The results from Step One were impressive, leaving little room for criticism. The company is demonstrating solid top-line growth, operating leverage, reduced ad spend as a percentage of revenue, and strong cash flow, all while paying out 100% of earnings as a fully franked dividend (3.8%).

@Strawman hosted an awesome meeting with Greg Taylor the CEO following the results release. Greg has a lot to say, and it was great to hear about how he bootstrapped the whole business on credit card debt and built it to where it is today.

My key take away from the meeting is that Greg is a test-and-learn machine. Or perhaps direct-to-consumer is a test-and-learn business and Greg born for it. Some noteworthy examples include:

• Greg noticed that 40% of customers had female names, prompting a shift in marketing from “Do you chafe?” to “Does your partner chafe?” This change led to a significant uplift in conversions and sparked the idea for a women’s range.
• In 2019-2020, while Step One was still an Australia-only business, Greg observed that 5% of orders were coming from the UK. One day he diverted a shipping container there, leading to the birth of the UK business.

One key insight is that men often don’t buy their own undergarments - over 40% of men’s underwear purchases are made by women. The expansion into women’s underwear isn’t just about broadening the addressable market; it’s also about targeting the primary family underwear buyer. The introduction of a junior range and bras further strengthens this strategy.

With the results itself, two trends stand out to me.

First, the company has managed its ad spend exceptionally well. Ad spend as a percentage of revenue continues to decline, while gross margins are maintained, and contribution and EBITDA margins are improving. This is, in my view, the most impressive aspect of the company - it might be on the verge of breaking free from the Google/Meta ad spend rat race.

This is likely through a combination of techniques. Partnerships with Surf Life Saving and STEPtember to attract new customers, indirect channels such as Amazon and John Lewis, and bulk discounts and discounted promotions to re-engage returning customers. Ad spend is still 33% of revenue - which is across both new and returning users - so there’s plenty of margin to play around to achieve better profitability outcomes than running ads.

Second, they’ve been going hard at increasing the average order size. In 2020 it was 3.6 items per order. This has now reached 5.5 per order for FY24 and with the run rate in 2H even higher than that. They’re sacrificing a bit of gross margin in the form of bulk discounts but making up for it in the form of reduced ad spend - which is seen by the improving contribution and profit margins. This also aligns with their strategy of appealing to the primary family underwear buyer. Underwear - unlike say RedBubble with unique t-shirts - lends itself well to bulk buying and repetitive purchasing patterns.

Personally, I’m optimistic about the US market opportunity. Management believes they have several strategies that have worked well in Australia and the UK - such as the women’s range, partnerships, and athlete endorsements/shareholders - that haven’t yet been rolled out in the US but are expected to be soon. Although commentary is pretty subdued in this area, US shipment data seem to suggest they’ll have a red hot crack in the coming year.

In terms of valuation, it’s not overly stretched. Trailing EV/E is only 22.5 and one can make the case it’s run-rating at under 20. The harder question to answer is “where’s the moat?” But then again, sometimes it only takes being 1% better here, and another 1% better there, and it adds up to become and multi-year growth story. How did Under Armour, Hoka shoes, or Lululemon become success stories in highly saturated markets? Did they have a clearer moat when they were fledgling companies?

I found the interview with Greg Taylor from Step One very good, the fact he said no Debt was interesting to me as an Invester and Step One moving into Ladies underwear has to be good for Step One Clothing Company. I see them paying a dividend of .028 cents looks very good for an investment into this company

ah, so to clarify, the $39m in "cash" consists of cash and $10m in term deposits ('financial assets'). Maturity is between 3-12 months.