Sustainable Apparel Digital Shift Will Spur Expansion Despite Risks

Key Takeaways

• Sustainability focus, digital-native model, and channel optimization position Step One for premium pricing, scalable growth, and margin expansion.
  
• Product innovation, international expansion, and disciplined inventory management support brand differentiation, revenue diversification, and long-term profitability.
  
• Heavy reliance on discounting, sluggish new customer growth, and inventory build-up threaten profitability and highlight significant execution risk in international expansion strategies.

Catalysts

Operates as a direct-to-consumer online retailer for underwear in the United Kingdom, the United States, and Australia.

• As consumers increasingly value sustainability and ethical sourcing in apparel, Step One's continued focus on plant-based, innovative, and eco-friendly products positions it to capture market share and command pricing premiums as these preferences accelerate globally-supporting long-term revenue growth and potential gross margin expansion.
  
• The ongoing structural shift towards e-commerce and direct-to-consumer channels favors Step One's digital-native, asset-light model, which enables operating leverage; as digital acquisition costs are optimized and new online channels expand (e.g., Amazon, TikTok Shop), this is expected to drive scalable revenue growth and higher net margins over time.
  
• Expansion into international markets, especially the U.K. and eventually the U.S., provides a multi-year runway for revenue growth, with early positive momentum in the U.K. suggesting that localization and influencer-driven marketing can effectively build brand awareness and customer loyalty-supporting top-line growth and earnings diversification.
  
• Diligent product innovation, including new women's, juniors, and adjacent categories (socks, sleepwear, sportswear), is broadening Step One's addressable market and increasing cross-sell potential, which can lift average order values and repeat purchase rates; these efforts should drive higher revenues and reinforce brand differentiation.
  
• Strategic reduction of promotional dependency and inventory optimization are expected to rebuild gross margins and support brand equity over the medium and long term, positioning Step One for improved profitability and sustainable earnings once the current retail environment stabilizes.

Step One Clothing Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Step One Clothing's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.6% today to 9.0% in 3 years time.
• Analysts expect earnings to reach A$9.2 million (and earnings per share of A$0.05) by about September 2028, down from A$12.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2028 earnings, up from 7.4x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 26.2x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Step One Clothing Future Earnings Per Share Growth

Risks

• Persistent dependence on heavy promotional activity and discounting to maintain market share signals weak underlying demand and erodes gross margins, risking long-term earnings quality and limiting the company's ability to drive sustained net margin and profit growth.
  
• Slowing new customer acquisition, coupled with moderated marketing spend to support short-term profitability, constrains top-line revenue growth; as acquisition costs rise and digital marketing becomes less efficient over time, future net margins and earnings could be negatively impacted.
  
• Ongoing inventory build-up and slow-moving SKUs require clearance through further discounting, putting continued downward pressure on gross margins and tying up working capital, which could eventually hurt both cash flow and operating profit if inventory turnover remains sluggish.
  
• Expansion into international markets, especially reliance on growth in the U.K. (with U.S. deprioritized), presents significant execution risks and exposure to cost-of-living headwinds in those regions; disappointing international results could weaken revenue diversification and overall earnings growth.
  
• Guidance of significantly lower EBITDA for FY '26 (A$10–12 million vs. A$17.4 million in FY '25), coupled with plans for higher advertising and personnel costs, signals a near-term structural reset in profitability; this may undermine investor confidence and put further pressure on share price and valuation.

Valuation

• The analysts have a consensus price target of A$0.9 for Step One Clothing based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$102.1 million, earnings will come to A$9.2 million, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$0.51, the analyst price target of A$0.9 is 43.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.