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

Thank you for standing by, and welcome to the Step One Closing Limited Half Year 2025 Financial Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Greg Taylor, Founder and CEO. Please go ahead.

Good morning, everyone, and thanks for joining today's call. I'm Greg Taylor, CEO and founder of Step One and joining me today is our CFO, Nigel Underwood. This morning, we announced our financial results for the first half FY '25, and I'm pleased to take you through the highlights. Turning to Slide 2, please. In the context of a challenging retail environment, we're pleased to have delivered a resilient result. We prioritize profitable growth and efficient customer acquisition, and we're well placed to continue our profitable growth journey. Against the record comparity period, we delivered $48.1 million revenue, up 6.8% on PCP. We deployed effective pricing and promotional strategies to create traction amongst our value-conscious customers in otherwise difficult conditions. Direct and efficient marketing is in our DNA. And pleasingly, lowered advertising costs as a percent of revenue to 29% compared to 34.1% last year. Our women's and indirect revenue grew by 19.1% and 38%, respectively, in the period. On the back of this, and our focus on efficiency, our EBITDA was up over 10% to $11.2 million. We're in a strong financial position and pleased to declare an interim dividend of $0.04 per share fully franked. Turning to Slide 3, please. Growth strategy. Our profitable growth strategy is underpinned by 4 key pillars: number one, product. Our mission is to transform the underwear market. We've done this by bringing innovative, ethical, comfortable and sustainable functional products to market to solve a problem for our customers. Ranging innovation is central to attracting new and retaining customers, and it's a priority of ours. Pillar 2, customer acquisition. We have a strong track record of efficient B2C customer acquisition and growing our database efficiently. We're strategically supplementing that growth with targeted partnerships with organizations in our fleets. Our B2C stats support our efforts in this department with nearly 70% of our customers returning in the half. Pillar 3, indirect channels. We're supporting our D2C growth by building a presence in trusted and established retail and e-commerce channels. This allows us to expand our reach, brand and tap into new data bases of customers. Finally, our footprint. Our plan is to emulate our profitable growth in Australia and scale diligently in global markets where there is demand. We are leveraging our successes and learnings from our proven Australian model. In the short term, we focus on winning Australian market share across our categories in Australia. Abroad, we're looking to grow profitably in the U.K., and the U.S. is now a longer-term priority, allowing us to refine our approach before further investments. Turning to Slide 4. Our strategy. This half, we continue to execute against our strategy. We expanded our women's line with the launch of our smoothed range in August with the BoyShort and Bralet. Extending our women's range is highly strategic. Our women's line offers significant upside for all SKUs because of the value of our female customers and the value they bring. These customers are proven to often buy men's products as well, and a major part of our focus is to ensure growth continues and to compound. During the period, we signed several more asset ambassadors who generate authentic Step One content and help attract new customers and eyeballs in a really core demographic for us. We also partnered with STEPtember and continued our amazing relationship with Surf Life Saving Australia. On channels, we progressed to the contractual and technical integration works to sell on new channels, including TikTok Shop and Amazon. During the half, revenue from Amazon grew nearly 30% to $3.5 million, now accounting for over 7% of total revenue. In addition to contributing to revenue growth, Amazon enhances Steo One's credibility and market reach in the U.K. We saw solid profitable growth in this half in Australia and modest profitable growth in the U.K. made an important step during the period and put boots on the ground in the U.K. to support broadening our brand awareness, whilst working closely with myself and the Australian team, our U.K. operations will leverage learnings and skills from our successful home market. Having on the ground marketing expertise to adapt strategies locally is an important step in scaling diligently. We've seen great results in Australia and look forward to driving the success across geographies. Slide 5, new products. I also want to call new products which we spoke about earlier this year, our Cloud Mesh. This new and innovated material designed to efficiently transfer heat. This product is engineered for airflow, keeping our customer cool no matter the circumstances. Product innovation continues to drive and is at the core of our existing customer value and driving consumer traffic. Slide 6, operations by region. In Australia, revenue grew over 17%, reflective of strong brand awareness, continuing to drive momentum. We saw benefits from collaborations with brands, ambassador and advocacy, which delivered customer growth. In the U.K., cost living prices impacted consumer spend, however despite this, we still delivered a modest 7% revenue growth. During the period, we saw organic sales traction in Europe through our direct U.K. website and U.K. Amazon. As I mentioned earlier, we've begun the process of systemizing our profitable growth strategy, formulate our trading growth trajectory. We have hired a dedicated resource in the U.K. and will continue to prioritize patient and profitable growth. I'm happy to report last week we launched in-store with one of the U.K.'s most beloved and established retailers, John Lewis. For our strategy, we see this as another avenue to broaden our brand awareness. In terms of the U.S., given the prevailing market conditions, we prioritize profit and pulled back on investment. This is part of the benefit of having an agile and adaptable business model. We'll continue to invest in our capital-light partnerships, including Amazon and other social commerce channels to remain present in the market. However, we have minimized our direct advertising. We now view the U.S. as a longer-term opportunity, and we tend to in scale when we intend to scale diligently in the U.K. first and then take this strategy to the U.S. Turning to Slide 7. We delivered a 4.5% conversion rate in line with the second half of last year. This is a very strong result for industry standards. In addition, we grew our customer base to over $1.8 million and had 69% return customer rate. For the third period in a row, we lowered our advertising as a percentage of revenue, which is now under 30% to 29%. This reflects our agility and direct marketing expertise and our success in building and retaining a lower customer base. I'll hand over to Nigel to talk through some of our financials in more detail. Over to you, Nigel.

Thanks, Greg. Turning to Slide 8. In the context of challenging market conditions, we are pleased to have delivered a resilient revenue growth of 17.4% in our core Australian market. This highlights the strength of our product and offering in our home market. While our global revenue increased 6.8%, it reflects a mixture of trading conditions and our strategic focus on profitability when growth is not economically available. Pleasingly, and in line with our strategy, revenue from women's and indirect channels grew by 19% and 38%, respectively. Gross margin declined to 78%, driven by a pivot towards attracting value-conscious customers during sale periods. Advertising costs reduced to 29% of revenue, offsetting margin pressure and reinforcing the efficiency of the business model. We are constantly monitoring trading conditions, and we'll make adjustments to the marketing mix in each country as required. Our ability to be agile and maintain profitability is a key feature of our business model. Overall, our EBITDA increased 10.4% on PCP, while net profit after tax increased 15.1%. Turning to Slide 9, the balance sheet. Step One remains debt-free with cash and financial assets diversified across licensed banks with a variety of terms. Inventory increased $3.7 million in the half as we expanded the product range. Turnover remained stable at approximately 1.2 years, aligning with our inventory strategy. While inventory is neither perishable nor seasonal a 5% provision is maintained for older SKUs. Turning to Slide 10, the cash flow. We have a strong cash flow generation profile with cash receipts increasing in line with revenue growth. Dividends totaling $5.2 million were paid in the period, which was 100% of the previous period's earnings being the second half of FY '24. We plan to pay 100% of earnings out again this period with an $8 million dividend payable in March '25. Term deposits with durations exceeding 3 months are classified as investments after adjusting for this classification requirement, cash flow was a positive $4.6 million. The group maintained strong financial position with cash and term deposits totaling $43 million, all held with licensed banks. The cash flow supports the conclusion that the business remains capital light. I'll hand you back to Greg.

Thanks, Nigel. Slide 11, strategy and plan of action. We have a clear plan of action for the second half of FY '25 to keep growing profitably. We have exciting product developments, including extending our Juniors range, new sports products, socks and other areas. In terms of channels, last week, we launched in store John Lewis as mentioned, we expect this to build our brand awareness and legitimacy in the U.K. We'll also be launching our products through additional channels. Regarding our footprint, we'll continue to prioritize Australian expansion while pursuing profitable growth in the U.K. utilizing our local resources. We will maintain the capital-light optionality in the U.S. and other markets. Turning to Slide 12. Our outlook. We're confident in our strategy and our ability to execute on it. Our focus remains steady. We're going to expand our product range, requiring new customers through efficient acquisitions and partnership expansion. As we have shown, we will deliver profitable growth while exploring new channels where momentum is building. No guidance has been provided for FY '25. To close, the resilience demonstrated in delivering the first half performance against a record comparative period and challenging retail conditions reinforces the strength of Step One's core product ability Step One's core product and unique features, our ability to market efficiently, our success in building and retaining a loyal customer base and the value of our profitable growth strategy. While the environment remains challenging, we're committed to future-proofing the business and driving growth through new products, new channels and strategic partnerships. I'll now open the line for any questions. Thank you for your time.

[Operator Instructions] Your first question today comes from Alexander Mees from Morgans.

Greg and Nigel. Just firstly, with regard to the U.S., can I just be clear on what the strategy now is. Am I to understand that we're going to be continuing with partnerships with Amazon and other affiliates, but we're not going to be looking to actively grow that business through our own direct marketing?

Yes. Thanks for the question, Alex. Yes, look, as we've mentioned, we're always looking for profitable growth and in areas where we've talked about we can grow profitably, we will and where it's challenging, we won't. So we've seen obviously some growth from the previous year in the U.K., we'll pursue that. So where there is opportunity to grow profitably, we will. But as we said, maintaining capital-light structure for the U.S. is something that we will continue to do, reduce costs there, but there will also be that opportunity there for us to grow when the right opportunity presents itself to us.

I think that's certainly the right strategy. And does that mean that the 29% ratio of marketing cost of sales is a number that we should think about as sustainable going to the future?

Yes, Alex, we're not providing no further guidance. So that's probably -- the current position is the best one, but we will constantly work towards improving our marketing spend and margin position as we go forward. But the current half is your best guidance for the following forecast.

And I think it just reiterates Alex, my point that we have been very disciplined in our marketing costs through this period. We've got the mix right for both profit and growth in this half, and we'll continue to take a close look at what that percentage of revenue is, but it does show our ability to pull levers quickly and get the best efficiency out of our marketing dollars when we do send them.

That's great. And just with regard to, obviously, a really stellar performance in Australia. So congratulations on that. And the promotional strategy that you've adopted has clearly been instrumental. It does mean, of course, that the gross margins are down, albeit is up. Is again this something that we should see as a guide for the future, this gross margin in the high 70s rather than the low 80s?

Once again, the current half is probably the best indicator for going forward. We will obviously work towards improving and increasing that margin. But we don't want to preempt where we're going to be. So the current level is probably the better go-forward position.

And then just finally, with regard to John Lewis, congratulations for launching in store. I'm just wondering if you can give us a bit more color about how many stores you'll be in and how many SKUs we should be thinking about? I suppose I'm just trying to get a sense for what this could do to U.K. growth in the second half.

Yes. Thanks. A good question to ask. Obviously, Alex being from the U.K., you'd understand, I guess, the enormity of what it means to actually bag John Lewis. At such a beloved and revered store over there. So we had a really great launch on Thursday in store there. And so I think we're in about 15 of our stores at the moment. There's approximately 40 across the country. Obviously, there will be a rollout dependent on sales and how we progress. But all signs of positive. We had a very successful launch on Thursday. And we've been working really closely with the John Lewis team, and they now work a new product offering to the customers, which has been really core around their mandate, particularly around FSC certified brands being -- or FSC certified brands being as part of their product mix so we'll continue to push that. And I think also looking at our brand equity and brand awareness, that will certainly assist with our brand awareness and credibility in the -- as I mentioned, because as for those who are familiar with it, John Lewis is really one of the brands that you do want to be a part of and having the scale that they do across the U.K. will give our brand a really high exposure across their stores once we do roll them out.

Excellent. And certainly, in my opinion, this result does show that your focus on profitable growth is really meaningful. And the fact that you've beaten estimates for EBITDA is a testament to that. Well done. And congratulations and good luck for the second half.

Thanks, Alex.

[Operator Instructions] Your next question comes from Michael Wu, private investor.

During the Black Friday up here, I noticed that the company had some fulfillment issues at the Australian warehouse I got this impression from the negative Trustpilot reviews as well as my own order experience. Would you be able to elaborate on what happened and whether it had a negative impact on the Australian results?

Thanks for your question, Michael. Look, during the Black Friday period, the entire postal and logistics systems well choked up and we're subject to those. But the delays we are aware of a number of those delays, but they were actually less than in prior years. And every year, we work on improving that process. The ask is to try and make sure that we -- when we're advised that there is a delay or someone hasn't received their order, and we fix it accordingly. So look, we want to learn from every sale we do, we want to learn, but there is issues with the entire literally the global logistics systems during those busy sale periods.

One last question. I think at the full year, it was mentioned that you were looking at expanding into Canada and Germany. Would we be able to get an update on that?

Yes. Look, their markets were clearly the people like our Step One product. And we're trying to find the best way into the -- the best way to expand in those markets. But then we have to go through a small period where we gain the appropriate registrations to sell direct rather than our cross-border transactions. So we're reworking some of those entries. And one day, I hope that I can report that there are a relevant percentage of our sales, but at this point, the they're exploratory and small.

Thank you. As there are no further questions at this time. I'll now hand back to Mr. Taylor for any closing remarks.

Thank you, everyone, for joining the call. As you can see, we've been very disciplined in our marketing costs during the period. We've shown we do call growth levers when we do when the conditions are right. We do reinvest in our growth. We've got a good cash balance and gives us the potential to invest in areas where we do see opportunity and we do have -- we do believe we've found a right mix of profit and growth during this challenging period for the half and look forward to growing the business service. So thank you, everyone, for your time, and look forward to staying to you in 6 months or so. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.