This is an interesting one. Reported half yearly results today. Hit record revenues and profits (+25%, +38% respectively vs pcp) surpassing the numbers reached during the height of the pandemic. One of the very few ecommerce retailers to do so!

Seems to have got the results by doing upsell promotions; by getting customers to buy more in a single order. As a result, average order size and the items per order have both increased, while the revenue per order decreased. So pushing more volume, for slightly lower prices. But margins have remained high, so the strategy is working.

A pleasing aspect of the result has been the performance of the UK and US divisions up 38% and 256% (tiny base) respectively. UK’s average order size has been moving towards that of Australia’s. While the US’s return customer metric has been improving and is now well above 40%. This will be the true upside for the company should they get those geographies rolling.

I like the candour of the management team. During the conference call, they mentioned that customer acquisition costs (CAC) is not solely about acquiring new customers. There is no way of attributing cost to new or returning customers. Which is the absolute truth - returning customers will still click on Google Ads! I haven’t heard of any ecommerce companies describe it like this.

One area to watch I touched on last time is the inventory levels. They’ve been able to run this down substantially in this half, and is consolidating the range of products. So a tick there.

At $1.40, it’s on a EV/E of 19 and pay around a 4.2% fully franked dividend.

Step One plans to report its 1H24 financial result on 20 February 2024. 

ESG and what about the carbon credits..

Share price stepping up Nice.. As long as this price avoids the 'elevator' on the way down well it should be ok here.

Price reaction up 11% this morning

Step One details behind-the-scenes scramble ahead of profit warning

by Simon Evans, Senior Reporter, AFR, 19-May-2022 - 4:13pm

Underwear group Step One has been forced to detail the behind-the-scenes scramble that led to its dramatic profit downgrade on May 16.

The ASX issued a “please explain” compliance notice asking when Step One became aware of the large profit declines, with the company on Thursday replying with a blow-by-blow description of the events that included hasty phone calls to some board members last week.

Step One chief executive and founder Greg Taylor.  

Step One, founded in 2017 by former rower Greg Taylor, promises a “no-chafing” experience to wearers of the bamboo fibre underwear. The stock reached $3 on November 19 in the weeks after a float when the issue price was $1.53, but its shares halved to 22¢ on Monday after the downgrade was announced to the ASX. The shares recovered slightly on Thursday to 35¢.

Step One told the ASX on Thursday in its reply to the compliance query that the extent of the deterioration in the group’s trading and full-year outlook didn’t become clear until the evening of May 11.

The company then re-worked some of its forecasts that night.

“Given the significance of the possible deterioration, management consulted with available board members between 9.49am and 9.55am on Thursday May 12 and agreed that additional time was required to validate both the new data and the reforecasting”.

The company secretary rang the ASX requesting a trading halt in a phone call which lasted two minutes from 10am on the same Thursday, and that was granted. The board and senior management worked over the weekend to further validate the situation and approve an announcement, which went to the ASX on May 16.

Step One said it complied with the ASX’s listing rules in the lead-up to the profit slide announcement.

The company on May 16 said profits for financial year 2022 were expected to be less than half of what was forecast seven months ago.

The group found the going much tougher than expected in both the US and the UK. It projected losses in the US would blow out to $3 million this financial year. The chairman of Step One is David Gallop, a former CEO of both the National Rugby League competition and Australia’s governing body for soccer, Football Federation Australia.

Chief executive Taylor said on May 16 he was disappointed to have to bring bad news to investors but the “challenges are by no means insurmountable”. The company has begun selling a small range of its products on Amazon.com to try to help build more awareness.

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Simon Evans writes on business specialising in retail, manufacturing, beverages, mining and M&A. He is based in Adelaide. Connect with Simon on Twitter. Email Simon at simon.evans@afr.com

Further Reading:

Step One underwear group suffering overseas growing pains (afr.com) Simon Evans, 16-May-2022, "Rapid shrinkage for Step One underwear group"

Step One founder Greg Taylor sells in float, skips wedgie (afr.com) Myriam Robin, Columnist, AFR, 16-May-2022.

Step One hopes UK rugby star will fix British stumble (afr.com), Simon Evans, 22-Feb-2022.

Step One back on the horse after early stumble (afr.com), Simon Evans, 17-Jan-2022.

Step One ASX: Bamboo underwear company quickens its pace with a strong IPO (afr.com), Simon Evans, 01-Nov-2021.

Greg Taylor, the founder and CEO of Step One underwear, trimmed his stake in the company from 100 per cent to 66.4 per cent in the IPO.  [photo: James Brickwood]

Step One underwear tries US on for size (afr.com), Simon Evans, 12-Oct-2021

Step One wraps up IPO, on track to list late October (afr.com), Anthony Macdonald, Yolanda Redrup and Kanika Sood, 07-Oct-2021.

Step One underwear ready to crack ASX (afr.com), Simon Evans, 16-Mar-2021.

Disclosure: I wear Step One Boxers but I have never owned STP shares either here or IRL. They're like the Red Bull of men's underwear, in terms of their set-up, being basically a marketing company that farms out all of the manufacturing and distribution, and just does the ads and other marketing, but without the Red Bull following and success.

The best of the further reading set above is probably this one:

Step One founder sells in float, skips wedgie

by Myriam Robin, Columnist, AFR, 16-May-2022 - 4:41pm.

Elite rower turned Step One bamboo underwear entrepreneur Greg Taylor made $41.3 million selling 27 million shares at the $1.53 float price when his four-year-old company listed in November. It’s more than the whole shebang is worth these days.

On Monday, Step One’s share price fell 55.2 per cent to 22¢. Its market capitalisation is now $39 million, after it slashed in half the $15.1 EBITDA guidance made in its October prospectus. Taylor’s remaining 123 million shares are currently worth $26 million, or 85 per cent less than they were the day Step One debuted.

Former NRL and FFA chief David Gallop may rue being partially paid in scrip by Step One. [photo: James Brickwood]

Seemingly not blessed with Taylor’s luck is Step One chairman and ex-football administrator David Gallop, who’s being paid partly in rapidly depreciating scrip. In December, he kicked in another $29,806.53 to buy 18,900 shares on-market at $1.58 a pop.

Another loser is Corporate Travel Management’s Jamie Pherous, who bought 150,000 shares in Step One’s float. We suppose Corporate Travel’s ever-loyal house broker Morgans – also the lead manager on Step One’s IPO – brought it to his attention.

Jocks seller/marketing company Step One got pantsed today on news of a significant downgrade to guidance (and prospectus). The U.S. tends to be where businesses from Downunder go to die and they're busy claiming another victim here with the company saying "USA revenue growth has occurred at a lower rate than expected, as we are working to establish our brand...". The chicks range of jocks also is cited as being a drag. This would come as no surprise to anyone who has had a look at it - I'm no expert when it comes to women's underwear (ok maybe one time) but it looked pretty underwhelming. @Slew flagged this in an earlier post. News that the company expects to spend 46% of revenue on marketing would be enough to make investors fill their jocks.

After listing at $1.53 and reaching a peak of $3.13 just six months ago management were strutting around like Harry Hipants. Today's update caught them with their pants down and shares are trading around 21 cents.

The business was originally well covered by analysts but with a market cap of less than $40m they're likely to have less coverage than a mankini.

[Not held]

Product review womens small.

I received my womens step ones last week and hate them. The rise is way too long 10 to 15 centimetres in my opinion which means they protrude excessively over the top of all my clothes which sit on the hipline not the waist.

The fabric is different to the mens, it's thinner with an increased amount of spandex, 7% versus 4% in the mens, which means they are much clingier. I found I was constantly having to dig them out of my behind.  

Given the feedback/reviews from women wearing the men’s product, I thought I’d better try the mens pair. Apart from the obvious bunching in the front, they fit much better, the heavier fabric doesn’t ride in and the rise is shorter. Are there going to be disappointed women’s buyers out there? 

After a couple of hours I requested a refund on the money back comfort guarantee and it was a painless experience. (Finding the return button wasn't super clear, you have to email, visibility on the website could be improved.) I had an answer offering a refund or a different size within an hour, I declined the replacement pair and had a payment credit pending on my credit card within three hours. 

This experience backs up my initial thoughts on the  women’s range that it has missed the mark. It also reinforces my opinion that the womenwear market has a lot more variables and is a lot harder to crack. I showed the product to a couple of girlfriends who were going to test them for me and they couldn't even bring themselves to buy them, one comment was hideous and  the other was they are too high in the waist. 

So my question for management, (hopefully in the earnings call next month) is what percentage of returns are they getting on the women’s and what is the size breakdown of sales.  I am still wondering if the product has appeal for larger sizes.  

I am unconvinced the women’s range is on the right track, cut, colour and fabric composition, doesn’t really leave anything else except a positive return experience!

I have a few points to add to Reece’s report and a different perspective on a few things.

Manufacturing

Step one could be viewed as marketing machine who do not control their manufacturing and I appreciate the comparison to A2M but I’m not sure it is relevant in the textile business. Basically all fashion labels outsource their production, from the big names Nike right down to the mass retailers. The good operators have steady long term relationships with factories and rely on them for sampling through to production, it is a system that has worked well in the past. Perhaps more recently the risks to a solely china manufacturing base have increased with the policy changes from Xi. I’m sure there are factories in Vietnam etc that could manufacture the product, what I don’t know is how readily available the ethical bamboo fibre is. If the yarn needs to be sourced from China there may be little advantage in manufacturing elsewhere.  This is probably my key risk to the manufacturing process and it would be interesting to know if there is a contingency plan for a supplier base outside China.

Marketing

All fashion is marketing so in this regard Step one is no different in cultivating a brand and customer love for the product.

Customer acquisition will be hard in the space, especially overseas as a new brand. I think the only way to grow is through clever organic marketing on social platforms etc, and to build brand awareness. If the website traffic is generated from direct brand searching, I’m unsure if the google algo will have such a big impact??  I’ve noted Reece thinks this may be an issue with SEO.

Distribution

This needs to be fixed and is completely in the control of Step one. If customers love a product, they will cut some slack for poor delivery, especially as they actively advised customers on delays and upgraded product to express deliveries, but I suggest you can only get away with this once. Greg confirmed on the last investor call, delayed delivery of product to customers from the black Friday sales impacted Christmas sales as no repeat orders were made before initial product orders were received, this had a big impact on UK sales.

Womenswear:  

Initial reviews on line hit the following points

·     Endorsing fit/comfort,

·     Comments around lack of bright colours and prints.

·     Several request for larger sizes, current ranging XS-3xl (22), this surprised me  

·     Positive response to using advertising models in all sizes, small to big.

·     Appears to be a bit of a fan club already, aka the men’s range.

Larger sizes womenswear

I have been wondering if they are tapping into a under serviced niche in larger women’s sizes. If you are plus sized, a fuller brief for support, (ie it sucks everything in) is a better option. Such underwear does exist but it looks like your grandmothers bloomers, not what you want if you in 30’s, well any age really. There may also be a comfort benefit in the longer trunk as they are less likely go up your arse and chafe, as sizes increase this is a bigger problem. Fashion companies often use the perfect size 10-12 when developing ranges, once these designs are scaled up beyond a certain size the styling/cut no longer functions well.

Plus sized womenswear, especially for young people is very under serviced, it often looks dowdy.  (Big size menswear is similar) The common women’s size range is 8-16/18, but a lot of women are bigger than that. (City chic has had success tapping into this market, I think there is definitely room for improvement in plus size underwear as well)

I really like the sizing and colour display on the website, if you click on your size the accompanying product picture shows a model in your size. This is great, nothing worse if you’re a size 18 looking at a garment on a size 8 model.

Styling womenswear

I have a hunch women will appreciate the underwear for certain activities and clothing choices. I’m thinking they will perform well under jeans and ski pants. However I’m not sure women, even those who love them will wear them all the time. Unlike blokes who wear the same jocks everyday, I suspect women will be more likely to chop and change depending on the day/occasion.

The exception to this may be the plus sizing for the reasons mentioned above.

Womenswear: sell through

As of today this is the current sell through on colours and sizes as per the website availability. I’m not reading too much into this as we don’t know the initial starting ratios in each colour and size. Black is virtually sold out, I’m hoping they anticipated this and had 4-5 times the product in black, as this was obviously going to be the best seller. If you are a M or L the only colour now available is mahogany.

ESG component

I find this amusing, by nature bamboo is far less water intensive and uses no chemicals to grow, its basically a weed in the right conditions. So yes it is more environmentally friendly than cotton. However it is worth considering that there are 2 ways to process the bamboo into yarn, naturally or mechanically, which basically means lots of chemicals. According to Step one their bamboo is broken down with a mould process, so it is a natural process and is more expensive.

I’d suggest a lot of the bamboo fabric on sale is not processed in an environmentally safe method and is riding on the coattails of a being a perceived green product. Further detail here https://fairware.com/bamboozled-getting-the-facts-on-bamboo-textiles/

The compostable packaging is a plus re-enforcing the green credential.

Colour ranging

Step ones approach to the colour range seems pretty on track to me. Basically stock your core colours, black, grey, plus a few best sellers and rotate the highlight colours through to create a constant freshness to the product line and new images for marketing. I don’t see the range keeping all the colours once they are released they will be retired for something new and bought back if they get big sell through numbers. I used to develop product and sell menswear into the big discount retailers Big W etc. Black, grey and navy outsold all other colours significantly. However we always had a small amount of a highlight colour orange, red, whatever was in at the time to create interest at the store level. The highlight colours were usually dogs and marked down at the end of the season. However their role was to make the floor stock, merchandising look attractive.  Without it the floor looked unappealing and ironically you sold more of the core colours by having the bright lure there. I don’t see that being any different online, the customer gets bored you need to keep the ranging fresh, so it looks different next time they log on, ie. “Look at that pink camo”. The main difference is jocks, being an undergarment, has a much greater colour range that appeals.

The other interesting point from a colour perspective is the men’s range uses the same colour accessories, grey elastic waistband and black inside leg panel, so the only change is the fabric colour which is a small change. This was probably done initially to keep costs down, one less variable.  Furthermore the printed designs are done on a white base cloth so fabric can be ready to go and printed as required.

In contrast the women’s range as mentioned on previous straw is a bit dowdy on colour choice. I still think they missed an opportunity here. Lets hope they are nimble enough to respond to the first sales and adjust the ranging appropriately, they have mentioned on socials that prints are coming.

Interestingly they have gone with matching elastic waistbands, which makes sense in the women’s range, but does increase the production cost of the garment marginally depending on volume.

Catalysts

• I’m watching the response to the womenswears
• Reviews and feedback online pointing to sales in the US & UK
• Expecting management feedback on the womenswear range release at Feb reporting

Questions

What % of sales are returned on comfort guarantee?

What is the % of first time customers put in a 2^nd order?

Step one released their women’s range today and in one word disappointing!

The colour range is woeful.

I’m really unsure who this range was product tested on?  In the last trading update webinar Greg mentioned the range is ready and had been consumer tested with a positive response, is this just the fit or the colours too?

In my opinion the women looking for this sort of product are not looking for a traditional range of colours, it is not a traditional brief.

Yes you need the basics, black, grey and beige but there are no fun colours or prints. I feel this has really missed the mark and opportunity to appeal to a broad range of first time buyers. 

I have some women lined up to test the product but I know they were looking for something far brighter/fun, orange/cameo aka the men’s range.

Australian brand Boody do a terrific range of women’s bamboo underwear, reasonable priced, great styling and colour range. The step one colours seem to echo their range, mmmm.

https://www.boody.com.au/collections/womens-bikinis-briefs

Knobbys also have a womens range which is now far more appealing in this category

https://knobby.com.au/collections/womens-underwear?uff_fkp63j_tags=Boyshort 

In conclusion I felt the release of the women's range could have been the catalyst for the next stage of growth for the company, having seen the range I have serious doubts about this.

Held in SM to monitor, I won’t be buying in RL, Female/ex ragtrader