- Shares collapse on wave of selling
- Damage to earnings largely self-inflicted
- No quick rebound in sales predicted
Iconic footwear brand Dr. Martens (DOCS:AIM) unexpectedly revealed sales and earnings for the year to March would be substantially lower than forecast due to a foul-up in its US distribution operations.
The shares plunged 25% to a new all-time low of 157p on higher than average volume as investors rushed for the exit.
WHAT WENT WRONG?
According to chief executive Kenny Wilson, trading ‘remained resilient’ in the third quarter to the end of December despite the challenging market conditions, with like-for-like revenues up 9% driven by an 11% increase in DTC (direct-to-consumer) sales.
However, the firm appears to have shot itself in the foot due to ‘significant operational issues’ at its new Los Angeles distribution centre.
A bottleneck at the facility was caused by ‘a combination of people and process issues’ resulting in an inability to meet wholesale demand and fourth-quarter US shipment forecasts.
First, inventory was transferred from the Portland, Oregon, distribution centre to a new third-party logistics centre in LA earlier than originally planned.
The company then agreed to requests from some US wholesalers to store direct shipments at the LA facility, causing further stockpiling.
This was compounded by a significant shortening of delivery times from the firm’s factories to the LA centre, creating a major bottleneck in the distribution chain.
As a result, full-year revenues are expected to be between £15 million and £25 million short of forecasts due to lost wholesale revenue.
Earnings before interest, taxes, depreciation and amortization (EBITDA) will be between £16 million and £25 million below target due to lost sales and the costs of measures to rectify the snarl-up, which include opening three temporary warehouses in LA and adding a third shift at the main distribution centre.
WHAT ABOUT NEXT YEAR?
Having reduced its sales growth forecast for the year to this March to between 4% and 6% on a constant-currency basis, the firm sees no quick rebound.
Instead, sales are forecast to grow by just ‘mid- to high-single digits’ for the year to March 2024.
‘The knock-on effect from the LA distribution centre issues and a more uncertain economic environment are likely to impact FY24 revenue growth.
‘In addition, we have been reviewing the strategic and economic benefits of continuing to sell into pure-play wholesale ecommerce accounts (etailers), particularly in EMEA, and as a result, we have therefore decided to reduce volume into these accounts in FY24.
‘Over time, the benefit will be to underpin DTC mix expansion but in FY24, revenue growth will be impacted.’
