Step One Clothing Limited (STP) Earnings Call Transcript & Summary

Good morning, everyone. I'm Greg Taylor, CEO and Founder of Step One Clothing. I'm joined also by our CFO, Nigel Underwood. I'm really pleased to present our FY '24 full year financial results. Let's start us on Slide 2. Our FY '24 financial highlights results are as follows: revenue up 30% to $84.5 million. EBITDA up 51% to $18.1 million, gross margin up to 80.8%. Cash is also up to $39 million. Total customers, up 23% to $1.67 million and our average order value has also increased by 7.1% to $96. And very pleasingly, our women's revenue is up 54%, now makes up 14% of total revenue. We have declared a fully franked dividend of $0.028 per share, bringing our total for the year to $0.068 per share. Turning to Slide 3, please. Here are 3 key highlights I'd like to draw your attention to from our FY '24 period. Firstly, our women's category. 30% of all orders now contain at least one women's product. Our international growth. All markets have grown, up 18.3%; U.K., up 33.2%; and the U.S., up 261.5%, delivering an overall growth across the business of 30%. And thirdly, word of mouth from our post-purchase survey, an average of 19% of global orders are now coming from word of mouth. Australia leads at 30%, U.K. at 26% and U.S.A. at 4%. This is a great proof point that not only do we have a great product, a great customer experience, but it really highlights our strong value proposition and that brand awareness is growing. Turning to Slide 4, please. Here are some further financial highlights. EBITDA last year grew 33%. This year, 51% to $18.1 million. Our advertising costs, as a percentage of revenue last year was 35.7%. We further managed to decrease that to 32.7%, showing greater marketing efficiencies. Our web traffic is up 5.3%. And what also I'd like to point you to, our website conversion rates. Last year, we've, not only increased our web traffic, but also increased our web conversion traffic, 9.1%. That's now sitting at 4.8%, just under 5%. And our gross profit, as mentioned, is 81% at $68.3 million. And finally, our customer mix. 63% of all purchases are from repeat customers, showing that we not only have a very strong, but also loyal customer base. Turning to Slide 5, please. How we've set on growing profitably. We sell the product to nearly every person who works every single day. The average wear time is over 18 hours per day. It's a functionally different product. It's not just a pair of standard underwear. It's a quality product with over 70,000 5-star reviews. We have strong ESG messaging, we have a customer-first focus, strong growing recognition. And what this has shown is that customers will invest in both quality and comfort. And highlighted is that 63% returning customer just is a very strong proof point to how we've been able to grow profitably during the period. On the right here, some of our world-class athletes wearing our products. I'll explain later in the [ presentation ] as to why these athletes only wear the product, but they've also purchased shares in Step One. Turning to Slide 6, please. Sustainability forecast. ESG is in our DNA. Sustainability, whilst it's a very broad area, we here provide an info on how we've attended to each of these 3 key areas, being firstly, environment, social and governance. And for the first time, we're reporting our carbon emissions, our carbon emissions. For us, ESG is not a destination, it's a journey. And this level of reporting shows we are well progressed on this journey. Our annual report has a detailed breakdown of our carbon emissions. Turning to Slide 7, please. Our ESG credentials. We're the first clothing company in Australia and the U.K. to receive the prestigious FSC chain of custody certification. This means that from where [ band ] moves, comes out of the ground to our customers' hands, every supplier along the journey has been audited by the FSC. That means things like no child labor, no forced labor, fair working conditions. And then our forest itself, also FSC certified. So things like no loss of natural habitat, no deforestation. And we even had biological mold to wastewater, so that can be used for irrigation. Our bags are also certified home compostable, made from cornstarch. It's an area we're very passionate about, and we'll continue this journey every year. And finally, I'd like to point out is that we're the first signatory to the Fashion Forever Green Pact. Turning to Slide 8, please. In February, we announced our partnership with Surf Life Saving Australia, whereby $5 per pair sold was donated. Last week, I'd be honored presenting a giant check to the CEO, Adam Weir, of $250,000. We sold over 45,000 pairs, which attracted 8,000 new customers to the brand, And of those 8,000, 23% of those have already returned to buy a Step One product. One, also, highlight is a quote from Adam. And he said the Step One partnership was seen to be the most successful first year partnership in our history where an amount from each sale is donated to Surf Life Saving. This shows that we can use partnerships that not only help the community, but also to acquire new and loyal customers. Turning to Slide 9, please. Our women's range, our women's range has grown. We launched our SmoothFit a year ago. And yesterday, our new bralette, which is nearly sold out in most sizes. The women's market is double that of the men's market in Australia. And as mentioned, 30% of all orders now contain women's products in our Australian business. And further to that, we've seen a 38% increase in women's order volume, PCP. Turning to Slide 10, please. Our men's range continues to sell really well. We recently introduced our Juniors range with Juniors pricing. The decision to make them was purely from demand. And this is the advantage of being B2C, whereby we can talk to our customers, listen to our customers and make products that people are actually asking for. Turning to Slide 11, please. I've talked about our relationship with Surf Life Saving and have not only managed to raise over $250,000, but also attract new and loyal customers to the brand. We're working on some exciting new partnerships that we'll announce later in the year. We don't know what -- we've -- our sales have performed very well. That will lead us to potential retail exposure. Today, John Lewis is over 30 U.K. locations. I'm very pleased to also announce today that we are partnering with STEPtember. This is raising money to several [ causes ], which is a similar concept of Surf Life Saving Australia. I think another further proof point that partnerships are really an area of growth for us. Turning to Slide 12, please. Our athlete shareholders. There are now over 50 athletes who are wearing Step One's who have now invested their own money into becoming a Step One shareholder. The fact they've invested into Step One shows, not only a belief in the product, but also the brand's potential both here and also internationally. And this group of athletes already have a combined following of over 1 million people. This leads, not only to authentic content, but it exposes us to their engaged audience and their followers. Turning to Slide 13, please. This slide shows the total addressable market or TAM across the 3 countries we currently sell in. I'm going to illustrate the Australian market. On the top right there, you can see the Australian market. The men's market is worth $0.6 billion. The women's market is worth $1.1 billion. In the last year, we released -- we entered the women's market. So we now have a TAM nearly 3x, that's sitting at just over $1.7 billion, so combined TAM. If you look at the graph below that, this graph shows how our men's product drives our women's products and our women's product drives a men's product. So as previously stated, 40% of our men's product is purchased by women. And then of that female cohort, 13% have now purchased at least one of our women's products. If we look at the first-time customers buying a women's product, 12% have already purchased a men's product. So this really demonstrates that our women's product drives both men's and women's sales, and our men's product drives women's sales, which is nearly double that of the men's TAM. Turning to Slide 14, please. This is about our business strategy. So Step One's built on a customer-first approach with innovative products and a model that's both capital-light and also maintains a strong ESG focus. So if we break these into the 5 pillars of profitable growth. So firstly, functional products. We make functional problems (sic) [ products ] that solve for everyday problems that are comfortable and best-in-class. We market those through our D2C channels, our partnerships via our capital-light model. I talked about our partnership with Surf Life Saving, our athlete shareholders and also our product adjacencies. That, in turn, creates loyal and returning customers. 63% return, and we have, as mentioned, nearly 5% website conversion rate. We then have a very strong ESG focus. So first company to sign on to the Fashion Forever Green Pact, and that, in turn, obviously leads to profitable growth. So women's growth is up 38%. Our TAM has increased. Our revenue has increased by 30% and our EBITDA is up 51%. These results show we have a clear strategy, and we're executing it. Turning to Slide 15, outlook. Our focus on profitable growth in both our existing markets and also in testing new markets. Our product adjacencies have shown great success of our women's and also our bralette. Our Surf Life Saving partnership proved the model that we can attract, not only new customers, but also loyal and returning ones, whilst also supporting community activities. This model can be replicated both here and internationally. Our athlete shareholders bring great credibility to our brand and expose us to their engaged followers. These points above, along with our results, give confidence in our future growth plans, not only in our existing market, but also potential new markets. So subsequently, at this stage, we're not providing any formal guidance. Turning to Slide 16, please. In summary, we've had a great year. We've executed our plan of both growth and profitability. We sell a product that people wear every day. Our revenue was up 30%. Our EBITDA is up 51%. Our women's category is up 30%; and finally, a 100% dividend payout. I remain confident in our business model and outlook. I'd like to thank everyone for your time, and I'll now hand back to the moderator for Q&A.

[Operator Instructions] The first question comes from the line of Alexander Mees with Morgans.

Greg, Nigel, that was a very strong result, so well done. I've got a long list of questions, but I'll restrict it to 3. Just firstly, the ratio of advertising cost to revenue at 32.7%, really impressive improvement on previous years. What have you done differently that's made you so much more efficient with your advertising costs in '24? And I suppose this 32.7%, a realistic floor and we should expect some increase in the future?

Yes. Good question, Alex. I think there are a couple of points I'll talk to here. Obviously, we've introduced our women's line. Women's market, as mentioned, is double that of the men's. So on Slide 13, we showed that how our men's products -- so we had 40% of our customers buying an a men's product with women. We converted already 13% of those. So as I note that marketing efficiencies, as an example, by simply releasing our female product, but also marketing efficiency. So being more disciplined on our spend, focusing on website conversion rate, focusing on customer retention. So it's a sum of all parts, it's enabled us to do that. And obviously, I'd like to say that will come down every year. But as we continue and we look at the -- we've now worked -- the partnerships. We've shown how we can attract new customers through those partnerships, and they're also returning customers. So we're looking at ways to not only grow the business organically through pay channels, but also these partnerships and also athlete shareholders are really key ways in which we can grow the business in new channels with a very low cost. And I think also, word of mouth, as you can see, is sitting at over 30% in Australia. So as the brand becomes more well known, word of mouth, and that, I think, really ties back into having a great product and that return customer rate of 63% drives all those factors, which in turn, drives down your advertising cost, as a percentage of revenue.

Excellent. Secondly, inventory down 19% year-on-year. Just wondering, is there a timing at play here? I would assume as the business grows, that inventory balance will increase and I would assume that you'll need to restock the bralette in particular, given that, that's almost sold out?

Yes, Alex, you're completely correct. It's a little bit of timing about when the orders get delivered. But we plan to still maintain an inventory level around about -- just a bit over that 1 year mark. And yes, yes, we will build a bit more inventory to stock the bralette if only customers slowed down buying it, which has been very successful, yesterday, in its launch. But it's selling well and we will plan to get it up to about 12 months' worth of supply.

Great. I did say I'd restrict it to 3, but I'm going to do 4. The third is just with regard to John Lewis. Greg, I think in the presentation, you referred to retail exposure potential. Obviously, this is a very high-profile department store in the U.K. What conditions need to be met for you to get that exposure, please?

Yes. Look, it's really interesting. And when John North approached us, it would be probably 18 months ago, so the -- it was purely an online trial. So we've been selling online. And I think we'll obviously cover that and announce that in due course. But there's a natural fit naturally that if you're obviously selling product online and that's successful and is proving sell-through, then it's a natural process to go through and potentially test some of their retail stores. And as I mentioned, there's over 30 locations. It's one of U.K.'s most prestigious and regarded retail stores, as you mentioned. So there's certainly a lot of green use there that, I think, will help build the business in the U.K. and also give us some exposure to retail potentially as well.

So we could expect some new formula or the other this financial year?

Yes.

Great. And then just finally, Hanesbrands recently said that it had launched an everyday value product for bonds, saying that it needed to address the consumers' desire to spend less on underwear. Is this a dynamic that you're seeing? Are you unaffected by the things that Hanesbrands are seeing?

Well, I think our numbers reflect that and a 51% growth in EBITDA, 30% growth in revenue. And I think if you look at that, it shows and I pointed out in the presentation around what our profitable growth looks like and how we do that is that people are willing to pay for quality and comfort and a 63% return rate. We spend 18 hours a day in this product. It's a best-in-class product, 70,000 5-star reviews, 63% return rate. Our numbers shows the opposite to that. So whilst I did say that result -- and that they, I think, mentioned around sort of discounting and creating bundle packs, I think we've actually shown and bopped that trend, showing that we can make -- if you make a great product, people will stick to it and they are loyal, and we've proven that, and the numbers reflect that.

Next question comes from the line of Tim Evans with Morgan.

Greg, well done on a great result. I just had a query on your comment on Slide 15 about testing new markets where you're popular. So you've mentioned Germany and Canada there. Can you just talk to how you would conduct a test, you have to launch a website or can they do it through another region or just expand a bit on that, please?

Yes. So it's interesting, yes. So obviously, Canada, just north of the U.S., so we can ship out of our 3PL in the U.S.A. But Germany, we're testing that through Amazon. So it's a good way for us to not have to put any infrastructure into a country to test a product. And as you'd see, if you look on Amazon, we've got some really good reviews and ratings there. So it's a really good channel for us to test new markets without having to put any infrastructure into a place like such as a warehouse, which we've done in the U.K. and U.S. But that obviously really keeps in line with our capital-light model.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Taylor for closing remarks.

Thank you, everyone, for your time. I'd like to thank the Board, the staff and everyone involved for a great result. Very much looking forward to what FY '25 brings, and thank everyone for their support, and we'll be in touch shortly. Thank you for your time.