Why is the Step One share price crashing 54% to a new low?

Step One shares are being smashed on Monday…

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Key points

  • Step One shares are being smashed on Monday
  • Investors have been selling the underwear retailer's shares after a shocking trading update
  • That update reveals that its expansions into the US, UK, and women's markets hasn't gone to plan

The market may be pushing higher today but the same cannot be said for the Step One Clothing Ltd (ASX: STP) share price.

The underwear retailer’s shares have returned from a trading halt and crashed 54% to a new low of 22 cents.

This means the Step One share price is now trading 85% lower than its November IPO listing price of $1.53.

Why is the Step One share price?

Investors have been selling down the Step One share price on Monday following the release of a trading update out of the retailer.

According to the release, the company’s expansion into the UK, US, and women’s markets hasn’t been going to plan. As a result, it expects its revenue and earnings to fall short of guidance in FY 2022.

What’s going on?

Management advised that US revenue has occurred at a lower rate than expected, as it works to establish its brand in a large and diverse region. This has resulted in higher customer acquisition costs, which is expected to lead to its US operations recording a loss of at least $3 million in FY 2022.

Over in the UK, its revenue has not grown at the rate expected. It notes that this is due to tougher than anticipated recent trading conditions and softer consumer confidence.

Bad news comes in threes, it seems. The release also advises that after a strong start to life, demand for the Women’s range has softened. It was fully restocked in mid-April but has not maintained the level of daily sales initially experienced in the months immediately following its launch.

FY 2022 guidance downgraded

The sum of the above, is that management now expects revenue growth of 15% to 20% in FY 2022. This is down from its previous guidance of 21% to 25%.

However, things are much worse for its earnings, which explains the weakness in the Step One share price today.

Step One’s earnings before interest, tax, depreciation and amortisation (EBITDA) is now expected to be $7 million to $8.5 million. This is down from its prior guidance of $15 million.

This means that its second half EBITDA will be a loss of $0.4 million to an operating profit of $1 million, which is down materially from its first half EBITDA of $7.4 million.

Management commentary

Judging by the Step One share price reaction today, it appears as though the market is extremely doubtful that the company’s expansion will succeed.

One person that remains optimistic, though, is Step One’s Founder and CEO, Greg Taylor. He commented:

I am disappointed to inform you of the impact of the headwinds we are currently facing in our international expansion. These challenges are by no means insurmountable, and I am completely focused on solving the issues we are facing to deliver an exceptional product to customers around the world.

We had a track record of delivering in international markets, but we are now a much more substantial business and our focus is on building a strong platform, with the right infrastructure to support sustainable international growth. This will ensure that Step One is well-positioned to rebound strongly as global macro-economic disruption eases.

We’ve continued to make operational progress, focusing on a tailored marketing strategy in each region, driving engagement with influencers and athletes in the UK and USA. This will continue into FY23 as we build momentum around the brand internationally. We’re now selling some of our core products on Amazon in our key markets to drive our brand visibility and support customer acquisition.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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