Last Updated on February 27, 2025 by
This is the story of how I missed out on a 4x bagger in less than 18 months; all because of uncomfortable undies.
In July of 2023 I posted this on Linkedin…
Just 18 months later, the share price went on a tear!
So what happened?
EBITDA margins lifted 3% through cost discipline, and the business was still able to grow revenues by 30%. In other words, they transitioned from unprofitable growth to profitable growth.
I’m going to break down:
- What the business does
- What happened to the stock price
- Why I didn’t invest
- The bull case
What is Step One?
Step One is a sports focused underwear brand.
They were founded by Greg Taylor after he got chafing on a hiking trip in New Zealand. I’m not gonna lie; Greg seems too nice and normal to be a great CEO!
If the CEO equivalent to Frank Slootman is David Goggins, I think the CEO equivalent to Greg Taylor might be Kevin James.
Step One operates as a 100% ecommerce player, focused on the Australian market. They focus on undies that don’t chafe, handle sweat, and stay cool.
The business listed on the ASX in 2021 on a 16.1x forward EBITDA multiple… I think the bankers must have cooked here. 🤣
So What Happened to the Stock Price?
Step One got absolutely crushed post-IPO.
The stock fell ~90% from $2.71 in 2021 to $0.27.
When I started looking at the business, the FY23 financials had just come out. At the time, revenue was down 9.7% YoY from FY22 – FY23. Given the retail recession, the market was uncertain whether it could turn the business around to profitability.
The company was trading at 3x EBITDA.
It was cheap — but given what I was seeing with our eCommerce clients and the broader macro economy, I had some question marks on their ability to turn to profitability.
Why I didn’t invest
There is a whole laundry list of reasons why I didn’t invest, including:
- I bought the product, and didn’t like it
- Industry-wide margin pressures & multiple compression
- Highly competitive category
- Fad Product / Unsustainable Revenue
Trying the Product
I did some Scuttlebutt research of my own. Just check out the LinkedIn comments — there was clearly a fan base of customers.
But I bought a pair, and I didn’t like them. They were very expensive, and I didn’t find them comfortable…
On this basis alone, I didn’t invest.
In hindsight, I missed a good opportunity to make a good trade.
But there were lots of other aspects of the business that I didn’t like.
Industry-Wide Pressures
Step One wasn’t alone as an eCommerce business that struggled after listing. Looking at an index of 8 public DTC eCommerce companies, I found that 7 of the 8 are currently trading at lower than their IPO price.
So what’s going on here?
There are a few interesting things to consider.
1. All of These eCommerce Companies Listed in a Frothy Market
All but one of the comparable companies I found went public in 2021 — when markets were bonkers and willing to value these businesses on unrealistic valuations. When interest rates rose and valuations returned to earth, most of these businesses re-rated to trade on lower multiples.
2. Margins Compressed
Across the board, a range of cost pressures impacted these businesses.
Namely:
- IOS Changes — the changes to Apple’s cookie tracking policy made customer acquisition less targeted, and worsened ad performance
- Freight & Logistics Costs — freight & logistics costs spiralled in the post-pandemic world. For eCommerce businesses, higher freight costs translated directly to lower operating margins, with logistics often accounting for ~20% of the total costs of an eCommerce business.
Given that the industry was struggling, I struggled to justify how I could take a position in Step One.
3. Competition
Underwear is an incredibly competitive category.
MeUndies, Bonds, Tradie, Boody, you name it.
Many of these businesses have been around for decades, and are run pretty efficiently.
What’s even worse about eCommerce (or any consumer business, for that matter) is that the winning products attract attention.
Whereas a B2B business might fly under the radar for 5-10 years before attracting competitors, once a consumer brand takes off, it usually has competitors popping up left, right and centre. So, as soon as Step One latches onto a winning category, all its competitors can come out with copycats in 6-12 months.
4. Product is a Fad. Revenue is Not Sustainable
With any eCommerce product – there is always a question about how durable the ‘moat’ is. If a business doesn’t have a moat or a competitive advantage, it won’t have pricing power.
Consumer companies are often ad-driven businesses that ride waves of consumer trends.
Chunky sneakers, ice baths, botox… these products are all driven by trends… but will the trends last?
If someone can source a product from China, set up a Shopify store and start undercutting your margins, then you don’t have enterprise value.
The Turnaround Story. What Happened in 2024?
So, what happened this year that caused the stock to rip?
Greg Taylor locked in this year…
In FY24, they dramatically improved the performance of the business.
Revenue reached $84.5m (+30% YoY) and EBITDA grew to $18.1m (+51% YoY).
A few things are going on here…
Margin Improvements
From a cost perspective, marketing spend as a percentage of revenue dropped from 35.7% to 32.5%, driven by an increase in the return on ad spend (ROAS) from 2.8x to 3.0x.
This improvement in marketing spend dropped straight through to the bottom line, with EBITDA margins up from 18.4% to 21.4%.
This improvement in EBITDA margins, and overall earnings, wasn’t just about a numerical increase though … it showed that the business can grow in all environments — and can grow profitably.
For any business reliant upon capital markets (public or private) to fuel future growth, the transition from unprofitable to profitable growth is massive. It means that if the tide goes out, and funding dries up, you still have a good business.
Topline Revenue Uplift
Topline revenue was also up pretty dramatically. Interestingly, this wasn’t actually driven by a growth in awareness about the company, with total website visits only up marginally from 14.8m to 15.4m. Instead, the business’s average order value increased dramatically, up 21% YoY.
This is great to see – it shows their customers are trusting them and willing to spend more on larger orders.
Looking at One Step’s business segment, the Women’s category and indirect channels (Amazon/John Lewis) also grew much faster at 54% PCP and 76% PCP, respectively – which helped to drive this dramatic revenue uplift.
Given how sensitive valuations are to growth rates, returning to 25%+ YoY revenue growth was critical for this business. It showed investors that there is still lots of room to run — and they can price in future growth for the coming years.
Ambassador Program
One Step’s ambassador program also seems to be working. So far, they’ve signed agreements with:
- Diamonds players (Gretel Tippet & Jamie-Lee Price)
- Boomers players (Will Magnay, Nathan Sobey and Jason Cadee)
- Big Bash Stars (Chris Lynn)
- NBL players (Xavier Cooks)
They’re going really hard on Aussie athletes, which makes sense given their performance focus as an underwear brand. Interestingly, they seem to be going after ‘smaller’ influencers – with their athletes only having a combined 1m+ Instagram followers.
Dividends
Financially, the business also started paying out dividends to shareholders. In FY24, Step One paid out $16m in dividends across the course of the year.
Given that the business has no debt currently, and ~$39m in cash on the balance sheet (similar to $38.3m in FY23), this feels like a good decision to provide investors with a return on their investment. This will also force cost discipline in the business (which is generally a good thing).
All of these factors combined translated to the 400%+ rebound of the share price.
Current Share Price
Overall, huge props to Greg for the turnaround here. Today, Step One is trading on a 15x LTM EBITDA multiple. The business has shown that it is resilient and can grow profitability without a dependence on performance ads.
Do I regret not investing? Maybe. But with public markets, it’s always hard to tell. There’s a world where Step One would have ended up in the graveyard of eCommerce companies that haven’t recovered since IPO.
