Step One Clothing (ASX:STP) reported a challenging first half of fiscal 2026, with management attributing weaker-than-expected sales and profitability to a strategic shift away from deep discounting and slower clearance of legacy inventory. CEO and founder Greg Taylor and CFO Nigel Underwood said the company is taking near-term pain to “reset” the business and rebuild brand equity, while pointing to early signs of momentum in third-party sales channels and new product launches.
First-half results miss expectations as discounting strategy changes
Taylor said first-half performance came in below expectations, with revenue of AUD 36.3 million, down 24.5% from the prior comparable period. He attributed the “softer headline sales” largely to Step One’s “strategic pivot away from deep discounting during sale periods to restore our brand equity,” along with slower-than-expected clearance of legacy inventory despite promotional efforts.
Margins, costs, and EBITDA impacted by provision and operating pressures
Underwood said gross profit was hit by the AUD 10.9 million inventory provision, which reduced reported gross margin to 43%. Excluding the provision, adjusted gross margin was 73.2%, down 4.8 percentage points, which management said reflected price reductions made in response to customer feedback.
On costs, Underwood noted:
- Advertising costs fell AUD 2.6 million in absolute terms but increased to 31.2% of revenue as the company continued investing in brand-led activity to support acquisition.
- Distribution and fulfilment costs increased to 20.6% of revenue, driven by elevated inventory levels and the introduction of an additional third-party logistics provider (3PL).
Adjusted EBITDA of AUD 1.0 million compared with AUD 11.2 million in the prior period, Underwood said. The combination of lower volumes, the inventory provision, and cost pressures resulted in a reported EBITDA loss of AUD 10.0 million.
Indirect channels show growth; new products gain early traction
Despite the weaker overall result, management emphasized growth in indirect revenue channels—sales through partners such as Amazon, John Lewis, and social commerce. Taylor said indirect revenue rose 75.9% year over year and grew to 18.3% of total revenue for the half.
During Q&A, Taylor said the growth in indirect revenue was “predominant in the U.K.”, citing the company’s TikTok Shop activity and its experience with Amazon in that market. He added that Amazon performed well “relatively broadly,” with growth rates “reasonably well spread.”
Taylor also highlighted new product introductions during the half, including socks, pyjamas, and new women’s period products. In response to an analyst question, he said the company initially sold out of socks, and that pyjamas were “probably our second-best product” in early trading. He described some adjacent products as more important for innovation and brand positioning than for near-term volume, while noting sleepwear could open the door to further adjacencies.
Balance sheet remains debt-free; cash and liquidity detailed
Underwood said the company ended the half debt-free with AUD 24 million in cash and other financial assets. Inventory on hand increased by AUD 2.7 million due to broader range and slower-moving lines, though net inventory was reduced by the AUD 10.9 million provision. After accounting for liabilities and committed purchase orders, Underwood said Step One ended with AUD 11.4 million of available cash.
Operating cash flow was an outflow of AUD 1.4 million for the half, compared with an inflow in the prior period, driven by lower receipts and higher inventory levels. Dividends totaling AUD 4.4 million were paid, down 14.5% from the prior period. Underwood said the company has maintained its “100% dividend policy,” with payments expected to resume when retained earnings return to a positive balance. He also noted term deposits longer than three months are classified as investments, and that cash and term deposits are held with licensed banks.
Reset program priorities: product adjacencies, brand advertising, and reduced discounting
Looking ahead, Taylor reiterated Step One’s reset program, anchored around product and range expansion, customer acquisition and retention, channel diversification, and international footprint development (with Australia as the foundation and increased focus on the U.K. and U.S.). He said the company plans to prioritize customer acquisition, brand equity, and channel development over short-term profitability in its international markets.
Operational metrics cited during the call included an average order value of AUD 93 and a 4.7% conversion rate, which Taylor said remained strong by industry standards. He also said the company’s customer database surpassed 2 million for the first time.
For the second half, Taylor said management will continue rolling out new products and adjacencies, enhance brand advertising with a heightened focus on digital, and further reduce discounting to support Step One’s positioning as a premium brand.
About Step One Clothing (ASX:STP)
Step One Clothing Limited operates as a direct-to-consumer online retailer for men's underwear in the United Kingdom, the United States, and Australia. It offers men's underwear products, such as boxer briefs, trunks, and a boxer brief with a fly through its website, www.stepone.life. The company was incorporated in 2017 and is based in Surry Hills, Australia.
