Sosandar Plc ($SOS)

Good morning, and welcome to the Sosandar Full Year Trading Update. Today, we're joined by Co-Chief Executive Officers, Julie Lavington and Ali Hall; and Chief Financial Officer, Steve Dilks. [Operator Instructions] I'd now like to hand over to Julie to begin the presentation. Over to you, Julie.

Thank you very much, and good morning, everyone, and thank you for joining us today. We're going to start with a brief overview of our full year '26 performance, and then we will open up to answer your questions. So this has been a year of strong and consistent trading. We've delivered year-on-year revenue growth, improved margins and profitability in line with market guidance. Additionally, we've continued to strengthen our cash position and our balance sheet.

Looking at the numbers in more detail. Total revenue for FY '26 was GBP 42.3 million, which is an increase of 14% year-on-year. Our own website performance was particularly strong with revenue up 24% year-on-year, and that's driven by increased traffic, improved conversion and higher order volumes from both new and existing customers. It's incredibly pleasing given our own site is the bedrock of the Sosandar offering. Gross margin strengthened to 63.9%, up from 62.1% last year. Profit before tax is expected to be GBP 0.4 million, which is in line with market guidance. We ended the year with a strong cash balance of GBP 8.4 million and we continue to have 0 debt, and this cash balance is after buying back 10% of the share capital at a total cost of GBP 1.8 million. The group is in a strong financial position with the foundations in place to deliver sustained growth in both profit and cash.

From a product perspective, all categories performed well from occasion wear through to casual wear, demonstrating our ability to translate trends into a distinctive Sosandar aesthetic. Growth continues to be driven by both new and existing customers with improvements across traffic and conversion, reinforcing the strength of our brand. Our third-party partnerships remain a key strength of our business with Sosandar being a top seller across all partners, including NEXT. Trading with M&S has now normalized following last year's disruption, and we're pleased with how the partnership has recovered as we move into FY '27. The Sosandar store estate delivered double-digit revenue growth where open for more than 1 year. Stores in market town locations have performed most strongly. However, as expected, stores continue to weigh on overall profitability until they mature, particularly those in shopping centers. We remain focused on driving profitability from each individual location before any further stores are opened.

So in summary, FY '26 has been a year of strong progress. We've delivered strong revenue growth, improved margins, delivered profitability and continued to generate cash. We enter FY '27 with clear momentum and a continued focus on profitable growth. Thank you, and we will now take your questions.

Thank you very much. Now we've had a number of questions that have been pre-submitted and ones that are currently being submitted live. [Operator Instructions] Now our first question is, the website is obviously doing well. Where do you see future growth coming from?

So we see opportunity for growth across all our channels. As you pointed out, our own website has shown significant growth in FY '26 and we see strong growth continuing. We're seeing growth coming from new customers finding Sosandar, also an increasing frequency of repeat customers, so they're shopping more frequently with us, and we see that continuing. We've also got opportunities still to grow with our third-party partners. And overall, in the U.K., the fashion market is a multibillion pound market. And obviously, at the moment, we're a relatively small business. So gaining market share, whether it's through our own channels or through third parties, really offers a great opportunity for us to continue growing in the future.

Next question related to that is, is M&S back on track?

Yes, pretty much. So if we look at what happened when the cyberattack hit us, we had some near-term impact with 0 revenue because we're only online through the M&S platform. We then saw disruption once they started trading again through predominantly the Autumn/Winter season with reduced volume of stock being able to be ingested into their warehouse for onward sale. So we saw some prolonged impact through that period. As we entered Spring/Summer, so that would be ingesting stock to M&S in February and March, those stock levels are much more normalized and much more as expected. So we see that we're very much back on track. And it feels like everything is back on track as well. Monetizing the impact, if we look year-on-year, the impact at revenue level is in the region of GBP 1 million of impact. But I think more importantly, if we look at what we would have expected to have done with M&S including growth expectations, the impact is much more significant, so closer to GBP 2 million at net revenue level, which would equate to nearly GBP 0.5 million of PBT, which I think also gives a sense of opportunity as to what FY '27 will bring with everything back to normal level of activity through M&S. So we've got great expectation for what this year and the future will hold.

And with the benefit of hindsight, was opening your own retail stores a mistake? And how much are they impacting profitability?

No, absolutely, it wasn't a mistake. It was the right thing to do. Stores are still at a really early stage. None of them are mature yet. And all stores that have been open over a year are in double-digit growth. Yes, the shopping centers are lagging behind the market towns, but the market towns are getting close to breakeven. It also shows how robust we are as a business that we can support entrepreneurial endeavors, which you have to do as a business. You can't stand still. Our priority now really is just getting each individual store to profitability.

It's worth noting that the PBT for FY '26 excluding the impact of the stores would have been GBP 1.3 million. So I think what it also shows, whilst it's important how Ali has just spoken, but the rest of the business is contributing now substantial profitability. So also, we're able to withstand in the near term some impact as we get up the learning curve and the maturity curve of stores, but it also shows and highlights how strong the rest of our business, so that's our own website and our existing concession partners, are and how much they contribute.

Now the next question. Please, can you provide further clarity around the share buybacks following the continuation of the program? Do you intend to cancel any of the shares? Obviously, there are a number of share options outstanding for which shares may be held.

Yes, of course. So as that question asks, yes, we fully consumed the original authority of 10% or 24.8 million shares that are currently being held in treasury. And we've had approval for an extension to that authority for a further 10%, which, up until now, nothing has been bought back subsequent to that general meeting. Currently, those shares are held in treasury and that's our expectation. So at the current time, we're not expecting to cancel any of those shares because we do have a pool of share options that we would foresee that the buyback shares would satisfy those option awards as and when they're exercised.

Next question is around the Middle East. Have you seen any impact from the conflicts in the Middle East?

Yes, we have. Immaterial, though, in the grand scheme of our business at this moment in time. If we look at the moving parts of this, the timing of when it commenced, the majority -- not all, but the majority of our spring stock had already either landed or was in transit. There was some stock, though, that we air freight from India. And air freight routes typically don't go direct to the U.K. from India. They go through the hubs in the Middle East. So we had to reroute some of our transits from India so that they came through different routes whilst the Middle East was no longer being utilized. So we saw a slight bit of disruption both in time, albeit immaterial because those reroutings were quick, and we've also seen a degree of cost impact on the latter shipments out of India for Spring/Summer. That being said, near term, the impact is immaterial. So we've got all of our stock or the majority of our stock for spring and summer already. And we've seen a bit of cost inflation, which is absorbable in the near term. I think other retailers have already commented that if the disruption and the inflationary effects of what's been created on fuel prices, which not only impacts transit, but also could impact manufacturing costs as well, if that carries on for a more prolonged period, in our case, particularly into the Autumn/Winter stock season, then mitigation tactics might be needing to be deployed. So that might include RRP increases in order to offset the prolonged inflation impact. But at the moment, sat here right now, immaterial impact and everything is good in terms of stock being with us in the U.K.

Next question. Well done on a year of good progress. One standout number was the gross margin in the second half, which made a step change up to around 65.2%, which is 3% higher than the 3 previous half years. Is this a structural improvement to a new higher level? Or are there more temporary mix factors, which might see it settle back?

So there's quite a few things within that question. If we just look over the last 3-year cycle, the big step change for us was made a couple of years ago when we no longer did a significant amount of price promotional activity on our own website. So structurally, that's happened. So our base level, if you will, on margin is now much higher. What's changed for the second half, particularly against the first half of FY '26, is our intake margins are much higher. The most significant one line item of that is to do with how sterling strengthened, and our forward contract rates for the autumn season were much better against the dollar than they were in the spring season. And those similar rates have been secured for Spring '26, the season we're now in. And we're mostly forward contract bought for Autumn/Winter '26 as well. So short answer is yes, we would largely expect this to be sustained certainly in FY '27. What happens in exchange rates will determine longer term how that plays out. But again, we've always got tactics that if sterling becomes suppressed for a prolonged period, then we'll look at pricing as mitigation to that. But I think what we're seeing now is a step change towards the mid-60s as our reporting margin on an ongoing basis. So the short answer will be broadly yes. But hopefully, that gives a bit of depth as well of understanding.

Next question is, how long before a new store pays for itself?

So if we look at the 2 stores that opened first, which in our case were Chelmsford and Marlow that opened now about 18 months, just over 18 months ago, they are moving towards breakeven. So we're in year 2. And if the current performance that they're demonstrating through Spring/Summer or spring season would continue through the rest of FY '27, they will be moving towards breakeven in their second year. So I think that gives a good degree of understanding about where we are with market town locations. As Ali said earlier, the shopping center locations are the ones that are weighing on profitability much more substantially. And there's a couple of stores within the portfolio of 4 that are the worst, if you will. That's quite harsh language, but those are the ones that are weighing most significantly in our overall shape. But the market towns in particular, we would expect to push towards breakeven in year 2 and then beyond, hopefully.

And the next question is, is M&A on your agenda? Or do you have enough to do with day-to-day housekeeping? And what is your target net margin?

I'll take the M&A question first of all. No, it's not a priority on our agenda by any stretch of the imagination. I think we've got more than enough to do running our business, and there's so much opportunity for growth. However, having said that, we would never rule anything out. We never rule anything out. So we always stay very vigilant to what's happening in the market and remain open-minded.

In terms of what returns this business can start to deliver, we're pushing towards a PBT level of 10% of net revenue. If we look at how this business will get there, the foundations of are such, with gross margin being in the early or even mid-60s, the operating leverage now particularly with growth through our own website is substantial. So the marginal gains on an incremental GBP 1 million on revenue would be really substantial, which starts to give some understanding about how the business can really disproportionately accelerate its PBT growth beyond the revenue growth because those foundations are so strong and particularly given the marketing spend that we incur on our own website pays back on first order, which gives us confidence to continue to invest, which then builds that cycle growth on revenue and disproportionate gains at the net margin level.

And the next question is, what opportunity do you see from export markets?

At the moment, we have some small tentative sort of forays into international markets. So we've got a good but quite small business in Australia, working with THE ICONIC, which is a platform in Australia. That's been really, really successful. We also sell through NEXT internationally, and that's very much a growing area for NEXT. You will have noticed that they particularly drew out international in their trading update just recently. And we do get a significant proportion of our revenue coming from international sites. We also do sell on our own website internationally. At this point in time, we don't spend any marketing money internationally, but that doesn't mean to say that we wouldn't in the future. And we are positioned to be able to fulfill sales overseas in order to invest in marketing should we decide to do that at some point in the future. At this point, there's such a massive opportunity to grow in the U.K. that, that remains our focus while, I would say, running small trials internationally.

And moving on to the next question. Will it be easy to exit the shopping center stores, leasing costs, et cetera?

It depends which one, I think. Easy, no. It's never easy to exit as such, but there's different ways that you can exit retail leases. That might be a straight exit with a direct dialogue with the landlord or potentially an assignment of the lease to another retailer if they want to take on the space which, for us, is a slightly easier route. But the other options are we've got break options within our leases that are at different stages, but those could always be executed. Those are one option, though, of many options available to us. And I think even if they're not making money, it doesn't mean they won't in the future. So I think it's still early days for some of the stores that are only just 1 year open. So closing a store is definitely an option and definitely something we would look at. Does it mean that we'll automatically do it because they're lagging? No. But it very much is an option that is available to us.

And the next question is, how much will you invest in marketing next year? Have there been any particular marketing successes and areas of marketing that you will focus on going forward?

So in terms of the year that we've just ended, we did increase our marketing expenditure significantly year-on-year, and that's been really successful. We've seen really good success from our marketing expenditure in terms of new customer acquisition because it pays back on first order. And that's really largely down to the fact that because the margin is now so much higher than it was a few years ago, that's meaning that marketing does now pay back on first order, which is kind of the holy grail, really. And also marketing to existing customers and getting them to shop more frequently has also been very successful. So the two areas that we invest actual cash in marketing is on glossy brochures, which we've done pretty much right back to the beginning when Sosandar started, and it's been hugely successful for us and continues to be very successful. We did 3 brochures last year, and the year that we're about to enter into, we'll probably do 4 brochures. We've increased it slightly because it was so successful. The other area is on social media. So for us, that's Instagram and Facebook. And that continues to be a very effective and profitable way to market our brand. Probably also just worth touching on e-mail marketing, which although that carries no cost, that remains the bedrock of our marketing activity to our existing customers. So we do 2 e-mails a day, so 14 e-mails a week. Very much we use almost like media, really. And we use it to do extensive content and really sell trends, talk about the weather, new product that's coming in, and that really is a very important part of us getting customers to shop more frequently. So we're very happy with where marketing is. We've had a very successful year with the year just gone. And we are intending to continue with the same types of marketing activity, albeit we will be spending more on marketing again in the year ahead because we have confidence that it will pay back.

[Operator Instructions] Next question is, great margin performance. Do you see any scope to increase your margin further? Or could you see any benefits from reinvesting selectively in price?

The majority of the gains have now been delivered. So if we go back to the previous question, the step change was to do with own site. The way in which we price with regards to price promotions on our own site, that's been delivered. I don't think there's much scope now to do more. That will flex normally just depending on full price versus sale or end of line, but not materially impacted. And then the other big aspect is intake margin, which has two aspects. One is the buy price and volume gains that might be achieved through suppliers. And then the second one is to do with the forward buying of sterling or the strength of sterling against the dollar because we buy -- not all of our product is denominated in dollars, but the majority or the higher portion of our volume is bought in U.S. dollar agreed prices with our suppliers. So we'll naturally flex to deal with those things. Is there a gain on volume by buying more product from suppliers? A little bit, but it's not as material with the gains that we've seen. If we sustain a reported margin in the region of 65%, I think that's a really good expectation for the longer term. There might be some gains, but I don't think we'll see step change gains in the way that we have done. In terms of the final part of the question, could we reinvest, i.e., report lower margins and reinvest back in price? Yes and no. I think it's dangerous because it's important that the customer trusts what they see from Sosandar. And where we were before when we were doing price promotions, the customer to a degree gets used to that and then doesn't buy at full price, and it becomes a more normalized price at 20% or 25% off. And that's what we've stopped. So going back to that, it can have a degree of danger, although we will continue to have tactical pricing activity. For example, customers that haven't bought for a prolonged period, it's a good way of reactivating them. And we'll continue to do that. But going back to the days where we do more regular activity, no, we don't think we would do that.

We're now moving on to our final questions for today. If you have any further questions, please do e-mail the team, who'll respond to any questions that weren't covered this morning. Our final question is, why should I feel more confident about the prospects for Sosandar today than I did a year ago?

Thank you. That's a great question. I think for us as a team, the way we feel about the business, we don't feel any differently about the business today than we did a year ago. We felt incredibly positive a year ago and we were very confident in having made that decision to focus on margin, to reduce price promotions. We were very confident that, that had been the right thing to do. I think from an external point of view, from an investor point of view, obviously, we have to prove that out. We have to prove that out to you rather than us just saying that's what we were going to do. So I think in terms of how an investor should feel a year on is this year has given us the opportunity to prove that, that has been the right thing to do. It's been a really strong year for trading. So I think although we don't feel any differently, I would understand from an investor point of view that an investor would feel more confident a year on because we've proven out what we were saying.

Thank you, Julie. As we've got no further questions, I'd like to hand back to you, Julie, for any closing remarks.

Just to say thank you all very much for joining us today. Great list of questions, thank you. And we look forward to speaking to you again.

Thank you. Thank you for the presentation today and for joining us. That concludes the Sosandar full year trading update. Please take a moment to complete the short survey, which will help the presentation team. The recording of this presentation will be made available on Engage Investor. I hope you have enjoyed today's webinar. Thank you.