- Footwear brand issues margin warning
- Flags slowdown in direct-to-consumer sales
- Interim dividend increased 28% to 1.56p
Shares in Dr. Martens (DOCS) were the biggest FTSE 250 fallers on Thursday, slumping 18.2% to 234p after the British footwear brand warned of a recent slowdown in its direct-to-consumer (DTC) arm, which represents the growth engine of the business.
The iconic boot maker also guided towards a 100-to-250 basis point drop in its full year earnings before interest, tax, depreciation and amortisation (EBITDA) margin due to US dollar strength and the decision to continue investing for the future rather than maximise short-term profit.
TRADING IS CHOPPY AS CHRISTMAS LOOMS
Dr. Martens warned the trading environment had ‘weakened’ from the second quarter onwards, crimping the all-important DTC growth which was ‘slower than anticipated’.
Moreover, sales since the half-year end have been ‘variable on a week-to-week basis’ as potential customers wrestle with cost-of-living pressures in the run-up to Christmas.
‘As well as slower DTC growth, we made a proactive decision to continue with targeted investment for the future rather than reducing investment for short-term profit,’ Dr. Martens explained.
MAKING POSITIVE STRIDES
The margin alert overshadowed encouraging results for the first half to September 2022.
Underlying revenue strode 18% higher to £418.6 million amid growth in all channels and all regions led by America and thanks to a price increase at the start of the second quarter.
Unfortunately, pre-tax profit fell 5% to £57.9 million due mainly to higher new store and IT-related depreciation.
Reflecting confidence in the future and a strong balance sheet, Dr. Martens increased the interim dividend by 28% to 1.56p and maintained its full year revenue guidance of ‘high-teens’ growth on an actual currency basis.
‘At the heart of our continued success is the strength of our brand, highlighted by underlying pairs growth and continually improving brand metrics,’ insisted chief executive Kenny Wilson.
‘We have further pricing headroom for AW23 (autumn-winter 2023) so we will offset cost inflation once again. Although there are economic challenges ahead, we are well positioned for future growth.’
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould said Dr. Martens had ‘tripped up in a big way with investors’ following these results.
‘The main reason the company has lost a bit of shine and polish is news that margins are under significant pressure. While external factors such as a stronger dollar are playing a part, the company is also suffering from weakening demand and there are at least hints that its pricing power isn’t what many might have hoped given the apparent strength of the brand.’
Mould continued: ‘Growth in the lucrative direct-to-consumer sales channel is slipping and that matters because building out this part of the business is a key thread of the strategy.
‘Hopes that a hefty increase in the dividend would keep the market sweet have proved forlorn, though one item which is hitting profitability, but which should earn Dr Martens a bit of credit, is the investment in the business.
‘Taking a short term hit to profit now to support growth in the future is what any business should be doing, and Dr. Martens will hope this will help it put its best foot forward from here.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
