Dr Martens’ profits tumble as margin outlook weakens

Investors in Dr Martens (DOCS) will rightly feel aggrieved by the more than 60 per cent fall in the value of the shares since the bootmaker listed in London in 2021. An increase in the full-year dividend and an initial £50mn share buyback programme might assuage a small amount of the pain, but the short-term outlook for the company remains problematic, as highlighted by a 13 per cent share price tumble after the unveiling of worse-than-expected profits, and guidance that margins will fall again this year.

Pre-tax profits contracted on the back of higher depreciation charges from system investments and new store and distribution centre expansion as the company continues to struggle with operational issues in the US, while chunky impairment and foreign exchange charges also hurt the bottom line as cash profits fell by 7 per cent. The City had expected a statutory profit figure of around £178mn, according to consensus forecasts on FactSet, £19mn more than the actual figure.

The board noted that it was “a disappointing year in America”, where performance has been hit by a supply bottleneck at the company’s distribution centre in Los Angeles and marketing and ecommerce failures. US disruption drove the decline in the gross margin, which fell by 190 basis points to 61.8 per cent. The cash profit margin was down by 4.5 percentage points to 24.5 per cent, and management expects this to fall by another 1-2 percentage points in 2024, although even this outcome depends on hopes of an improved US situation in the second half.

US revenues rose by 12 per cent to £428mn, but would have fallen were it not for currency effects. In the company's other locales, EMEA and APAC sales were up 11 per cent to £443mn and 2 per cent to £129mn, respectively. 

On the balance sheet, inventories more than doubled to £258mn, raising the spectre of a need to cut prices to get stock levels down. But the company’s brand equity and pricing power should help it to avoid this potential further threat to margins.   

Investec analysts cut their pre-tax profit forecasts for the next two years by 16 per cent and 25 per cent, respectively, noting that Dr Martens "has attractive long-term growth potential, [albeit] with a better US performance needed before sentiment improves”.

If the company can solve its US problems, margins should move higher over the medium term. And given that analysts value the shares at a consensus 12 times forward earnings according to FactSet, the rating is undemanding. Hold.

Last IC View: Hold, 147p, 14 Apr 2023