ii view: Dr Martens shares suffer another nasty fall

First-half results to 30 September

• Currency adjusted revenue down 3% to £395.8 million
• Adjusted profit (EBITDA) down 13% to £77.6 million
• Interim dividend unchanged at 1.56p per share

Guidance:

• Now expects full-year adjusted profit (EBITDA) to be moderately below the bottom end of City forecasts of between £224 million and £240 million 

Chief executive Kenny Wilson said:

"We saw a mixed trading performance in the first half of the year. We made good progress with our strategic priorities, continuing to invest in the business and our people to drive sustainable long-term growth. During the period we focused on controlling the controllables: we delivered significant supply chain savings, successfully transformed our North America distribution network, opened 25 new stores, and launched a Dr. Martens UK repair service.”

“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.”

• Invest with ii: Top UK Shares | Free Regular Investing | Open an investment Account

ii round-up:

Iconic boot maker Dr. Martens Ordinary Shares (LSE:DOCS) today issued a warning about annual profits given both the effect of unseasonably warm autumn weather on sales plus lower-than-expected US retailer demand due to greater caution among American consumers. 

City analysts now expect full-year sales to fall by around 8% on an adjusted currency basis as opposed to a prior forecast for a low single-digit increase. That takes analysts’ adjusted (EBITDA) profit forecast for the year to the end of March 2024 around 10% lower than the current forecast of £224 million, which is comfortably below last year’s outcome of £245 million.  

Shares in the FTSE 250 company plummeted by around 25% in UK trading having come into this latest news already down by 40% year-to-date. Fellow luxury goods retailers Burberry Group (LSE:BRBY) and Watches of Switzerland Group (LSE:WOSG) are down 29% and 22% respectively during 2023, while the FTSE 250 index itself has fallen by 4%.

Dr Martens' sales for this latest first half to the end of September fell 3% on a currency adjusted basis to £395.8 million compared to City hopes for a fall of 1%, with adjusted profit retreating 13% year-over-year to £77.6 million.

Along with its iconic boots, Dr Martens also sells shoes, sandals, and accessories such as leather bags in more than 60 countries via other retailers through its wholesale division, along with 225 of its own stores and its Direct-To-Consumer (DTC) business. 

More profitable DTC sales climbed 11% year-over-year to £196.4 million, countering a 15% fall in Wholesale revenues to £199.4 million.

The interim dividend was left unchanged at 1.56p per share. Full-year results are scheduled for 30 May. 

ii view:

Dr Martens was founded in 1960 in Northamptonshire. Today it employs over 2,000 people, selling around 5.7 million pairs of boots, sandals, and shoes during this latest period. Geographically, its Europe, Middle East and Africa region generated its biggest slug of sales over its last full financial year at 44%, followed closely by America at 43% and with Asia Pacific the balance of around 12%. 

For investors, more erratic weather patterns offer challenges for retailers as a whole, and the difficult backdrop for consumer spending globally and particularly in the USA cannot be ignored. Earlier year operational issues in the US have proved a factor, too, costs generally for businesses remain elevated, while the high fashion nature of the company’s product continues to warrant consideration. 

• Stockwatch: is there life left in this share down 96%?
• Still time to buy, or too late to profit from the best market since Covid?
• Insider: heavy buying at two FTSE 100 companies and this small-cap

On the upside, a management focus on more profitable DTC sales remains, with revenues for the division up year-over-year and including expanding e-commerce sales. New stores are still being opened, some £10 million in supply chain cost savings were achieved during this latest period, while the shares now offer a forecast dividend yield of around 5%. 

Speculative bargain hunters might be tempted by such a significant fall in share price, hoping that the selling has been overdone. However, there is no guarantee that the worst is over and, while possible US interest rate cuts in 2024 could help consumer demand in the States, more cautious investors are likely to sit and watch the shares until signs of a sustainable recovery in profits appear. 

Positives: 

• Geographical diversity
• Growing Direct to Consumer sales

Negatives:

• Consumer cost-of-living crisis
• Exposure to currency movements

The average rating of stock market analysts:

Strong hold