Women’s Range Expansion And Sustainability Focus Will Drive Powerful Long Term Upside Potential

Catalysts

About Step One Clothing

Step One Clothing designs and sells innovative, sustainable underwear and adjacent apparel ranges through a capital light, primarily direct to consumer model.

What are the underlying business or industry changes driving this perspective?

• Expansion of the women’s range, including new SmoothFit products, materially increases basket size and lifetime value as female customers often purchase across both women’s and men’s lines. This supports higher revenue growth and structurally stronger gross profit.
• Rapid growth in indirect channels such as Amazon, TikTok Shop and John Lewis builds brand credibility and unlocks large third party customer bases at similar EBITDA outcomes per unit. This creates a scalable path to accelerate top line growth without proportionally higher marketing costs.
• Rising consumer focus on comfort, sustainability and ethical production aligns directly with Step One’s product DNA. This reinforces pricing power and brand loyalty that can support robust repeat purchase rates and net margins over time.
• Proven playbook in Australia, now being localized and replicated in the U.K. with local marketing teams and influencers, provides a clear template for disciplined international roll out. This approach can help compound revenue and earnings as new markets mature.
• Upcoming product adjacencies in sports, socks, sleepwear and juniors broaden the addressable market while leveraging existing brand equity and a 1.9 million strong customer database. This enhances operating leverage and supports long term earnings growth.

Assumptions

This narrative explores a more optimistic perspective on Step One Clothing compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Step One Clothing's revenue will grow by 6.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 14.6% today to 7.0% in 3 years time.
• The bullish analysts expect earnings to reach A$7.4 million (and earnings per share of A$0.04) by about December 2028, down from A$12.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$2.7 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 26.0x on those 2028 earnings, up from 3.8x today. This future PE is greater than the current PE for the AU Specialty Retail industry at 22.9x.
• The bullish 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 7.87%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent cost of living pressures in Australia and the U.K. are already forcing heavier discounting and value driven promotions. If these challenging retail conditions endure, Step One may struggle to grow beyond modest low single digit rates while sacrificing pricing power, which would pressure both revenue and gross margins over the long term.
• The strategy to reduce deep site wide sales, clear slow moving inventory and realign pricing could dilute the brand if customers become conditioned to frequent discounts or if clearance activity drags on. This could lead to structurally lower realized prices and a sustained step down in gross margin and EBITDA.
• Long term growth depends on expanding in indirect and international channels such as Amazon, TikTok Shop, John Lewis and eventually the U.S. However, early U.S. softness, introductory discounts on new platforms and the risk that overseas marketing does not scale as efficiently as in Australia could mean international expansion fails to deliver the expected operating leverage, constraining revenue growth and compressing net margins.
• Inventory has grown meaningfully with a broadened SKU range and some lines are already slow moving. As the company adds new products in sports, socks, sleepwear and juniors, there is a risk of ongoing over assortment and higher working capital needs, which could require further discounting to clear stock and weigh on earnings and cash generation.
• The decision to materially increase advertising spend towards roughly 30 percent of revenue and to invest more in brand building and headcount in a subdued demand environment may not translate into proportionate customer acquisition or higher lifetime value. This could leave Step One with only moderate top line gains and structurally lower EBITDA than the bullish narrative assumes.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Step One Clothing is A$0.85, which represents up to two standard deviations above the consensus price target of A$0.57. This valuation is based on what can be assumed as the expectations of Step One Clothing's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.85, and the most bearish reporting a price target of just A$0.3.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be A$105.7 million, earnings will come to A$7.4 million, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of A$0.27, the analyst price target of A$0.85 is 68.8% higher. Despite analysts expecting the underlying business 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.