This was a tricky one on a few levels.

For the past 3 years, between FY23 to FY25, the company posted strong statutory numbers. Growing revenues, high levels of profitability, and most impressively this was done with the backdrop of declining ad spend (as % of revenue). It was a company that appeared to have hit the critical mass required to escape the search engine and social media ad spend rat race.

It was also clear they achieved this by increasing the average basket size - encouraging customers to purchase more pairs of underwear in one go. It made sense. Provide some bulk discounts, give away some of the luscious gross margin, and save in ad spend and logistics costs as a percentage of revenue. This worked well, so well in fact that the company eventually found itself spamming the bulk-discounting-sale button over and over again. It got so putrid that in FY25 63% of revenue was earned during sales promotions (black friday, xmas, singles day, whatever excuse they could find) vs 35% the previous year.

By the end of FY25, the company knew they’d reached the end of the road with this one trick. And it was time to reset the whole sales strategy. FY26 was always going to be a tough transition as they began the process of weening customers off this expected practice. The risk of undershooting the initial guidance was high.

Step One underscored the importance of thinking deeply about how companies achieve impressive statutory results, constructing robust bear-case arguments, and continually challenging oneself on whether those arguments hold any truth.

For STP, these questions were - how is the company reducing its ad spend, are the increase in discounting sales sustainable, is the company hollowing out the value proposition and making it difficult for future years?

These days for SaaS companies sometimes I find myself asking - why are the cashflows out running the revenues by such a large margin, were there some once-off sales, did the company do deep discounting to encourage customers to pay so far in advance, what is the intention of doing this?

Sometimes it isn’t only investors who are misled - management and employees can be as well. They may end up chasing metrics that look impressive in isolation, without taking the time to think deeply about what they are actually doing.

A few weeks ago I started getting an avalanche of messages from STP. It looked like desperate advertising so I sold out at a loss, but did beat the massive diarrhoea attack. Very messy, and I don’t see a way back.

On analysis, I am guilty of faulty logic. One has to have some form of advantage over competitors, I knew that, but I also wondered why Lorna Jane could command such a premium. Perhaps it’s a “look at me’ thing which gives LJ an edge whereas Step one is essentially a loin cloth and it’s not twee to saunter through the sauna room in your Step one’s thinking ‘look at me’.

Yep, they are comfortable, I wear them and will do for the next 5 to 10 years, I reckon…therein lies another problem, longevity doesn’t sit comfortably with repeat orders. Again I knew this, but thought brand expansion - male, females and juveniles - geographic extension - Europe in particular, and maybe specific sports segmentation, would ensure sales would hold. But they haven’t, and the competition came thick and fast…with a substantially lower price.

So, a chaste lesson and for me, a loin cloth is a loin cloth is a loincloth. Period!

There’s just got to be a solid customer reason for them to buy.

Lol, the metaphors write themselves @Scoonie!

To my mind Step One is a classic example of a great business that has been corrupted by institutional and public market incentives. And, perhaps, an overly ambitious and promotional mindset.

From his bedroom, Greg created a brand and business that now generates $87m in annual revenue, a figure that has more or less quadrupled since 2020. All while being profitable for most of the period. And with a commodity product and a tiny team.

It's an incredible feat.

The issue was the Clarion call and pursuit of growth. Not that growth is bad, but the error has been in over promising on that front, which caused the price to be bid up beyond what was sensible. So the share price drop is the market actually being more rational and correcting earlier over exuberance. The worry is that the self inflicted hype drives decisions that are less than prudent and too narrowly focused on short term outcomes.

I'm more and more convinced that the best public CEOs are those that can resist the institutional imperative and tell investment bankers and institutional shareholders to eff off and give the market an honest and somewhat sandbagged view of the future. Absolutely drive for growth, but only in a manner that is tempered by a focus on resilience.