I would now like to hand the conference over to Mr. Greg Taylor, CEO and Founder. Please go ahead.
Good morning, everyone. Welcome to Step One's first half 2026 results conference call. I'm Greg Taylor, CEO and Founder of Step One. I'm joined by our CFO, Nigel Underwood. We're going through the presentation that was loaded this morning at the ASX, and there'll be time for questions at the end. Turning to slide 2. There's been a challenging period, and sales and profitability for the first half came in below expectations. The softer headline sales can be largely attributed to our strategic pivot away from deep discounting during sale periods to restore our brand equity and slower-than-expected clearance of legacy inventory, despite our efforts to clear this product through promotional activity. Consequently, we're reporting revenues of AUD 36.3 million for the first half, which is down 24.5% against the same period last year.
As a result of the legacy inventory, we've also taken out a one-off AUD 10.9 million provision, which has impacted our profitability. When removing the inventory provision on an adjusted basis, EBITDA sits at AUD 1 million for the half. By taking these measures now, we provide a foundation for the implementation and delivery of our reset program. Despite the disappointing financial performance, we are seeing reassuring green shoots. Our indirect revenue, that's our sales through third-party channels such as Amazon, John Lewis, and social commerce channels, has been notably successful, up 75.9% versus the same period last year, with revenue across that channel growing to represent 18.3, nearly 20% of revenue for the period, a significant uplift. Our gross margin declined to 73.2 on an adjusted basis.
As we lowered our pricing in response to customer feedback, we have continued to listen and evolve with our customer and launched several new products in the first half, including our socks, pyjamas, and new women's period products, which have proven popular among our customers in early trading. Turning to slide 3. As we look ahead, our growth strategy continues to be anchored around the four core pillars that underpin our reset program and our long-term ambition for the brand. First, on product and range, we remain focused on extending the breadth of our offer in a disciplined way. As mentioned in the first half, we've launched several new products and looking forward to it. Looking ahead, our priority is to continue expanding into logical adjacencies and diversifying beyond bamboo-based fabrics. We also remain committed to growing our women's range.
With the addition of bralettes, pyjamas, and socks over the past 18 months, we are building a more complete offering that positions Step One as part of our customers' broader basewear wardrobe, not just their underwear drawer. Ultimately, this is about reinforcing our credentials as a quality comfort-first brand and ensuring that we have depth and range to drive repeat purchase and broaden our relevance to customers. Second, customer acquisition. Customer acquisition and retention remains a core tenet of our strategy, and despite softer revenue numbers than expected, our customer acquisition numbers remain healthy, and our customer database now exceeds 2 million for the first time. Customer appetite for our products remains strong, and feedback across both our core and new product adjacent ranges has been reassuringly positive.
Along with our reset, we've been more disciplined with discounting and have continued to invest in brand-led advertising to reinforce Step One's position as a comfortable and quality brand. This is consistent on brand activity, particularly across social and digital. This is helping us attract new customers and maintain engagement, even as we shift towards a more sustainable approach to promotions. And thirdly, as I mentioned in our previous slide, channel diversification is a key priority for us, and the growth we're seeing validates our expansion into indirect channels. Our partnerships with Amazon and social commerce channels have matured, and our presence in John Lewis stores continue to provide valuable credibility and market insights in the U.K. This diversification complements our D2C channels and allows us to extend our reach, brand, and tap into new databases of customers.
And finally, on international footprint, of course, Australia remains our foundation as we dedicate more time to the U.K. and U.S. Our intention is to build a stronger long-term presence by prioritizing customer acquisition, brand equity, and channel development over short-term profitability. As with everything in this reset, our approach remains measured and deliberate. Turning to slide 4. Our order average value is slightly lower for the first half. It remains strong at AUD 93, and our customer order mix has been stable, with a strong 65% return rate. This underlines that our product and brand continues to resonate with customers. We delivered a 4.7% conversion rate, which remains a very strong result by industry standards. In addition, our customer database has surpassed 2 million for the first time, representing modest growth in our addressable audience.
The remaining charts illustrate the revenue and profit guide performance we've discussed. I'll hand over to Nigel to walk through our financials in more detail. Over to you, Nigel.
Thanks, Greg. Turning to slide 5. In line with the trading backdrop Greg outlined earlier, revenue for the half declined 24.5% to AUD 36.3 million, driven predominantly by our strategic pivot away from deep discounting during sales periods. Gross profit was impacted by the AUD 10.9 million inventory provision taken in the half, which reduced our reported gross margin to 43%. On an adjusted basis, excluding the provision, gross margin was 73.2%, down 4.8 percentage points. Advertising costs fell by AUD 2.6 million in absolute terms, but increased to 31.2% of revenue, as we continued to invest in brand-led activity to support customer acquisition.
Distribution and fulfilment costs increased to 20.6% of revenue, driven by elevated inventory levels and the introduction of an additional 3PL. As a result, adjusted EBITDA was AUD 1 million for the half, compared with AUD 11.2 million in the prior period. The combination of lower volumes, the provision, and cost pressures resulted in a reported EBITDA loss of AUD 10 million. Turning to the balance sheet on slide 6. Our balance sheet remains fundamentally strong despite a difficult half, with the business continuing to operate debt-free and holding AUD 24 million in cash and other financial assets at the end of the period.
Inventory on hand increased by AUD 2.7 million due to the broader product range and slower moving lines, although the net inventory balance reduced by the AUD 10.9 million inventory provision we discussed earlier. Overall, after accounting for liabilities and committed purchase orders, we ended the half with AUD 11.4 million of available cash. The balance sheet remains capital light, providing a stable foundation as we execute the reset program. Looking at the cash flow on slide 7. Operating cash flow for the half reflected the softer trading performance, with an outflow of AUD 1.4 million, compared to an inflow in the prior period. This was driven primarily by lower receipts in line with reduced revenue, alongside the impact of higher inventory levels in the half.
Dividends totaling AUD 4.4 million were paid in the period, which was down 14.5% relative to the last period. We have maintained our 100% dividend policy, against which payments are expected to resume when retained earnings returns to a positive balance. Term deposits with durations exceeding 3 months are classified as investments. The group maintains a strong financial position with cash and term deposits totaling AUD 24 million, all held with licensed banks. I will now hand back to Greg to map out our future plans.
Thanks, Nigel. Turning to slide 8. In the second half, we'll continue to execute our strategic reset plan. Firstly, we'll continue to develop and roll out our new products and adjacencies. Second, continue to enhance our brand advertising with a heightened focus on digital advertising. And finally, we'll reduce brand discounting to maintain and build our position as a premium brand across our segments. Looking ahead, our focus is firmly on executing the reset plan while prioritizing product innovation, strengthening brand-led customer acquisition, scaling our indirect channels, and deepening our international footprint. We are laying the foundations for long-term sustainable growth. The actions we are taking now position the business to emerge stronger, more disciplined, and better aligned to the significant opportunities ahead. I'm confident these initiatives will position Step One well to establish a stronger foundation for sustainable, profitable growth when market conditions improve.
I'll now open the line for questions.
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're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Emily Porter with Morgans. Please go ahead.
Yeah. Hey, guys. Yeah, obviously a disappointing result that was materially below our prior expectations, but I did notice that revenue exceeded the guidance that you provided in December. Just wondering maybe if you can talk a little bit to the maybe strength that you saw in December, and I guess why it sort of exceeded your expectations?
Well, Emily, when we set the guidance in December, we were unable to count all of the sales from the Black Friday sales, though we had enough information to provide indicative guidance. So, they came in a bit stronger, and we also were clear that it was excluding the Christmas sales, which did continue quite strong. So, it's really a slightly more optimistic outlook on Christmas sales in the last couple of days of Black Friday. It represents that difference.
Okay, sure. Maybe just a question on the U.K.. I guess if you look at the three regions, the U.K. probably, you know, fared the best. Maybe if you can just give a little bit more about, talk to the performance in the region and I guess, you know, some of the changes you've made over the past sort of 12 months and, you know, the approach to marketing in the region and, and maybe just how, the performance in John Lewis stores has gone.
Yeah, good, good question. So there'd be two factors to that. Firstly, we focus on our indirect channels. As I mentioned, those channels across the board are up nearly 80%, like in the U.K. and Australia. So having an increase in those indirect channels, what that does is acts as a base to acquire customers on a cost per acquisition basis, rather than a specific cost per acquisition versus a basic cost per customer. So that's the first part. And then the second part is we localized our-
... content to match and rematch and fit the market. And we've been talking about that for a while, and I think those numbers reflect what we've done. But the two areas there were localized content to the market and growth of our indirect channels.
Okay, great. And then, you mentioned, you know, the three new product adjacencies that you launched, you know, during the half. Maybe you can just talk about some of, you know, the initial feedback and the traction you're getting so far?
Yeah. We've released the three various period products, X Cup and our pyjamas, but as well as our socks. So from that point of view, our the pyjamas and the socks, we sold out of the socks initially. And also the pyjamas were probably our second-best product. So whilst some of the products, like X Cup, were not volumetrically important to us, are volumetrically valid to us in terms of what we look at. What they do provide is innovation, and that really sits at the heart of the brand. So it's a logical adjacency for us to go into socks, but also sleepwear then opens the door to us to look at what other adjacencies that can lead to.
Great, thanks. I'll leave it there for now. Let someone else ask a question.
Your next question comes from Leo Armati with Bell Potter Securities. Please go ahead.
Yeah. Good morning, Greg and Nigel. Just a few from me. Just to start on indirect revenue. So I know we sort of touched on it just briefly, but just given the contribution increase, can you sort of talk to the regions that this mainly came from? And then maybe just the progress of, you know, those other channels, ex-Amazon, like TikTok Shop.
Leo, the Amazon did well, relatively broadly, proportionate to our share in that market already. So, but TikTok was probably predominant in the U.K.. So probably most of- I'd probably say more of the growth in indirect came from the U.K. because they're the-- like, that was the market we launched TikTok Shop in, and it's probably the market we've got the most expertise on Amazon in. So predominantly U.K., but, but Amazon was pretty growth, growth rates were reasonably well spread.
Yeah, great. And then maybe on logistics costs, it just didn't mention in the deck the introduction of additional 3PLs. I guess this would sort of imply maybe a ramp-up in volumes. Can you give any color on maybe where those 3PLs are located, just regionally or in each market?
U.K. and Australia, and we needed to address some of the issues we were having in previous sale periods regarding our delivery, our delivery schedule. I'm quite pleased to say that we've resolved quite a number of those issues with our delivery schedule. But unfortunately, it comes with a small additional cost, but that additional cost is also related to the large inventory volume we're holding.
Okay, great. And then just the last one from me, just on category performance. Is there any sort of color you can provide on how the women's range performed versus the men's, maybe in the U.K.?
We don't split category performance by country, but women's generally has performed sort of commensurate with the men's, if not outperforming it just slightly across each of the markets. The release of new products, I should say, helps that category each time, and obviously, the period product assisted the women's category.
Okay, great. Well, I'm happy to leave it there. Thanks, guys.
Pleasure.
There are no new questions at this time. I'll now hand back to Mr. Taylor for closing remarks.
That concludes our first half 2026 financial presentation. Thank you, everyone, for your time, and we'll speak to you in six months' time. Thank you, everyone.
That does conclude our conference for today. Thank you for participating. You may now disconnect.