Universal Store Holdings Limited (UNI) Earnings Call Transcript

Good morning, everyone, and welcome to the Universal Store Full Year FY '25 Results Call. Apologies for the delay in letting you access the room today. My name is Sam Wells from NWR, and joining me from the company today is Managing Director and CEO, Alice Barbery; as well as CFO, Ethan Orsini. Following the summary of the results released to the ASX this morning, investors and research analysts will have an opportunity to ask questions. There will be a choice of 2 options. First, analysts and investors can either raise your hand via the Zoom function should you wish to ask a verbal question of the management team or you can also submit a written question via a Q&A function at the bottom of your screen. We will endeavor to get to all questions asked; in some cases, combining questions on the same or similar topic. And for the analysts asking verbal questions, we kindly ask you to limit your questions to no more than 2 during today's live session. Thank you, and over to you, Alice.

Hello. Good morning, and thank you so much. I'll make sure that we get through the presentation as quickly as possible and make up the time. I'm pleased to share that we -- this has been a really strong period of trade for UNI Group. We delivered impressive sales growth with solid top line results and healthy gross profit margins, proving that our model continues to resonate with our customers. That's why we're investing not only in stores and systems and operations, but importantly, in our people, developing talent, building succession for key roles and strengthening the depth of capability across the business that's central to driving sustainable momentum. By laying these foundations, we better position ourselves for long-term growth. So I'll move on to Slide 4. A few key callouts from this slide. So group sales, $333.3 million, up 15.5% on the prior corresponding period. Underlying EBIT of $54.6 million, up $7.5 million versus PCP or up 15.9%. Impressively, the team lifted gross margins a 100 basis points while we remain diligent on pricing despite the noise in the marketplace. We also invested wisely in team capability, retaining key players, attracting exciting new talent and proudly paying higher-than-anticipated bonus, reflecting the strong trading period. Perfect Stranger opened 5 new doors to achieve a 19-store footprint with like-for-like sales growth up 25.5%, which is on top of a 7.4% growth the prior year. Universal Store like-for-like sales growth of 13% on a basically flat performance last year, opened 5 new stores and 4 new stores -- 4 stores relocated into preferred and better performing locations within the same centers. We continue to offer on-trend and differentiated product, adding new brands, collaborating with existing brands and refining private labels to ensure the offer is fresh and sells profitably. And I really must commend all team members about the disciplined approach to inventory management. CTC: THRILLS, Worship, like-for-like retail sales up 2.9%, demonstrating again growth on growth. The network is now 8 stores with 2 new openings and 2 legacy stores closed within the year. The wholesale market does continue to be volatile and sales were down 13.8%, driven by a small number of key retail accounts of the THRILLS brand. Worship from a much smaller base is in growth, up 10.5% on PCP. And given the tariff situation in the U.S.A., we have scaled back import in half 2 FY '25. You'll recall, we recognized a $13.6 million goodwill impairment based on the adverse wholesale performance. The focus for CTC is driving retail forward, which is key to accelerating our growth objectives. Moving on to the next slide. This slide is a good graphic summary of our results, and Ethan will go into a bit more depth with you. But some key callouts on this slide, 61.1% gross margin, up 100 basis points and an acknowledgment I'd like to give to the entire team achieving this result. It takes exceptional teamwork starting from product, design, buying, selections, moving through to allocations, distribution, marketing, shop floor and online execution and ultimately supported by all of the business support functions. The key to this result is customer centricity flowing through every department and with a shared purpose. Online sales up 8.6%, growing to 13.3% of sales, which is a really solid result in the low discount model business. Underlying EBIT and NPAT up 15.9% and 15.2%, respectively. Earnings per share, up 14.6% or $0.454 and underlying cash flow remained strong, up 23.3% to $98 million. We're very pleased to offer a second half dividend to $0.165. And just to call out a few of our business trends on this slide, like-for-like growth, finding post-COVID stability with a 6-year average of 8.3%. The group now sits at 111 physical stores, and group sales have more than doubled in the past 5 years from $150 million when we first listed in FY '20 to $333 million last year. The team's ability to continue to deliver growth despite operating in a very volatile and uncertain environment highlights the strength of our strategy and team, making clear that the continued system capacity and bench strength investment position us strongly for the future. Growth in underlying EBIT more than doubled over the 5 years from $25 million to $55 million, which is a 5-year CAGR of 17.3%. And really pleased to share some insight into our strategic positioning by brand. Universal Store continues to win in the market as the go-to destination for youth fashion. The team continues to curate the collection with premium on-trend products that customers love and trust while ensuring we are somewhat shielded from rampant discounting in the market. And that is achieved through intelligent differentiation strategies such as delivering exceptional private brand, collaborating with great third-party suppliers to ensure that we have wanted product our customer has come to count on and value. The team's customer-first mentality goes beyond product and marketing, and our unique service model is valued by our customers. The Universal Store footprint has capacity to grow beyond 100 stores, and we continue to refine and invest in our overall capability to meet the youth consumers' ever-changing needs. Perfect Stranger: This brand has demonstrated success in winning new customers and the national rollout is well underway. We continue to apply our disciplined and diligent rollout strategy in order to ensure investment is well managed. Focus remains on growing brand awareness as we continue to elevate the beautiful product design and store design and deliver an excellent customer experience. This brand continues to grow from strength to strength. And CTC continues to build its retail muscle for future national rollout. We have invested in enhancing the skills and capability of range curation with speed-to-market capacity, a clear difference from the wholesale cadence the original team were used to. We have embedded new leadership in a CEO and Head of Product, bringing new capability into design and marketing to achieve our ambitious retail goals while we continue to stabilize the wholesale market. It's encouraging to see DTC comp gains being delivered while we continue to elevate and refine the retail offer. And a call out for some of the underpinning strategies across the group to secure long-term growth through targeted investment. Firstly, customer connection, leveraging influencer marketing programs and advanced customer analytics to stay close to our customers, supported by market research across all brands. And for the first time, this market research also is happening at CTC. And this will continue to provide valuable insights to guide our decisions, and those insights will be available to us in November of this year. Sustainability leadership: Investments delivering results with brands achieving certification under the Organic Content standard and Global Recycled standard. We are very proud of our team who are working diligently to ensure that we are well placed to meet the growing reporting requirements, which kick off in FY '27 and continue to escalate in both complexity and depth of reporting requirement year-on-year, and hats off to our team for their early preparation. People and capability, our new HCM system or Human Capital Management system implemented in half 1 FY '25, supporting talent development and workforce planning. We continue to invest in our people and HR capabilities during the year and ongoing. Retail excellence, new POS system implemented across the CTC network in quarter 2 FY '25 will roll out in Perfect Stranger and Universal Store in half 2 FY '26 clearly avoiding any interference with peak trade periods. And execution discipline, strengthening our PMO skills and our PMO team with exceptional leadership in order to deliver a prioritized long-term strategic road map with sharper planning and more elegant execution. So I'll hand over to Ethan to give a bit of a deeper dive into the financials, and Ethan will also provide us with our business updates.

Great. Thanks, Alice, and good morning, everyone. I'll start with the group P&L. Total sales grew to $333.3 million for the year, up 15.5% on prior period. Pleasingly, all 3 retail banners achieved growth for the year. Universal Store sales grew 15% to $280.9 million. Perfect Stranger sales grew to $25.5 million, up 83.1% on prior period. And CTC's direct-to-customer sales grew 2.9%. This was partially offset by a decrease in the CTC wholesale channel, which was down 13.8% due to a small number of key accounts. Gross profit grew to 61.1% of sales and was driven by the expansion of the Perfect Stranger retail format, increased Universal Store private brand sales mix and improved inventory management, leading to a lower clearance sales mix. Cost of doing business increased to 33.1% of sales due to 3 factors: the continued investment in team capability and technology to support future growth, cost inflation and a higher FY '25 bonus expense consistent with improved trading. Underlying EBIT of $54.6 million was up 15.9% on prior period and represents 16.4% of sales. We'll now look at the long-term sales performance trend for the group. The graph on this slide shows the 6-year sales trend by business. And from this, we can see the steady continual growth of Universal Store to $280.9 million. We can also see the journey Perfect Stranger has taken from going from an organic start-up in FY '21 to a $25.5 million business in FY '25. The CTC sales in this graph excludes sales made to Universal Store and the decrease on prior year is due to the decline in the wholesale channel. We'll now take a further look at gross profit. The graph on the right shows the 6-year trend of the group's gross profit performance. In FY '25, we saw gross profit increase to 61.1% of sales. This represents a 100 basis point increase on prior period and is driven by 4 factors. First and foremost is the continued expansion of the Perfect Stranger retail format, which now represents 7.6% of total group sales compared to 4.8% in the prior period. Secondly, we saw an increase in private brand sales mix in Universal Store led by Neovision, which made up 18% of Universal Store sales for the year compared to 11% last year. The next impact was the improved inventory management by the team, which led to a lower mix of clearance sales in the period. And finally, the team continued to be very disciplined in how they approach pricing and promotions. We'll now take a look at the cost of doing business for the year. The graph on the left shows the cost of doing business movements on prior period. And from this, we can see 4 main impacts. Wage inflation and the investment in team resulted in a $5.6 million increase in CODB for the year. This represents 170 basis points of sales. New roles were added to support strategic projects, future growth and digital capability. Secondly, we see the impact of like-for-like sales growth in new store openings. This represented a $9.8 million increase in costs relating to incremental wages, rent and other variable costs. However, as a percent of sales, this growth fractionalized our cost of doing business by 160 basis points. Thirdly, we paid a higher bonus in FY '25, reflecting stronger trading results and team growth. Finally, other costs represented a $2.1 million increase on prior period, and this was due to non-wage inflation, investment in technology and customer research. During the year, we renewed 32 leases. In aggregate, the cash rental cost increase of these renewals is about 5%. We'll now move on to the group balance sheet. Looking at the balance sheet, we can see we ended the year with $17.2 million of net cash. This is up 20.3% on prior period. The group fully repaid its $15 million bank debt during the year. These loan facilities remain in place should they be required in the future. Inventory increased 11% to $33.3 million due to an increase in store numbers and investment to support customer demand. The group's right-of-use assets and lease liabilities increased 47% and 44%, respectively. This increase is due to new store openings and the renewal of 32 leases during the year. Finally, the final CTC deferred variable consideration payment of $800,000 will be paid in September 2025. Moving to group cash flow. The group delivered a very robust operating cash flow from operations of $98 million, which represents a 23.3% increase on prior period. This increase was driven by strong profitability and working capital management and is reflected in our EBITDA cash conversion percent of 105%. FY '25 CapEx related to 12 new store openings, 4 relocations and investment in IT infrastructure. The $2.6 million acquisition of subsidiary payment relates to the second deferred variable consideration payment relating to the CTC acquisition. We'll now move on to the FY '25 business updates, starting with Universal Store. FY '25 sales of $280.9 million were up 15% on prior period, driven by solid like-for-like growth of 13% in new store openings. Gross profit increased 150 basis points on prior period. This increase was driven by strong assortments of both private and third-party brands. This effective range curation by the team supports our low discount model and disciplined pricing. Online sales grew to 5.1% on prior period, and underlying Universal Store and Perfect Stranger EBIT was $53.2 million for the year, up $11.1 million or 26.4%. During the year, we opened 5 new stores and closed 1 pop-up store, bringing our year-end network to 84 physical stores. We are planning to open 4 to 6 new stores in FY '26 and we'll close 1 store in quarter 1, '26 due to its center being under renovation, and this store will reopen in FY '27. We're happy to say 4 new stores have been confirmed for quarter 2 FY '26. 4 stores were relocated in FY '25. And in the year ahead, we plan to relocate a further 2 to 3 and refurbish 4 stores as part of upgrading our fleet. Jumping into Perfect Stranger. Sales grew to $25.5 million, up 83.1% on prior period. This was driven by like-for-like growth of 25.5%, new store openings and robust online growth. Perfect Stranger continues to attract new customers to the group with little noticeable cannibalization of nearby U.S. stores. We continue to focus on building brand awareness and network expansion. And to support this expansion, we continue to prudently invest in dedicated resourcing to support Perfect Stranger s growth. Five new stores were opened during the year, bringing our network to 19 stores. And we are planning to open 5 to 7 stores in FY '26, with 3 stores already confirmed for opening this year. Finally, moving on to CTC. Wholesale sales were down 13.8% for the year due to a decrease in a small number of key retail accounts of the THRILLS brand. The impact of these 3 accounts was largely cycled in FY '25. As Alice mentioned, the impact of U.S.A. tariffs resulted in us scaling back sales to that geography. Pleasingly, the Worship brand continues to grow, achieving 10.5% growth in the wholesale channel for the year. Combined THRILLS and Worship sales to Universal Store were $13.2 million in FY '25, down from $14 million in FY '24 due to lower THRILLS sales. However, collectively, THRILLS and Worship make up 10% of total Universal Store sales. FY '25 gross profit of 42.9% was down 330 basis points on prior period. This decrease was due to product sales mix and aged inventory markdown activity. Underlying EBIT for CTC was $1.5 million for the year. Two new stores were opened and 2 legacy stores were closed in FY '25. As a result, the network remains at 8 physical stores. We are planning to open 2 to 4 stores in FY '26 with 1 store opened earlier this week. From a strategic point of view, the focus continues to be on growing the direct-to-customer channel and stabilizing wholesale channel. To this end, we onboarded a new CEO and new Head of Product to drive the product development and retail execution. This includes leveraging the THRILLS Byron Bay heritage, passion for music, art and vintage look. I'll now pass back to Alice for a trading update.

This slide everyone comes for, right? Look, it's been a promising start to the half, and these last 7 weeks are a clear reflection of the strength of our brands and the energy of our team. Group FY '26 to date, the first 7 weeks of the financial year, direct-to-consumer sales up 17.2% on PCP broken down by brand. Universal Store up 14.7% and that is a 12.5% like-for-like growth; Perfect Stranger up 52.8% and a 19.3% like-for-like growth; and CTC direct-to-consumer sales up 12.9%, which is a 4% like-for-like growth. We expect CTC wholesale to remain challenging for FY '26, and I should call out that CTC wholesale represents less than 5% of group sales, net of intercompany eliminations. Gross profit, we remain committed to our customers' needs as we balance the mix of both third-party and private label. We continue to monitor our foreign currency risk. Due to cost of doing business, the group continues to invest in team capability and depth to support future growth and succession planning. New POS implementation plan for half 2 FY '26 continues and management remains focused on balancing wage optimization with customer service and team safety. We have had a strong kickoff for the new financial year and have solid strategic initiatives embedded to help us drive momentum. I want to recognize our incredible team members across the entire group and every business function for their passion, resilience, focus and teamwork because ultimately, a winning culture is what drives our results. We are looking forward to the Christmas trade period and the rest of the half with focus and enthusiasm. We know that we face into much tougher comps this peak season than last, and the challenge is set for us to continue to achieve like-for-like sales growth in the toughest and the most exciting months of the year. If you don't like Christmas, don't work in fashion retail. I want to thank the Board for their continued guidance and support and belief in our long-term vision. And to our shareholders, we are grateful to you for your continued confidence in us. We remain committed to making you proud of your decision to back our business. Thank you very much, Sam, and we will be very happy to open for questions.

Great. Thanks very much, Ethan and Alice. [Operator Instructions] A couple of quick questions to kick off on like-for-likes. Some really impressive growth there. Can you just elaborate and provide a little bit more context, including expectations looking forward as well as the comparisons that you look to cycle as the year progresses?

Well, we definitely have tougher comps to face into. And I suppose it is about stabilizing everyone's expectations. It has been a very strong kickoff, but we definitely know we're leaning into tougher trade. Anything you want to add?

No, I agree also just the fact that 7 weeks is always a small sample size. So we're very pleased with the start to the year, but we note that July and August tend to be relatively quieter months.

Yes. Sure.

Great. Thank you. And just on costs, the CODB continues to rise, which you signaled throughout the year. How should we think about costs moving forward? Is this investment and team composition complete heading into FY '23?

I think it's important to remind everyone how lean we have been as an organization and the growing governance requirements, the growing reporting requirements that exist. As we continue to grow and flex, there are more safety requirements. There's a lot more for us to do. And in order to ensure that the investments that we've made have been solid, succession planning, part of my change to my role into a more strategic role has really highlighted how we could be better at retention and attraction strategies. So we've just hired a brand-new General Manager of Human Resources. We're also adding, for the first time ever, a new role, which is a Loss Prevention Manager and a lot of retailers take that for granted. Our high service model in store has helped us not need that department in past. But with youth crime growing and knife crime growing and retail crime lifting, how do we maintain protecting our assets and our team. There are different ways of thinking that we need to do in order to protect the investments. I'm really comfortable with our percentage. I think we're doing a great job. And hopefully, people will appreciate that these investments are carefully, diligently considered and not the least bit ways for.

Okay. Great. Thank you. And we'll just shift across to some live questions. [ Chami ] at Bell Potter.

I think 2 from me. To start off with, as you said, the slide that everyone likes on the comps. Would you say that the first quarter, I mean, the start of the first quarter so far of the new year is more consistent with the fourth quarter comps or slightly better than that last bit of the second half?

Yes, I think we're seeing fairly consistent sales momentum. So I'd say they're fairly consistent with the quarter 4 of FY '25.

Okay. And anything to call out in the THRILLS? I know it's a small -- I mean, relatively smaller than sort of the really good comps that you have printed. But just in the THRILLS retail in the second half, anything to call out here?

I think we're just growing our retail muscle. We're continuing to refine products. We're continuing -- so we've just opened a brand-new store yesterday in Miranda. So those of you who are Sydney-based, we encourage you to go and have a visit. We are just continuing to do a much better job. And I'm really comfortable with the cadence that the team is now taking, the speed with which they are enthusiastically embracing the change to product design delivery cadence. It's been a big change for the team. And we're -- the new stores that we've opened have definitely outperformed the older stores that were ill considered and poorly placed. But we've still got a lot of work to do.

Perfect. And then just switching to the new stores. Yes, again, good to see the FY '26 starting point for the dark target there. Just in terms of the 100 stores for Universal Store, how does timing -- how do you consider timing of that? And also now with the 2 younger brands, what's the landlord opportunity looking like?

Yes. We've always said 100-plus stores for Universal Store. And doing -- the better technology we get to, the more heat mapping we can do and understand where our online purchases are coming from, that gives us more confidence to spread out into some centers that we might have originally considered were ideal for us, and that's been proving useful. Landlords aren't growing at the moment. So one of the only things they have to leverage their growth is charge more rent. And unfortunately, we come out with great results. They think that there's more opportunity for them. But definitely, as we go to them in a more of a packaged view that we have 3 brands that we could open, we're working our best, but we will not open sites that we don't believe in. We won't open sites that are the wrong location in the center, the wrong size. And certainly, as the commercials don't stack up. Ethan will hit in rigs and where are we going

Thanks, Chamithri. [ Sam at Petra ]

Congrats on the results. Just on the -- just going back to gross margin and cost of doing business trajectory. It seems the theme is that you're getting an underlying accretion in gross margin and you're reinvesting some of that to cost of doing business in a measured way. Should we expect a similar theme in 2026? So just more color in terms of -- or is there an opportunity for cost of doing business as a percentage of sales to start to stabilize?

Yes. I think if you look at -- maybe to cost of doing business first. So in FY '25, we referred to some vacancies being filled and primarily merchandise and marketing areas that were hung over from FY '24. So those -- that's now been done. So that will start to stabilize, but we continue to incrementally add resource where needed. And Alice gave 2 good examples of our GM of HR and Head of Loss Prevention. Also with Perfect Stranger as that business continues to grow, we need more dedicated resourcing and not shared resourcing with Universal Store. So we're still expecting CODB investment, but the rate of investment year-on-year will start to subside.

Right. So you're still expecting an increase in percentage of sales, but not as material.

Yes. Yes. That's fair to say, yes. And then from a gross profit point of view, we're always led by the customer. So we're very aware of the importance of third-party brands to the success of our business. And we don't set the team targets on private brand mix. So first and foremost, we have great brands, and we want to continue to grow those brands, but we'll always be customer-led. Hence, why we don't give specific guidance on gross margin going forward.

And just on the data analytics and AI, is that featuring in your business in terms of AI capabilities? Is that an opportunity that's sort of untapped at this point, thinking about personalization and optimizing price points and things like that?

Yes. I think it's fair to say we're early in the journey. And I think a lot of the work the team are doing is more from a search and how we help customers digitally find the products they want. So yes, I don't want to misrepresent that we're far down the path on AI, but it's something we've started with more in the customer-facing part of the business.

I was just going to ask quickly on offshore plants. You're doing some work there as my last question. Any update there?

Offshore in terms of retail?