Thank you and good morning, everyone. Welcome to Step One's FY 2025 Results Conference call. I'm Greg Taylor, CEO and Founder of Step One, and with me today is our CFO, Nigel Underwood. We'll be going through the presentation that was lodged earlier today with the ASX, and there'll be time for questions at the end. Everyone, please turn to slide two. In the context of a challenging environment, we're pleased to have delivered modest growth and maintained profitability. In line with the broader retail sector, maintaining market share in FY 2025 required an elevated level of promotional activity and discounting, with cost of living pressures driving customers to prioritize value offers. We responded to these conditions with agility, deploying effective promotional strategies to create traction amongst our value-conscious customers while maintaining discipline in our approach.
Our Australian business delivered steady results against its challenging backdrop, and the U.K. has shown promising momentum. The decision to scale back advertising while supporting short-term profitability has limited our ability to attract new customers in this market. However, engagement from our existing customer base remains strong, with healthy repeat purchase rates reflected both product and quality and brand loyalty. Against a record comparative period and these headwinds, we delivered $86.9 million in revenue, which is up 2.8% on PCP. Gross margin reduced as customers continued to be attracted by discounted value offers. However, we were able to offset the majority of this decline through reducing our advertising costs as a percent of revenue, which is down to 27% compared to that of 32% last year. Pleasingly, two of our key growth drivers, our women's line and indirect channels, grew by 8% and 53% respectively in the period.
On the back of this, our EBITDA was $17.4 million, which is slightly down from last year. Our cash balance, while still strong, reflects higher inventory investment, which we're now actively working to draw down through our strengthened inventory management processes. We're pleased to declare a final dividend of $0.024 per share, fully franked, maintaining our commitment to returning value to shareholders. Turning to slide three. Our profitable growth strategy is underpinned by four key pillars. Number one, product. Our mission is to transform the underwear market. We've done this by bringing innovative, ethical, comfortable, and sustainable functional products to market to solve problems for our customers. Range innovation is essential to attracting new and retaining customers, and it's a priority of ours. Pillar two, customer acquisition. We have a strong track record of efficient D2C customer acquisition and growing our database efficiently.
We're strategically supplementing that growth with our targeted partnerships and organizations, as well as ambassadors. Our D2C stats support our efforts in this department, with nearly 70% of our customers returning during the year. Pillar three, our indirect channels. We're supporting our D2C growth by building a presence in trusted and established retail and e-commerce channels. This allows us to extend our reach, brand, and tap into new databases of customers. Finally, our footprint. Our plan is to emulate our profitable growth in Australia and scale diligently in global markets, where there is demand. We're leveraging our successes and learning from our proven Australian model. In the short term, we focus on continuing to win market share in Australia, growing our U.K. business, and as announced in February, the U.S. remains a longer-term priority, allowing us to refine our approach before further investment. Turning to slide four.
This half, we continue to execute against our strategy. We expanded our women's line with the launch of our Smooth Fit range and introduced Cloud Mesh for men. Expanding our women's range is strategically important and offers significant upside as female customers bring higher value to the business, as they often purchase men's products as well. This compounding growth continues to be a focus area for us. The launch of Cloud Mesh showcased our commitment to innovation. This premium fabric engineered to transfer heat away from the body has received excellent early feedback from customers. Product innovation remains central to our strategy and continues to drive engagement, especially in challenging environments. During the year, we maintained our partnership with Surf Life Saving Australia in September, while supporting causes closer to our customer demographic, including Men's Health Awareness Ball, the 25 STAY ALIVE campaign, and the Morgans Big Dry Friday.
Our channels saw modest initial results from TikTok Shop in the U.K. and have since launched TikTok Shop in the U.S.. Amazon revenue grew 35% to $6 million and now accounts for almost 7% of total revenue. In addition to contributing revenue growth, Amazon continues to enhance Step One's credibility, particularly in new markets. We saw modest but credible growth in Australia and the U.K., while softness in our U.S. performance reflects our pullback in that market as we prioritize profitability. We made an important step during the period by strengthening operations in the U.K. to support our brand awareness initiatives. Working closely with myself and the Australian team, our U.K. operations leveraged learnings from our successful home market. Having local marketing expertise is an important step in scaling diligently, and we're seeing early signs of progress there. Moving to slide five, please.
In Australia, revenue grew 7%, reflective of strong brand awareness offset by headwinds from cost of living pressures, with customers responding well to our value-driven promotional offers. Similarly, in the U.K., cost of living pressures impacted consumer spend. However, we still delivered 9% revenue growth. We went in-store at John Lewis during the period, and while retail sales remain modest, it's a valuable channel for driving product awareness and particularly brand credibility. Later in the period, we also began trialing a refreshed marketing approach informed by local insights and customer feedback, which resonated strongly and reinforced our brand positioning. This positive response gives us confidence as we consider evolving our global messaging to reflect this formula and market efficiency efficiently across geographies. Given prevailing market conditions, we prioritize profitability and reduce direct advertising investments in the U.S.
We continue promoting and selling through Amazon and TikTok Shop to maintain our market presence. However, now the U.S. is a longer-term opportunity. Our intention is to scale the U.K. first and then apply those learnings to the U.S. market. Turning to slide six, please. These charts provide more color on our performance this year. While I was looking to drive more growth, overall the business is in sound condition, with most metrics improving or only slightly down. Our average order value increased, driven by promotional offers requiring greater volume purchases to earn a maximum discount. Our return customer rate supports our view that the product continues to resonate with customers, though we're hoping for stronger new customer acquisitions, and this will be a focus moving into FY 2026 for us.
We delivered a 4.6% conversion rate, and while this has historically fluctuated between 4% and 5%, it remains very strong by industry standards. Our customer database reached 1.9 million, representing modest growth in our addressable audience. The remaining chart illustrates the revenue and profit performance we've discussed. I'll now hand over to Nigel to walk through our financials in more detail.
Thanks, Greg. Turning to the income statement on slide seven. In the context of challenging market conditions, we've delivered revenue growth of 2.8%, which was underpinned by 7% growth in the Australian market and 9% growth in the U.K. market. Gross margins declined to 76%, driven by a pivot towards attracting value-conscious customers during sale periods. Advertising costs reduced to 27% of revenue, offsetting margin pressure and reinforcing the efficiency of the business model. Overhead increased primarily due to manpower costs necessary to build both capacity and capability, particularly in our U.K. business. Overall, our EBITDA decreased 3.9% on PCP, while net profit after tax increased to 2%. Turning to the balance sheet on slide eight. Inventory increased by $6.3 million in the year as we expanded the product range. Turnover remains stable at approximately 1.2 years. However, we do note that some inventory lines are slow-moving.
While inventory is neither perishable nor seasonal, a 5% provision is maintained for older SKUs. As part of our inventory optimization process for FY 2026, we are focused on selling the slow-moving inventory at a discount via our own clearance site. Turning to the cash flow on slide nine. We continue to generate cash flow, with cash receipts increasing in line with revenue growth and payments reflecting increased inventory levels. The dividends totaling $13 million were paid in the period, maintaining a payout rate of 100% of earnings. We plan to pay 100% of earnings out again this period, with a $4 million dividend payable in September 2025. Term deposits with durations exceeding three months are classified as investments. The group maintains a strong financial position with cash and term deposits totaling $33 million, all held with licensed banks. The cash flow reflects the attractiveness of our capital-light business model.
I'll now hand back to Greg.
Thanks, Nigel. Everyone, turning to slide 10, please. Moving forward, Step One will continue to be guided by our profitable growth strategy, centered on our four key pillars, expanding our product range, acquiring new customers through targeted marketing and strategic partnerships, pursuing profitable growth opportunities across all markets, and testing and developing new channels where meaningful traction can be achieved while maintaining operational discipline. We have exciting product developments in the pipeline, including new sports products, socks and sleepwear, and other strategic adjacencies that will expand our category reach. In FY 2026, we'll invest in our customer acquisition through increased brand advertising, aligning with our global brand messaging to highlight core product attributes and improve visibility across e-commerce, social commerce, and AI-driven search channels. We'll continue to grow with our indirect channel partners, including John Lewis, Amazon, and TikTok Shop, while testing new channels where we can achieve meaningful traction.
Regarding our footprint, we'll continue to prioritize Australian expansion while pursuing profitable growth in the U.K., which we expect to be the primary driver of expansion in the near term. We'll maintain a capital-light optionality in the U.S. and other markets. Turning to slide 11, please. In response to the increasingly challenging marketing positions faced in the retail sector, Step One is refining its tactical execution and implementing adaptive measures that reflect our nimble approach to navigating difficult trading environments. The retail landscape has become more demanding, with softening demand trends leading to increased promotional activity. These conditions require a careful balance between maintaining market share and managing margins, and we're taking deliberate steps to navigate this trade-off. Adaptive initiatives include, firstly, pricing realignment to reduce average prices and adjust bundle discount structures. Two, a refined promotional approach with moderate site-wide discount rates.
Three, our inventory optimization program to systematically clear slow-moving inventory. Four, brand investment, acceleration to improve visibility across digital channels as well as above-the-line media. Finally, prioritizing new products and adjacencies, strategic collections and collaborations that lift brand credibility and expand category reach, as well as strategic limited edition color releases and products. These adaptations are not merely short-term measures. They align with our long-term strategy to continue building brand equity and diversify our product range. We're acting to support our business and attract long-term value customers. Through disciplined execution of refined promotions and brand-led growth, we'll be ready to accelerate with stronger brand, broader product offering, and a more engaged customer base when the market recovers. In the short term, we expect these initiatives to impact our FY 2026 financial performance as follows. I ncreased advertising to drive customer acquisition and establish long-term brand health.
Two, moderate revenue growth is anticipated, with the U.K. expected to be our primary growth driver. Three, marketing investment will increase above FY 2025 levels to support brand building and new customer acquisition. Personnel costs will be higher due to hires already made, with further hiring limited within the current environment. A sale of slow-moving inventory at promotional pricing is expected to moderate gross margins towards the end of levels achieved in the second half of 2025. Finally, reduction of reliance on sale periods. This year, we're at 63%. We need to move these back in line with previous years of mid-30%. Based on these adaptive initiatives, we expect earnings performance to be moderate in the near term as we make deliberate investments in brand building and inventory optimization. Therefore, FY 2026 EBITDA is expected to be in the range of $10 million - $12 million.
Simply, we made a decision to prioritize the long-term value of the business. Step One is a quality brand, and we're focused on the long-term value. We're acting to protect and grow the brand value, not just now but into the future. We know people buy a brand, not a product. Deep sales cheapen the brand, and we need to flatten out our revenue curve to reflect more historic norms. I'm confident these initiatives will position Step One well to establish a stronger foundation for sustainable profitable growth when the market conditions improve. I'll now open up the line for questions. Thank you, everyone.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speaker phone, please pick up the handset to ask your question. Your first question comes from Emily Porter at Morgans. Please go ahead.
Hey, guys. Thanks for taking my question. Obviously, it's been a challenging market, so I appreciate giving the color on the outlook. I guess my question just in terms of gross margins, obviously down materially in the second half. I think you made the comment that you'll be making some pricing changes. Maybe if you can just talk a little bit about the quantum of these changes and your approach to promotions and discounting moving forward.
Yeah, thanks for your question, Emily. As we mentioned, we've seen a decrease in our gross margin at the top line. We need to reduce that across the board and increase that back in line with previous periods, which is sub-80%. What we'll look to do is our core products, which we've had on sale previously, we'll look to have a lower discount rate on those. Where we will be looking to move, say, older products, we'll be having higher discount levels on those, which will sort of margin out. Our aim is to obviously hold our margin to increase, but also manage inventory along the way with that as well.
Okay, great. I guess in terms of that inventory, you made a few comments around slower moving inventory lines. Can you maybe just talk a little bit more specifically about that?
We're not going into further detail on which lines are moving slowly, but we have a plan now to clear them, and we'll bias our sale events towards selling through that older inventory or slower moving inventory. Keep in mind, it's not perishable, so we don't have the clock ticking against us on that. We have the luxury of time, but we do have a plan to sell it down.
That's great. I might squeeze in one other question if I can. I guess just on the U.K., that's a key focus area moving forward. You mentioned you trialed a new marketing approach there and some positive signs. Maybe if you can just give a little bit more color on the sort of change in approach there, and I guess also just of the performance since being in John Lewis stores.
Yeah, no, good question. Obviously, we saw some good growth there in the U.K. As a percent of market, that's where we see a bigger part of our growth being in the near future. Being in store in John Lewis has been great from not only a brand recognition point, but also brand value, and also bricks and mortar over there are sort of circa 80% of retail. There's still a huge footprint there for us to increase that. When it comes down to what's worked and what's fueled the growth, it's actually been working with more local influencers, collaborators, talking the language of the people there. Also, what's been particularly good is catching onto trends that are very local-based, whether it be through social trends, through social media trends, through what's in the news, etc. That's done really well.
Also, putting much more focus on our tone of voice, whether it be through our socials, but also through our emails and our general tone of voice to the U.K. population versus the Australian population. I'd say that would be the key factors which have helped our growth there in the U.K..
Okay, thank you. I'll leave it there. Thanks, guys.
Thanks, Emily.
Your next question comes from Leo Armati at Bell Potter Securities. Please go ahead.
Good morning, Greg and Nigel. Thanks for taking my questions. Just a few from me. Firstly, on advertising and marketing spend, you managed to keep it around 27% of revenue, and it's continued its downward trajectory year on year. You call out that you will be increasing the spend above FY 2025 levels, but will we still see this to remain sub-30%?
We've not guided you precisely in that number, but it will increase from the 27%. It will probably go closer to the 30%, but we haven't been specific on it.
Okay, great. No worries. Just on your indirect revenue, that grew 53% on the PCP and is around 8% of your revenue. Can you talk to how much of this is Amazon and maybe John Lewis? Also, just the makeup of these in your lower gross margins going forward?
Mixed question there. The predominant indirect revenue is Amazon, but TikTok Shop is increasing in its prominence later in the period. John Lewis is a minor portion of that revenue. As Greg just went through, John Lewis has got absolutely fantastic, gives us brand credentials or brand credibility by being sold in their stores. It gives us a model to take forward, but they're a minor portion of our revenue. The second part of your question on gross margin, the initial phases of TikTok would obviously be lower gross margin as where our introductory phase offers and things like that. Generally, we find we're agnostic to the channel in terms of that they roughly deliver similar, I'm going to say, EBITDA outcomes rather than gross margin. What you pay in the fees to the platform is what you save on the advertising expenses.
We're relatively agnostic as to which channel we go through.
Great. Perhaps on categories, women's is now 15% of revenue. Can you talk to how that's performed regionally? Maybe in the U.K., has there been much uptake there?
We don't get into the details of each category by region, but generally, women's performs at a similar rate in both the Australian and the U.K. markets. We've only got a very limited product in the U.S., so it's not a relevant comparison.
Right. Maybe just finally, on those categories, is there any sort of update or can you give some color on the juniors range?
We don't pull that out because juniors crosses over with younger adults as well. It fills the range in a little bit like other brands that have introduced their product to people at a younger age as well for the future for us in terms of a person who wore them as a youngster will most likely continue to wear them as a young adult and then an older adult. We haven't gone through the details of both sales, but we're pleased at how it's starting to build a broader customer base.
Okay, great. Thanks, Nigel. I'll leave it there.
Thanks, Leo.
Your next question comes from John Burgess with RaaS Research. Please go ahead.
Oh, good morning. I'm just interested in your SKU management and the number of SKUs you've sort of built up over the late years and whether that's sort of part of the inventory build over time. What do you see in the opportunities to rationalize those SKUs at all, or do you intend on increasing them?
The multiple question there is that the SKU range is probably a little wider at the moment than we would desire, and that we'll work through as we sell down some of the older inventory. Whilst that part of the project or optimization will reduce our SKU range or SKU breadth, we are looking to introduce new products which will obviously re-expand it. The SKU range itself is not something that we focus on. We're looking more at the velocity of the sale of the digital products.
We're looking to eliminate older SKUs, but it's the total SKU range we have. What goes out, we get a new product in that will replace it. Does that answer your question?
Yeah. Yeah, definitely. I guess SKUs can build to be a problem if you don't manage them. The other thing I've noticed is that the limited editions don't seem to be as prevalent. Would that be a fair comment, or is that something you're looking to increase as you get SKUs under control?
Yeah, look, I touched on that in the presentation, John. It's a good question. Those historically have done very well for us in terms of the timing of those. What we're doing this year moving forward is looking at those more strategically and also looking at those in terms of brand collaborations or influencer collaborations, as well as not just limited edition colors.
Where it is, is getting back to a level of scarcity around those, but also creating something new and different and working out how that fits across a range of products as well.
Okay, appreciate it. Thank you.
Your next question comes from Peter Storer, a shareholder. Please go ahead.
Hello, Greg and Nigel. Thank you for taking my question. You talk about the subdued retail environment. Can you give us an idea? We've had two interest rate cuts now and likely more to be on the way in Australia. How are we trading in the start of FY 2026? That hasn't been mentioned in the presentation.
You're correct. We haven't mentioned it. We don't give shorter than six monthly updates. To say that the trading in FY 2026 is consistent with our statement is probably as far as I will go. As far as the interest rate cuts, it's always a question of why they're doing an interest rate cut. It's general about economic health and things like that, which I'll let other commentators make more commentary on. I think the broader focus area is our customers are all in the cost of living category. I think the news media is talking about that quite a lot in all of our markets.
Okay, yeah. I will make just a comment on that if I may before another question. There are retailers like Nick Scali and JB Hi-Fi that are doing reasonably well, but we'll move on from that. One thing that really interested me and worries me is that last at the half year when you gave the report, you didn't give any guidance for the full year, which I would encourage. I think retailers giving guidance is a dangerous area. Now you've given, despite the fact that you've got new products coming through and expansion in the U.K., you've given guidance for FY 2026 the whole year. Why have you decided to do that?
When your views on the future are not consistent with where the consensus seems to be landing, we're obligated to update the market. We would agree that we'd prefer not to give guidance, but it's one of those occasions where it's necessary to do so. We'll see where we think we are going.
Okay, given that guidance, basically the EBITDA for the whole year is about the same as last year's half one. I believe that as a shareholder, I believe the share price is going to come under increasing pressure. It is a flag 5% small fall this morning. I suspect it's going to be a lot worse than that. Given that cash that's sitting there, isn't the best use of capital now a share buyback at these very distressed prices? I know we need to keep some for growth, but that would seem an extremely good use of capital at this stage. I'm not concerned about liquidity. I know there's a huge argument about liquidity. If businesses perform well, liquidity is irrelevant.
Your comments are noted, and the board regularly considers our capital management strategy. At this stage, we have no plans to undertake any capital actions, but we note your comments, and if that changes, we'll announce that accordingly.
Great, thank you. That's all from me.
Thank you. Thank you, Peter.
There are no further questions at this time. I'll now hand back to Mr. Taylor for closing remarks.
Thank you, everyone, for your time. That wraps up our FY 2025 results. I appreciate your time and look forward to speaking with you in the near future. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.