revenue-generating channel. It's also the driver behind our overall increase in margin in the last financial year. We've successfully transitioned to full price trading with minimal price promotion and margin has continued to rise in Q1 of the new financial year to 65%, driven by sosandar.com. In Q1, revenue has also increased on our own website, up 15% year-on-year. This is driven by an increase in the number of orders, both from new and existing customers. This return to revenue growth on our own website, coupled with the higher margin that we're operating at, is a pivotal turning point for our business. As revenue increases on our own website, costs do not proportionately increase, and there are, therefore, significant economies of scale as the business grows. And our own website still has huge potential for growth as we still only reach a small proportion of our demographic. Our tried and tested marketing activity, which includes e-mail, social media and brochures, has become even more financially efficient now that we're operating at higher average order values and higher margins. As our own website continues to grow and we realize these economies of scale, our own website will be the pivotal channel in driving higher profitability for the whole business.

So now to talk about stores. We're very much at the beginning of our journey with stores, having only opened our first one less than a year ago. We're delighted with how we brought our brand to life in the physical retail environment. We knew stores would be a great marketing tool, and that's proven to be the case, as 60% of customers in store are brand new to Sosandar. We also believed we'd see an increase in traffic and revenue in the areas in which stores are located, and that has happened. We have been able to open and handle all the logistics of running these stores without adding to our head office team, as we have a wealth of store expertise within our current staff. So having opened 4 market town stores and 2 in shopping centers, what have we learned? Our customers love the upmarket feel of the stores and their unique design. But most importantly, they love our product. We have found that footfall across market towns and shopping centers is pretty similar, but what differs is the conversion. At this point, conversion in our market town stores is much higher than in shopping centers. What we have seen is that the demographic of our type of customer in market towns is more concentrated, and they more regularly shop in the area. This combination is driving higher conversion. The stores we opened in the first 2 market towns have got the highest revenue and the highest conversion rate and are near to breakeven. The second 2 market town stores only opened in February and are already following a similar trajectory. The shopping centers are a slower burn. The 2 market town stores that opened in February are ahead in both revenue and conversion of both shopping center stores that opened in October and November. Although the market town stores are getting close to breakeven, it's taken longer than we forecasted, so have been a drain on PBT. However, overall, the opening of stores has impacted the brand positively. The opportunity to interact with our customers on a personal basis through our stores has been extremely beneficial. It has brought the entire company even closer to our customers. We now plan to pause any further openings whilst we focus on getting our 6 stores to breakeven followed by profitability, as we don't want to put any further strain on PBT. Any future stores will be in market towns. We have yet to ascertain how long it will take for the 2 shopping center stores to reach breakeven. We need to trade through the autumn period to determine how long this may take.

So coming on to third parties. Setting aside the challenge of M&S, which we've talked about, we've had a really good start to the year with our other third-party partners. Revenue with our other third-party partners is up 11% year-on-year. Our strategy going forward is to retain our position as a top-selling brand with all our partners, and we work extremely closely with all of them to optimize our growth. We will also be selling all our licensed products through our third-party partners. So we have 3 licensing categories launching this autumn with 3 different partners. The first is a homeware range with Next launching in September 2025. This includes everything from sofas to cabinets to rugs and lighting. It's being sold exclusively through Next online. How it works is that Next take all the stock risk and we are paid a commission for every product sold. We have been closely involved in the product development of the range and are about to start designing the range for autumn/winter '26. The second licensing agreement is a range of leather handbags with a company called Lloyd Baker, who supply to all the main retailers. The bags will be available in a variety of styles and colorways and will be sold through a multitude of retailers. Our third licensing agreement is a home fragrance range with Mellers, who are private label supplier to many retailers. Our range of scented candles and diffusers will be available from September '25. The beauty of licensing is that there are no risks or costs to us, any profit will be straight on to our bottom line. So finally, just to summarize. During the last year, we strengthened the foundations of the business in order to deliver our growth and profit ambitions going forward. We have all the infrastructure in place, which includes a fantastic team and a new state-of-the-art warehouse, which better serves our growing business. In FY '26 and beyond, we see revenue growth at high margin. In FY '26, we're forecasting 18% growth in revenue and an improvement in PBT year-on-year. Our own website, in particular, is a key driver of increasing PBT as it drives the highest percentage contribution of all our channels, and this will continue to increase as revenue grows. The business will continue to be cash generative in FY '26 and beyond. And on that note, we will now hand over to you for questions.

Thank you. We have a number of questions pre-submitted and submitted live. The first being, why would you reduce your guidance to the extent you have when M&S is back trading?

It's probably worth talking about our arrangement with M&S from a concept perspective before we go into the specific answer to that. We're a stock supplier of M&S. What that means is our stock is moved to M&S' warehouse before onward shipping when orders are taken on the M&S website. They have different arrangements with different suppliers, including drop ship suppliers and those drop ship suppliers don't move the stock to their warehouse. They ship directly to the customer even though the order is placed through M&S. Those suppliers, after M&S went back live, were quicker to go back live, bypass the warehouse. We've not shipped stock to their warehouse since the attack commenced, and we're not expecting or anticipating moving any or much stock until the transition to the autumn/winter season, which is typically through August for a go-live late August, early September. As a result of that, we're being cautious about what quarter 2, in particular, will look like, because whilst we do have some stock in that warehouse, we haven't got as much or as deep as we normally would at this moment in time. Secondly, we're taking a cautious view of what autumn/winter as a trading season might look like until we start to move stock and we know how much stock we might move to them. We're taking a prudent view as to what trading might look like. There's a lot of unknowns about what the future will look like in the near term. And what we want to do is be cautious until we've got known information about whether they can ingest the same amount of stock as they would do it normally. And there's nothing from them saying they won't be able to. We're just internally taking a cautious view around what the rest of FY '26. So that's the primary reason why we're being cautious about our FY '26 guidance. The second element is referencing how Ali spoke about the performance in our stores, which in the near term is a bit of an additional drag on our PBT. It's the secondary point to M&S in the guidance, but it is still relevant that we're just taking a prudent view about. It's taking a little bit longer, particularly in those 2 locations that are in shopping centers, to get towards the expectation in terms of a profit delivery. And therefore, we're just taking a further cautious view, because the runway towards our expectation for those locations is a little bit behind where we would have expect it to be at this moment in time. So for those 2 reasons, we think it's prudent at this moment in time to revise the guidance in the market.

Thank you. The next question is Q1 FY '25 cut promotions by 80%. Are you continuing to cut promotions? How is customer acquisition being managed with minimal promotions?

So we are using some promotional activity in order to acquire new customers. What we've been able to do, though, is significantly reduce the amount of discount that we're offering in order to attract new customers. So the overall discount level now on our own website is considerably less than it was prior to the activity that we've undertaken to reduce price promotions, which you can obviously see very evidently in the margins. So while we do use it, it is very, very contained, much less than it was before. And what we're finding is because we're doing so little price promotions, the few price promotions that we do, do are working even better. so which is just making the whole engine run more profitably and more efficiently. In this spring period, we have -- so our marketing activity in spring has been social media primarily and also one brochure. And we found that the brochure that we did in May has worked incredibly well with a much lower level of price promotion than we would have done in the past.

Thank you. On net cash, how much is being allocated to store rollout versus digital investment?

So if we look at the 6 stores that we opened during the financial year just gone, we spent a total of GBP 1.7 million. So that equates to just over GBP 275,000 on average per store, although there was, within that spend, the initial conceptual designs of what our look and feel will look like. Any future stores that we envisage opening, we would anticipate being less than that Because there is an element of efficiency or economy of scale now we're live with our conceptual designs. That's all spent and is absorbed within the GBP 7.3 million that we had in March and the GBP 8 million in June. So I think it's important also to add to that before I think maybe Julie will talk about digital. Cash generative, we were cash generative last year if you exclude the investment in CapEx despite that drop in revenue. And we're really pleased both with the balance and also the fact that we're now becoming cash generative on an ongoing basis with GBP 8 million at the end of June, so adding GBP 700,000 to our overall balance in the first quarter of the new financial year.

So on digital, just to expand a bit more on marketing. Although we're investing in marketing activity this year, and we are investing more than we did last year, what we're finding is that marketing activity is paying back on first order. So therefore, whilst it is an investment, it's not a drain on cash because we're getting more than equivalent back again and that marketing activity is effectively profitable. So it's not a drain on cash.

The next question is, do you think a store portfolio can still work in time?

Absolutely, we think a store portfolio can work in time. And as we've said, the first 2 stores that we've opened are getting near to breakeven. And our last 2 are following the same trajectory. So they are getting towards breakeven and then we will move them towards profitability. I think we just have to remember that those 6 stores that we've opened have been opened less than a year and 4 of them haven't even gone through a full autumn/winter season yet. So the trajectory is good, and we can see a portfolio going forward.

Thank you. Can you guide to roughly what the gross margin is in periods where there is no sale?

Yes, sure. If we look at in-season full price, if you want to call it that, we will be averaging somewhere between 65% and 66%. So our weighted average will be dropped when we do end of season or in-season promotion. But our full price margin, which also always includes a degree of welcome program on our own website, which is first order incentivization, will be somewhere between 65% and 66%.

Given the pause in new store openings, are there any commitments to new stores that were made and that you will, therefore, need to back out of?

No, there are no commitments made. And so we're able to just concentrate on taking the 6 that we've got towards profitability.

What proportion of Sosandar's total equity is currently held by directors and senior management?

In total, there is held shares just over 18 million, which equates to just over 7% of the total equity in circulation. In addition to that, in total, we have an option pool for directors and the senior management of just over 27 million options, over half of which has met vesting criteria, just not been exercised at this moment in time.

Thank you. What ways are the team trying to enhance liquidity, share buyback or returning capital?

As a Board, we're actively talking about this subject at this moment in time actually. There's no news for us to update to the market today other than to say it's something that we're actively looking at as a Board. And I think we will talk probably in due course when there is information to share, but it's something we're actively discussing as a group.

Can you talk more about your typical customer and how they might be faring in the current economic climate?

So our typical customer is, age-wise, she's anything between 35 and probably 75. We would describe her as ageless, I suppose, because that's the kind of phenomenon that we've seen of women really not aging in the way they behave, in the way they dress. You get to 40, you don't really -- you kind of stay the same age for the rest of your life, and you don't change how you address things. So that's where she is from an age perspective. Our customers are affluent relative -- they are definitely the more affluent end of the spectrum. Our price point is not expensive, but it's a mid-price point. So we're not targeting a lower demographic of customer. A dress would typically be about GBP 80, for example. So what we've seen in spring, I would say, is we've probably seen -- there have been times, I think, over the last couple of years where you can feel customers just being a bit more cautious in how they're spending, not necessarily because our customers have got less money, but I think there's just been a general feeling with all the general bad economic news, one thing after another. But I would say this spring, we've seen quite very high demand. And I think to a degree, we would say consumers are quite fed up of bad economic news, bad news generally. And if they can afford it, are trying to kind of live in their own -- live in a bubble of their own world and just operate as normally and try not to let themselves be affected by just bad news coming from everywhere, I would say, in the macroeconomic environment.

Who do you think you are taking market share from?

Good question. Probably everywhere -- a bit of everywhere. I think it could -- I mean, literally from anywhere. It could be from Mint Velvet, Phase Eight to a degree. When we sell through Next, we take -- people choose to shop with us rather than buy Next on label. It could literally be anywhere and everywhere. I mean, it's a huge -- the clothing business in the U.K. is the second biggest retail business after groceries. It's absolutely huge. And we have a very, very tiny market share of that. So it's certainly not from one particular area, but I think it also shows the market that we've still got to go after, because we've barely scratched the surface.

Are there any concrete steps you can take to get some of your stores closer to profitability?

I think we've taken lots of steps along the way, and we're seeing the positive effects of those, definitely looking at stock packages. This will be our first full autumn/winter season where we've been able to take all the learnings that we've seen so far and provide a stock package that absolutely works for stores. And we've been able to take lessons from every area, from customer service, from the way the store looks, to the stock package, to everything. So we've learned so much in just under a year, and all those things have been implemented, and we really, really feel that this autumn/winter will be a good one.

Given that M&S were insured, are you getting any return from them on this?

No, I wouldn't anticipate that being the case, no.

How are you managing stock effectively? Are you using any AI tools?

I don't know if AI would be the answer, but we always have been and continue to be highly data-driven. There is a good blend of guts, knowledge of market, what's shopping, and we back everything up that we do with a high degree of both data and interpretation and analysis. And that's always been the case. And I think that blend allows us to follow the gut, but justify that feel with what's gone before and everything that we've got around us. So I think we strike a really good blend around this subject, I think, which is why our sell-through of product that we buy is so strong in general terms. So I think we kind of pool all the knowledge around us. We also have people that look at the market all of the time. We've got a very diverse team, but everyone is looking at what's selling not only with internally, but also externally and seeing what the trends are and how that will be implemented by ourselves on the high street.

[Operator Instructions] There are currently no further questions. So I will hand back to Julie Lavington for any closing remarks. Thank you.

Just to say thank you again, everyone, for attending this morning, and we look forward to speaking to you again very soon.

Thank you very much. Thank you for joining us today. That concludes Sosandar's investor presentation. Please take a moment to complete a short survey following this event. The recording of this presentation will be made available on Engage Investor. I hope you enjoyed today's webinar. Thank you.