Step One (ASX: STP) Shares Plunge 35% on Profit Warning! Is it Back to Square One?

Step One Falls Flat

Step One (ASX: STP) experienced a heavy re-rating today, falling 35% in a single session. That is a substantial hit for any investor owning shares. The catalyst was the release of its H126 trading update, and the numbers came in well below expectations. Revenue is now forecast to land between A$30 million and A$33m, which represents a 31 to 37% decline from the A$48m delivered in H125.

The picture looks even tougher on the bottom line, with management guiding to an EBITDA loss of A$9m to A$11m compared with an A$11m profit a year earlier. And if this is the result during the half of the year that contains Black Friday…is there hope for the second half?

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Time to get some?

For many of us, we first heard of Step One when we saw these advertisements containing Lawrence Pola.

Greg Taylor, an Olympic rower in a previous life, founded the company in 2016 as he didn’t see anything in the market suitable for someone of his physique. The underwear was made from bamboo, was promised to not ‘ride up’, cause chafing or trap sweat. It was listed in late 2021 at $1.51 per share.

After a few weeks of gains, purely driven by FOMO, things all went pear shaped a few days prior to Christmas 2021 when the company identified an overclaim of GST credits and revealed that logistics challenges in the UK and Australia increased customer delivery times. Sustained lockdowns in China, where its factories were, and the war in Ukraine increased logistics costs.

Expansion into the UK and US, as well as into women’s underwear as well as into thermal and sports lines was slower and more costlier than expected. Moreover, after some years of selling on its own site, it expanded into retailers and online marketplaces including Amazon.

But arguably the worst of all was investor speculation about how the cost of living crisis could have consumers still willing to spend A$29 on each pair of underwear, when they could get some for $3 each from Big W?

Step One’s results since its listing

In FY21, it made $61.7m in revenue, $9.8m EBITDA and a $118k loss (on a statutory basis). For FY22, $72.9m revenue, $9m EBITDA and a $3m NPAT loss. FY23, $65.2m revenue, $12m EBITDA and an $8.6m profit. Then in FY24, $85m revenue, $18.1m EBITDA and $12.4m NPAT. You can see the easing of the cost of living crisis and eventual success of its expansion did good things.

Then in FY25, $86.9m revenue, $17.4m EBITDA and a $12.4m profit. It closed that period with $33.1m cash and no debt, paying a dividend of 2.4c per share. Delving into ‘nitty gritty figures’, there were some good signs, including that women’s wear was now 15% of revenue and that advertising as a percentage of revenue improved by 5.7%. Returning customers were 67% of sales, and the average order grew and grew rach year, reaching A$103 per order. It guided to $10-12m positive EBITDA. But of course, this was downgraded, leading to the fall in its share price.

Step One’s $10M Write-Down Reveals a Growth Hangover

As we mentioned, it now expects a $9-11m EBITDA loss. A key reason for the update was a A$10m inventory obsolescence provision tied to slow-moving stock. This signals that the company overcommitted on inventory and sales assumptions at a time when competition in the apparel space continues to intensify.

It is a familiar pattern for clothing companies that scale quickly and then struggle to keep forecast accuracy aligned with real demand. The reset today is painful, but it does give investors a clearer look at the operational challenges Step One will need to overcome before confidence returns.

We are now seeing weaker demand across Step One’s core markets of the UK, Australia and the US, with competitive pricing pressure weighing heavily on profitability, particularly in the online sales environment. The company’s direct-to-consumer model depends on constant digital advertising, and rising customer acquisition costs appear to be slowing top line growth. our read is that repeat purchases are falling more than the company expected, which is often the first sign of a deteriorating customer lifetime value story.

The A$10m provision for inventory obsolescence is the standout concern in this update. It tells us that Step One built up excess or outdated stock and has been unable to clear it, forcing management to write it down to reflect its lower resale value. This points to overproduction or misjudged demand during earlier growth periods, which is a common challenge for consumer brands that scale rapidly and then hit a plateau. What’s more concerning is that this is not the first time it has happened – clearly the company has not learned from its past inventory issues.

Guidance Pulled, Losses Deepen

For a business that previously highlighted its strong margins and efficient cost structure, moving to a loss making position is a material shift. Investors will rightfully view this as a serious concern, not only because of the magnitude of the downgrade, but because it raises questions about the durability of the business model in a more competitive and cost-sensitive market.

The company also withdrew its FY26 guidance, which introduces a new layer of uncertainty around future demand and internal forecasting. This is usually a red flag for investors because it implies that management no longer has clear visibility even through the Christmas trading period, which has historically been Step One’s strongest season. When a consumer business cannot confidently guide through its peak period, it raises questions about how predictable the revenue base really is.

The Investors Takeaway

On the positive side, management has been transparent in acknowledging the shortfalls and communicating the reset clearly to the market. The balance sheet is still strong enough to absorb a difficult stretch, which gives the business some breathing room. With roughly A$30m in cash and an expected loss profile of around A$10m a year, the company has roughly eighteen months of runway under a base case scenario. That is enough time to adjust inventory, fix forecasting and attempt to stabilise demand.

The risk, of course, is that cash burn accelerates or demand continues to weaken. If the turnaround does not materialise, the pain could deepen quickly. For now, the company still has time, but investors will be watching the next few trading updates closely to see whether Step One can regain momentum or whether this downgrade marks the beginning of a more structural challenge.