Investors put the boot into Dr. Martens (DOCS) after the iconic footwear brand downgraded its year-to-March 2024 EBITDA (earnings before interest, tax, depreciation and amortisation) guidance once again and withdrew previous guidance for high single digit sales growth in full year 2025.

The shares slumped more than 20% to 89p, a fraction of 2021’s 370p initial public offering price, after the bootmaker reported weaker-than-expected third quarter trading amid a worsening consumer backdrop in the US where the company has been grappling with operational issues.

However, there were encouraging signs in the half year results as the North London-based boot brand highlighted improved trading in the EMEA and APAC regions in more recent weeks.

WARM WEATHER WOE

Dr. Martens reported ‘mixed’ trading in the second half to date with the start of the Autumn/Winter season impacted by warm weather across all three regions and weaker traffic overall.

The British brand beloved by mods, ska fanatics, punk rockers and goths also bemoaned a ‘more challenging’ consumer backdrop in the USA in recent months.

‘Although we have seen some encouraging signs in very recent direct-to-consumer (DTC) trading, including over the Black Friday weekend, we expect that it will take longer to see a material improvement in USA performance than initially anticipated,’ warned Dr. Martens, explaining that widespread caution amongst its wholesale customers has resulted in a weaker order book than in prior years.

YET ANOTHER DOWNGRADE

As a result, North London-based Dr. Martens now expects to deliver a high single digit full year 2024 sales decline, with EBITDA expected to be ‘moderately below’ the bottom end of the £223.7 million to £240 million consensus range and a higher finance bill to impact pre-tax profits to boot.

Despite yanking earlier full year 2025 guidance, Dr. Martens’ medium term expectations remain unchanged, ‘underpinned by the significant white-space growth opportunity and our iconic brand and product range’.

Pre-tax profit more than halved to £25.8 million in the six months to 30 September 2023 amid a challenging US backdrop and with Dr. Martens absorbing higher-than-expected costs from its Los Angeles distribution centre.

First half sales were down 5% year-on-year at £395.8 million, mainly due to US wholesale weakness, although one bright spot was a 9% rise in DTC revenues, which now speak for half of group revenues.

Retail and ecommerce sales grew up 15% and 3% to £104.7 million and £91.7 million respectively, demonstrating continued demand for the Dr. Martens brand in geographies unaffected by operational issues.

WHAT DID THE CEO SAY?

‘In the USA, where there is an increasingly difficult consumer environment, our results have been more challenged, led by weakness in wholesale,’ explained CEO Kenny Wilson.

‘Notwithstanding the clear challenges we face in the USA market we remain very confident in our iconic brand and the significant growth opportunity ahead of us.’

AJ Bell investment director Russ Mould said US wholesalers’ reluctance to stock large volumes of Dr. Martens’ boots and shoes ‘suggests a lack of confidence in US consumer spending power and a headwind the bootmaker could do without. When times are good, Dr. Martens has shown it is possible to make decent returns from its iconic products. But when the economic outlook is more uncertain, the company suffers from having its products priced slightly above the level at which someone wouldn’t think too hard about paying.’

Mould added: ‘No-one can accuse the business of standing still. It has been busy investing in technology projects to make the business more efficient and to save money over the longer term. It has also been pushing its direct to consumer offering so it can have more control of the brand, learn more about customer spending habits and make bigger margins.

‘While the market backdrop is not currently in its favour, when the winds change it should be in a stronger position to capitalise on the growth opportunity.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.

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