Dr. Martens Starts 2023 On The Wrong Foot After Second Day Of Stock Declines

Non-conformist British shoemaker Dr. Martens suffered a second day of investor wobbles as the London-listed company saw its share price end the day at £1.39 down 3.7%. This follows a 30% collapse on Thursday after the shoe retailer issued a profit warning—the second in a matter of just two months—and admitted “significant operational issues” at its new distribution center in Los Angeles.

Since mid-December, Dr. Martens stock had been trending upwards and for most of January it was riding above £2.00, peaking at £2.12. The dramatic slide means that the company’s stock value has fallen by more than two-thirds since it was floated just two years ago in January 2021.

Thanks to a bottleneck at its LA distribution center, which has limited capacity to meet wholesale demand in the current quarter (Q4 in the company’s financial year), Dr Martens will lose wholesale revenue and incur costs. This will cut EBITDA by £16-25 million in the current financial year, depending on how fast the company can normalize operations.

In a statement on Thursday, CEO Kenny Wilson, said: “Due to significant operational issues at our LA distribution center and weaker than anticipated US direct-to-consumer (DTC) trading, in part due to unseasonably warm weather, we now expect full-year revenue growth of 11-13% and full-year EBITDA to be between £250m and £260m.”

The impact on wholesale revenue could reach £25 million in the financial year to March, including supply chain costs of up to £11 million. There will also be a knock-on effect into FY24 and the company anticipates conditions could take until September to get back on track.

Reversing distribution failures

To resolve the issues, Dr. Martens has opened three temporary warehouses nearby and will start a third shift at the center by the end of January. In the meantime, the company is reconfiguring its east coast distribution so it can ship wholesale orders from there. The fact that the company—made famous in the 1960s by its air-cushioned DM boots—has had to send the “most experienced members” of its EMEA and global supply chain teams out to Los Angeles is a sign of how entrenched the problems are.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, commented: “Dr Martens’ operational problems pile yet more problems on the beleaguered boot maker. The transfer of inventory to the new hub was faster than planned, and the chaos (has) forced the company to take on new space and an extra shift of staff which pushes up costs.”

Pulling back from third-party e-commerce

Add to that some disappointing sales in the U.S. in the golden quarter, a market viewed as key for long-term growth. Streeter added: “Revenue growth is now expected to slip in the following year to mid- to high-single digits due to these latest supply chain snarl ups.”

She continued: “Dr. Martens is attempting to position itself more upmarket by reducing the number of boots being sent to retail channels. While this may avoid too much discounting, which can damage the brand, lower volumes will also hit revenue. If the company can tread into the style books of wealthier consumers, it would offer long-term benefits. However, trends do still wax and wane and there is still a risk that the pulling power of Dr Martens could fade over time.”

While that is a bleak assessment, it should be remembered that Dr. Marten’s annual revenue has grown year-over-year through the pandemic and in FY22 it became a billion dollar company with sales of £908 million ($1.12 billion). Moreover, results for the Christmas quarter—the peak Q3 trading period—were quite resilient. Sales hit £336 million ($416 million), up 3% at constant currency, but negative for wholesale (down 1%) and Asia Pacific (down 4%). The Americas grew by just 1% against the previous quarter’s 13%.

Having warned that the current fiscal fourth quarter will be difficult, Dr. Martens says it has also reviewed sales into wholesale e-commerce accounts, particularly in EMEA. A decision has been made to reduce volumes in this channel from FY24. The aim is to beef up the company’s DTC mix and drive margin expansion, but in the meantime company revenue will be further dented.