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

Thank you for standing by, and welcome to the Step One Clothing Limited FY '26 Financial Results. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. I'd now like to welcome Greg Taylor, Founder and CEO, to begin the conference. Greg, over to you.

Good morning, everyone. Welcome to Step One's FY '26 Results Conference Call. I'm Greg Taylor, CEO and Founder of Step One. I'm joined by our CFO, Nigel Underwood. We're going through the presentation that was lodged this morning with the ASX and leave time for questions at the end. Turning to Slide 2, results highlights. FY '26 was a year of deliberate change for Step One. We set out the half to reset the business, and the full year result reflects both the impact of that decision and some early indicators of progress against that reset program. Revenue for the year was $63.7 million, down 26.7% on FY '25. As we flagged in February, the reduction in discounting was a significant contributor to the revenue decline during the year, a decision we took to restore brand equity and pricing integrity rather than chasing volume. We reported an EBITDA loss of $7.4 million for the year. On an adjusted basis, excluding the inventory provision, EBITDA was a profit of $1.7 million. The provision expense for the full year settled at $9.1 million, down from the $10.9 million we raised at the half as we recovered $1.8 million through the second half as older product moved. We reported an adjusted gross margin of 75.9% at just 0.5% below FY '25. Maintaining adjusted gross margin at level while reducing discounting provides an encouraging indication of the resilience of our pricing and product proposition. Our indirect channel continued to grow during FY '26. Revenue through third-party channels such as Amazon, TikTok Shop and John Lewis grew 62.3% and now represents 18.2% of total revenue. We also released six new products during the year, extending the range beyond our core, in line with our vision of owning more of the customer's drawer. Revenue of our women's range was down 35.7% and represented approximately 15% of revenue. This performance was below our expectations, and we're reviewing opportunities to improve the performance of this segment. Nigel will speak to the cost pressures that weighed on the result. We have more work to do, and the reset program has further to run. Turning to Slide 3. Our growth strategy continues to be anchored around the same four pillars that underpin the reset program. We will remain disciplined in executing these priorities while responding to changes in customer demand and market conditions. First, on products and range. We released six new products during the year, being our CloudPress, men's briefs, socks, periods and sleepwear and our X-Cup. Our priority from here is to keep expanding into logical adjacencies and to extend beyond bamboo fabric where customer demand supports it. With bralettes, PJs and socks now established, we're building a more complete offering that positions Step One as part of the customer's broader [ basewear ] wardrobe. Despite releasing new women's products during the year, performance in the women's range was below our expectations. We're reviewing opportunities to improve performance and grow this segment of the business. Second, customer acquisition. We recruit through consistent brand-led advertising that positions Step One as a comfortable and quality brand, and we've increased our brand investment with sharper focus on marketing efficiency. Over 2.1 million customers have purchased Step One products. Encouragingly, new customers made up 47% of orders in the second half, up from 36% in the first half, which is an early indicator of new customer acquisition as we increase our focus on brand investment. Thirdly, indirect channels. Revenue from these channels grew 62.3% during FY '26, and our approach remains selective. We expand with partners who align to the brand, and we protect brand integrity and margin discipline in every one of those relationships. Our presence in John Lewis continues to provide credibility and market insight in the U.K. And finally, footprint. Australia remains our foundation, but it's worth noting that the U.K. was more resilient this year, down 11.1% against a 36.1% decline in Australia, and it now represents 41% of group revenue. Our U.K. strategy is digitally focused, and our approach to the U.S. remains disciplined. Across both markets, we're prioritizing sustainable growth and improving profitability rather than growth at any cost. Turning to Slide 4. Average order value for the year was $98 and recovered to $101 in the second half as the benefit of reduced discounting came through. Our customer mix shifted to 41% new customers, which reflects the brand investment I mentioned, with returning customers at 59%. Conversion moderated to 4.1% for the year and compared with 4.6% in FY '25. Our customer database grew to 2.1 million, an increase of 215,000 over the year. The remaining charts illustrate the revenue and profit performance we've discussed. I'll now hand over to Nigel to walk through our financials in more detail.

Thanks, Greg. Turning to Slide 5. Revenue for the year declined 26.7% to $63.7 million. Australia was down 36.1% to $35 million, the U.K. was down 11.1% to $26.2 million, and the U.S. was down 7.2% to $2.5 million. As Greg mentioned, the U.K. was more resilient than Australia during the reset period. Reported gross margin was 61.6% after including a $9.1 million specific inventory obsolescence provision. Shareholders can obtain more information about the specific provision and its impact on the financial result on Slide 12 of this presentation and in the annual report. While the reported gross margin was 61.6%, excluding the impact of the $9.1 million specific inventory provision, it improved to 75.9%. This is 0.5 percentage points below FY '25, predominantly reflecting the higher discount rates applied in the first half. Advertising and marketing fell $2.4 million in absolute terms to $21.1 million, but rose to 33.1% of revenue, up 6.1 percentage points on PCP as we maintain brand-led investment through our lower revenue base. Distribution and fulfillment costs of $12.7 million were broadly flat in dollar terms, but increased to 19.9% of revenue, up 4.9 percentage points. Cost pressure on global logistics and distribution was compounded by higher inventory levels and the costs associated with the transition to a new 3PL in Australia. Overhead was held at $9.7 million, down 1.4% on the prior year. The result was reported EBITDA loss of $7.4 million, with an adjusted EBITDA profit of $1.7 million against a $17.4 million profit in FY '25. Reported loss after tax was $6.4 million, with an adjusted profit after tax of $0.8 million. Turning to the balance sheet on Slide 6. The business is debt-free, with $25.8 million in cash and financial assets held with licensed banks across a variety of terms. Inventory on hand increased $1.7 million during the year through range expansion and accumulation of slower-moving lines. The net inventory balance reduced by $9.4 million to $15.8 million, predominantly as a result of the obsolescence provision. We plan to dispose of the obsolete inventory in 1H '27. Net assets closed the year at $40.4 million. After allowing for $8.2 million of liabilities and $1.3 million of inventory purchase orders placed but not yet fulfilled, available cash at 30 June was $16.4 million. Step One remains a capital-light business, and that provides a financial foundation from which to continue executing the reset plan. Looking at cash flow on Slide 7. Operating cash flow reflected the softer trading performance with an outflow of $2.7 million against an inflow of $8 million in FY '25. Receipts declined 27.3%, in line with reduced revenue. Dividends totaling $4.4 million were paid during the year, distributing 100% of earnings to 30 June 2025. There is no change to our dividend policy, and declarations are expected to recommence once retained earnings returns to a positive balance. Term deposits with a duration greater than 3 months are classified as investments. Closing cash was $15.7 million and with term deposits together totaling $25.8 million, all held with licensed banks. I will now hand back to Greg to talk about FY '27.

Thanks, Nigel. Turning to Slide 8. In FY '27, we'll continue to execute the reset plan. We'll release new products and adjacencies, we'll enhance our brand advertising and we'll maintain our brand premium through reduced discounting. Step One will prioritize long-term value creation over short-term performance with a focus on sustainable growth and improving profitability. There is no change to our dividend policy. And as Nigel noted, declarations are expected to recommence once retained earnings return to a positive balance. We'll not be issuing financial guidance. FY '26 was a hard year. We've not shied away from that, but we finished it with a stronger margin structure, materially clean inventory position, a growing indirect channel and a customer base over 2 million. We believe the decision we took this year were the right ones for the business over the longer term, and I'm confident they position Step One to deliver sustainable profitable growth. I'll now hand back to the operator and open the line for questions.

[Operator Instructions] And your first question is from the line of Emily Porter of Morgans.

Maybe -- I mean, I guess I appreciate you haven't given guidance, but I guess, how should we think about sort of top line growth moving forward? Maybe a bit of color by region? And I guess, just generally, how you're sort of seeing the consumer environment and how your customers are responding to the pricing reset?

As we spoke, we're focused on the reset plan. We're focused on rebuilding the full price customer within our cohort, and we will look to grow where we can see growth. But at this stage, it's -- we're focusing on the reset plan. Overall, from a market perspective, yes, the consumer is under cost of living pressures. We acknowledge that. However, our focus remains the same. We're clear on where our plan is, and we'll continue to execute that throughout the next year.

Yes. Okay. That's great. And maybe just in terms of the women's revenue down a fair bit on last year, and I think you noted, probably below your expectations. Maybe if you can just give a bit more color around why you think this is?

So in line with reduced discounting across the site, we've looked at where our brand sits and how we speak to our customers. So what we've identified is that our women's -- the way we speak to our women's customer is a little bit different to way we speak to our men's customers. So what we'll be doing is we'll be focusing on, as we said during the presentation, is the product will still remain on the site. However, we will continue to develop strategies that can bring back that revenue and provide a stable yet profitable path forward within that women's category.

Okay. And maybe on the indirect channels, like some really strong growth, up over 60%. Maybe if you can just talk to that by the different channels and sort of how you think about indirect moving forward as well?

Yes. Indirect was strong for us. It grew over 62% and made up 18.2% of our revenue. So it's profitable and disciplined, and we look at partners who fit our brand. We protect our margin in every relationship there. It also puts the brand in front of customers that we're not reaching. Whilst D2C remains our core focus, indirect will extend it.

And your next question comes from the line of Leo Armati of Bell Potter Securities.

Just a few from me. Just to start, as we saw Australian revenue had a significant drop, and that was sort of below our expectations, while the U.K. seems far better. And it's great to hear that it was more resilient, in your words. Can you just sort of talk to what made the U.K. market more resilient versus Australia?

U.K. is a little less mature as we are in Australia. So as we said last year, we focus -- and it's also a bigger market as well. So as we said last year, we focused on local advertising, local tone of voice and looking at ways in which we can extend not only our D2C business, but through Amazon and through John Lewis. So we are in John Lewis in the U.K. And whilst it doesn't provide what I would call meaningful revenue at the moment, it does provide credibility and brand credibility to us. So we'll continue to focus on the U.K. market, as we've said, and that all forms part of the reset plan.

Yes. Great. And then just moving on to advertising. So obviously, it grew as a percentage of revenue, but we saw conversion drop quite a bit. So you're basically spending more to convert less. Is there just sort of a weaker underlying customer here? Or is it a traffic issue? Or can you just talk to that?

Yes. So the total spend fell $2.3 million for the year. But within that, we shifted the mix towards brand TV sponsorships, ambassadors and away from discount-led performance spend. So less money was spent, but it's pointed at building the brand rather than essentially renting the next transaction, and that forms part of our strategy moving forward.

Yes. Okay. Great. And then just lastly, if we talk about inventory. So obviously, inventory on hand increased when you released the new product range. And I think you noted that there was an accumulation of slower-moving lines. I'm just wondering if the slower-moving stock is still accumulating? And does that mean or at least signal risk into FY '27 of more obsolescence?

We've -- in the actual annual report, we flagged that we've modified the way we look at the inventory provision. But we will take the lesson of what we've had to do currently, and we will improve the way we push the inventory. But what we're looking at is that our processes over the last period of time have improved considerably. So not expecting any repeat of this specific obsolescence provision.

[Operator Instructions] And your next question is from the line of John Burgess of RaaS Research.