Shares in Step One Clothing Ltd (ASX: STP) have fallen more than 55% over the past 12 months to the time of writing — a painful drop for investors and a sign of just how tough retail has become in today's climate.
But with two brokers still rating the company a buy, there could be more to this story than meets the eye.
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What does Step One do?
Step One is a direct-to-consumer underwear brand that offers a range of high-quality, sustainable, and ethically produced men's underwear. It operates in Australia and the United Kingdom and prides itself on catering to a wide range of body types with its inclusive designs and environmentally conscious materials.
While it's still best known for its men's range, Step One has flagged its intention to launch a women's collection, a move that could broaden its addressable market and drive future growth.
What's gone wrong?
In short: consumer spending.
In a recent statement, founder and CEO Greg Taylor summed up the challenge:
FY25 has been a challenging year, with subdued consumer spending and ongoing cost-of-living pressures continuing to weigh on discretionary spending. Customer purchasing behaviour has become increasingly reliant on sale events and promotions.
This trend has hurt Step One's margins. With shoppers holding out for discounts, the company has had to cut prices to maintain volume — a tough balancing act for any premium brand.
As a result, Step One has taken a more cautious approach to marketing investment, choosing to protect its balance sheet in the face of economic uncertainty.
Brokers still see value
Despite the challenging conditions, brokers at Bell Potter and Morgans have both retained buy ratings on Step One shares, albeit with trimmed price targets.
Bell Potter now sees Step One as worth $1.25, noting that while gross margins are under pressure, sales growth has held up and the product model remains attractive. The broker believes a turnaround could begin in the second half of 2026, supported by lower interest rates and a less promotional retail environment.
Morgans is a little more upbeat, maintaining a $1.50 price target and noting that shares offer compelling value — trading on under 10x forecast FY26 earnings and potentially offering a fully franked dividend yield of ~10%.
The broker cut its FY25 and FY26 net profit forecasts by 14% and 17%, respectively, due to reduced sales growth and thinner margins. But the long-term story, it seems, is still intact.
What to watch from here
Step One is scheduled to report its FY25 results on 20 August 2025. With expectations reset and brokers still in its corner, any green shoots in guidance or margin recovery could spark renewed interest in the stock.
While it's been a tough year, the brand's strong customer loyalty, premium positioning, and potential expansion into women's apparel could underpin a longer-term rebound.
