Step One Clothing Limited (STP) Earnings Call Transcript

Thank you for standing by, and welcome to the Step One Clothing Limited AGM. I would now like to hand the conference over to David Gallop. Please go ahead.

Well, good morning, everybody, and thank you for joining us today. My name is David Gallop, and I'm Chair of Step One Clothing Limited. On behalf of the Board of Directors, I'm pleased to welcome you to Step One's 2025 Annual General Meeting. It's now just after 11:00 a.m., the nominated time for the AGM. I've been informed by the Company Secretary that a quorum is present, so I'm pleased to declare the meeting open. Today's AGM is being held virtually via the online meeting platform. Today, I'm joined online by my fellow directors, Greg Taylor, Founder and Chief Executive Officer; Kate Thompson, Non-Executive Director; Michael Reddie, Executive Director; and Rick Dennis, Non-Executive Director. Also present today are Nigel Underwood, our Chief Financial Officer; William Hundy, our Company Secretary; Crystel Gangemi and our audit and assurance partner from auditor Grant Thornton, is also present and available to answer questions about the audit, the auditor's report, the accounting policies adopted in the financial statements and the auditor's independence. Our Annual General Meeting is being broadcast from Gadigal Land. Our commitment to sustainability and ethical practice is at the core of who we are at Step One. We cannot do this without the first step in acknowledging First Peoples. Step One acknowledges the traditional custodians of the land, skies and waters of First Peoples across the world. We tread respectfully on their countries and honor their continued connection to their culture for many millennia. We acknowledge elders past and present and thank them for providing guidance and sharing their knowledge and wisdom and all First Peoples who have continually paved the way in sustainable practices. Step One continues to be guided as we learn and grow. The running order for today's meeting will be as follows. Firstly, I'll say a few words about Step One, including strategic highlights of the Step One business, then Greg will address the meeting before we proceed to the formal business of the meeting. After the formal business, shareholders will have the opportunity to ask further questions not directly related to the respective resolutions. I want to begin by acknowledging what has been a challenging 12 months for Step One and the broader retail sector. Sustained pressure on household budgets across all markets has fundamentally shifted consumer behavior. Discretionary spending has been cautious with customers showing a clear preference for promotional offerings and heightened price sensitivity. In this environment, we delivered revenue of $86.9 million, up 2.8% and net profit after tax of $12.6 million, up 2% on the prior year. These results reflect both the difficulty of current trading conditions and the resilience of our business model. While we had higher ambitions for the year, we've had our market position and continue to grow our customer base, which speaks to the underlying strength of the brand and business. Our approach to voting long-term value is underpinned by our four-pillar growth strategy, and I'd like to update you on our progress across each pillar in this financial year. First, product innovation remains at the heart of everything we do. In FY '25, we launched Cloud Mesh, a premium, high-performance underwear range. We also broadened our women's offering, achieving revenue growth of 7.9% in this segment, which now accounts for 15% of total sales. The introduction of bralettes and expansion into adjacent categories reflect our ambition to become a significant part of our customers' everyday wardrobe choices, not just their underwear drawer. Second, customer acquisition remained a key focus, growing our customer base by 15% to reach 1,923,000 customers is a particularly pleasing outcome given the headwinds we faced. This growth is being driven by more sophisticated brand marketing, stronger social media engagement and strategic partnerships. Each new customer represents an opportunity for incremental value creation through repeat purchases. Third, channel diversification remains a key strategic priority. The expansion of our indirect sales channels has been notably successful. With revenue through these channels growing 53% to represent 8.2% of our total revenue. Our partnerships with Amazon and social commercial channels have matured. And our presence in John Lewis stores continues to provide valuable credibility and market insights in the U.K. These channels complement our direct-to-consumer model, broadening our reach and gaining brand credibility with customers. Finally, international expanding continues to be measured and deliberate. In Australia, we continue to grow. In the U.K., we intensified our efforts with encouraging results. And in the United States, we continue to lay groundwork for long-term growth. Our focus remains on sustainable profitable growth rather than aggressive market share gains that will compromise margins. As we look to FY '26, management has commenced a comprehensive reset of our operational approach to position the business for improved performance. These initiatives address the lessons learned from FY '25's challenging trading environment and focus on recalibrating our promotional strategy, optimizing pricing and inventory management and rebuilding brand investment to appropriate levels. Greg will outline these initiatives in his address, but the Board is confident that this reset establishes a clear pathway to margin improvement and renewed growth as market conditions stabilize. Capital position and dividends. Step One closed the year with cash and financial assets of $33.1 million and no debt. This strong balance sheet provides optionality, enabling us to invest in growth opportunities while maintaining capacity to withstand further market volatility. The Board declared a final dividend of FY '25 of $0.025 per share, fully franked, bringing total FY '25 dividends to $0.068 per share. This represents distribution of 100% of earnings to shareholders. Our capital allocation approach balances the return of surplus profits to shareholders through fully franked dividends where possible with the need to retain sufficient flexibility to fund strategic investments that drive long-term value. In closing, I extend my gratitude to my fellow directors for their counsel and the entire Step One team for their dedication throughout what has been a demanding year. To our shareholders, your continued support enables us to execute our strategy with confidence. The Board remains convinced that the initiatives now underway will position Step One for a new momentum and sustainable growth as market conditions improve. I will now hand over to Greg, who will provide a detailed review of our financial and operational performance and discuss our plans for FY '26. Thank you.

Thanks, Dave, and good morning all. Greg Taylor, Founder and CEO of Step One Clothing Limited. I'll walk you through our FY '25 performance, our operational response to market conditions and the strategic initiatives we're implementing for FY '26. While I sought to drive strong growth, FY '25 was more modest than I hoped, challenging trading conditions across our key markets required us to recalibrate our approach. Despite these headwinds, our fundamentals remain strong, and our response demonstrates the agility that is defined Step One since inception. In FY '25, we delivered revenue of $86.9 million, up 2.8%; EBITDA $17.4 million, down 3.7%; net profit of $12.6 million, up 2%; cash and financial assets of $33.1 million and no debt. We adapted quickly to challenging marketing conditions by deploying promotional periods strategically to align with consumer behavior, while managing our advertising spend efficiently. Average order values grew, but gross margins were impacted by the additional promotional activity required to maintain market share in a tough environment. This was a trade-off we navigated deliberately and thoughtfully. At its core, Step One addresses a universal and recurring need. We have clearly created the consumer segment that understands and values sophisticated products designed to solve real-world problems. Our innovations such as anti-chafe panels, breathable viscose and a signature 3D pouch, solve genuine problems that customers experience every day. The evidence is compelling. We have accumulated more than 60,000 of 5-star reviews, and our repeat purchase rate sits above 60%. This provides strong proof that their products resonate with customers, and they continue to remain loyal to Step One. Our business model amplifies these advantages. We operate a capital light direct-to-consumer model that gives us full ownership of the brand and the direct relationship with our customers. Our flexible and responsive supply chain enables us to innovate quickly, adapt to market signals and maintain the highest level of product quality while managing costs effectively. The addressable market opportunity remains substantial. Innerwear is a daily necessity globally. And we are well positioned through product quality, innovation design and independently certified sustainability credentials. Looking forward to FY '26. Step One continues to be guided by its profitable growth strategy. However, the retail landscape has become increasingly demanding, softening demand trends have driven heightened promotional activity across the sector requiring us to carefully balance market share preservation with margin management. In response, we are refining our tactical execution and implementing a series of adaptive measures that reflect our ability to navigate pivotal trading environments with agility and purpose. Our key initiatives include: Pricing realignment to reduce average prices and adjust final discount structures, enhancing competitiveness and lowering barriers to attract new customers; a refined promotional activity approach to maintain participation in major sale events, while applying a moderate site-wide discounts to balance customer acquisition with margin discipline and protect margins on our best-selling products. In the inventory optimization program that accelerates the clearance of slower-moving items through dedicated clearance stages, targeted sale events, improving working capital efficiency. Brand investment acceleration to align global messaging around core product attributes and improved visibility across e-com, social commerce and AI-driven search platforms. Our product development focus on new products and adjacencies, strategic collections and collaborations that expand category reach. Limited edition color releases and brand fitting collaborations that strengthen our brand appeal and at the same time, attract new customers. These initiatives will shape our financial performance in FY '26. We anticipate modest revenue growth led by the U.K. market and supported by new product launches. Marketing investment will increase above FY '27 levels to support brand building and customer acquisition. Personnel costs will be higher year-on-year, reflecting hires already made with further improvement limited in the current environment. Other operating costs are expected to rise in line with inflation or to support our key strategic priorities. Gross margins are expected to moderate towards the second half of FY '25 levels as we clear slower-moving inventory at promotional prices. Earnings performance is expected to soften in the near term. However, we do remain confident that these measures will enable Step One to navigate current market conditions effectively, establish a stronger foundation for sustainable, profitable growth as conditions improve. FY '26 EBITDA is expected to be in the range of $10 million to $12 million, reflecting our deliberate investment in brand building, product expansion, and inventory optimization. In the first quarter of FY '26, we've been focused on executing these initiatives, including progressing our product pipeline. Several weeks ago, we launched a new women's period product, which has received a very positive initial feedback. Within the last 2 weeks, we also launched our socks range, a natural adjacency that helps increase average order value. These new product releases reflect our commitment to solving real-world problems and delivering best-in-class innovative products. The range is sustainable. Cost of living friendly and aligned with consumer expectations around both performance and environmental responsibility. As we move into the Black Friday, Christmas trading period following Singles Day, we are deploying a more strategic approach to discounting. Rather than applying across-the-board discounts, we're targeting deeper discounts specifically on slow-moving stock lines. This approach protects margins on our core high-velocity products while ensuring we clear inventory efficiently. These operational adjustments are not simply tactical measures to navigate current conditions. They reflect our ongoing commitment to the long-term strategy we've articulated, building brand equity, diversifying our product range and deepening our presence in core markets, whilst at the same time, growing the lifetime value of our customer base. We are being thoughtful about promotion, disciplined about inventory, and strategic where we invest in brand building. By maintaining this operational discipline whilst investing smartly in brand and products, we are positioning Step One to accelerate when market conditions improve. We have a stronger brand and broader offering, a more engaged customer base and a proven track record of successfully navigating a difficult period. We have identified key opportunities to build brand awareness in areas that are a natural fit for Step One. These initiatives will help us grow our junior range, build credibility, and tap into large engaged databases. Our first broad partnership launched recently with the National Basketball League, alongside sponsorship of Basketball Australia's junior program. I would like to thank our Board for their counsel throughout the year and our team for their dedication, flexibility and commitment to excellence during what has been a demanding year. To our shareholders, your confidence in our long-term vision enables us to take a measured approach we believe will deliver lasting value. Step One has a strong balance sheet, premium products that customers love and adaptable business model. We are well positioned for the future, and I remain committed to building lasting value for all stakeholders. Thank you for your time, and I'll now hand back to David for the formal business.

Thanks, Greg. We will now progress to the formal business of the meeting. Details about how shareholders can participate in the meeting are set out in the notice of meeting, which was distributed to all shareholders and also in the online meeting guide. Both are available on our Investor Relations website. A poll will be held for all resolutions, and I now formally open the poll on all resolutions. Voting for all resolutions will remain open until 5 minutes after the end of the meeting. You may submit your live vote at any time before them. Results will be published on the ASX after the conclusion of the meeting. At the time, each item of business or resolutions considered, I will invite any questions specific to that matter. If you have a question that you'd like to ask, there are 2 ways to do so. Firstly, for those who wish to ask a question using the online meeting platform, there is an ask-a-question button located at the top or bottom of your screen that will allow you to type in your questions. You may submit written questions in this way at any time. You do not need to wait until the relevant item of business. So I encourage you to submit your questions as soon as possible, so you have enough time to type your question. Secondly, verbal questions can be asked using the web telephone, which can be accessed by shareholders online by clicking the go-to web phone button on the computer screen, entering your name and then following the further prompts. Questions that are relevant to the business of the meeting will either be read aloud to me or moderated via the phone seek to address your questions during the discussion on the appropriate item of business. If we experience any significant technical issues today, we may adjourn the meeting. If this occurs, I'll advise you accordingly to the extent possible and an ASX announcement will be made. As stated in the notice of meeting, I intend to cast the vote of all open proxies granted to the chair of the meeting in favor of all resolutions. The first item of business is to receive and consider the financial report, the director's report, and the auditor's report for the financial year ended 30 June 2025. There will be no vote on this item. It is a discussion item only. Crystel Gangemi from Grant Thornton is available to take questions about the conduct of the audit, the auditor's report, the accounting policies adopted in the financial statements and the auditor's independence. We would be pleased to deal with any questions you may have in relation to our reports or to the auditor. I will now address any questions on this item. Moderator, are there any questions on the phone?

No phone questions at this time.

Are there any questions online?

There are no questions online, Chairman.

If there are no further questions, I'll move to the next item of ordinary business. Resolution 1 relates to the election of Catherine Thompson as a Director of the company. Catherine's biography is included in the Notice of Meeting. The resolution and proxies are set out on the slide. I will now address any questions on this item. Moderator, are there any questions on the phone?

No phone questions at this time.

Are there any questions online?

There are no questions online, Chair.

If there's no further discussion, I now put to the meeting Resolution 1. Please record your vote online. [Voting]

Resolution 2 relates to the election of Rick Dennis as a Director of the company. Rick's biography is included in the Notice of Meeting. The resolution and proxies are set out on the slide. I will now address any questions on this item. Moderator, are there any questions on the phone?

No phone questions at this time.

Are there any questions online?

There is a question online, Mr. Chairman from Stephen Mayne. Question is, is reelection candidate, Richard Dennis planning to add to his 30,000 shares before next year's AGM? An investment worth $15,000 looks a bit light on relative to his annual board fee of $98,120 for a company capitalized at $92.6 million. Also, are there any issues with serving on 2 listed online retailers, given Richard's position on this entire Board. Does he ever have to step out signing a conflict? Or is it all upside from having a wider industry perspective with no direct competition, given the companies operate in different markets.

Well, thanks for the question, Mr. Mayne. The company doesn't have a minimum shareholding requirement for directors, and to that extent, Mr. Dennis' decision on investment are matters for him. As it relates to his position on this entire Board, we've never had a situation where we've identified a conflict. And as your question describes, we would say that there is some benefit in having his broader e-commerce experience as well as the other experience that he brings to our board group.

There are no further questions, Chair.

If there's no further discussion, I will now put to the meeting, Resolution 2. Please record your vote online. [Voting]

Our next resolution, Resolution 3 relates to the company's remuneration report for the financial year ended 30 June 2025. Remuneration report is contained in the company's 2025 annual report available on our investor website. The resolution and proxies are set out on the slide. I will now address any questions on this item. Moderator, are there questions on the phone?

No phone questions at this time.

Are there any questions online?