Dr. Martens plc (DOCS) Earnings Call Transcript

I mean from my perspective, I think when we stood up at the end of November, the wholesale piece in the U.S., we had no awareness of that issue because we were shifting high double digit of the prior year. So that piece takes care of it. Jon gave 2 big assumptions. The first was that there was a weaker base in Europe that we thought would come through in December and has come through. He also said that we would benefit to improve availability in the United States, and we would improve off the back of that better availability in the United States. We didn't improve as much as we had expected in our DTC channel with only 12% constant currency growth. So we missed. However, what we did see, and as I said earlier, I think that was due to weather driving a channel shift -- back to your payers question, we sold 32% more payers through wholesale in North America in December. So we have reflected out the fact that our DTC channel has not delivered what we wanted, and that is the assumption that clearly, you can point to just was a miss versus what we say.

And just to build -- sorry, one more build as well, when we stood up at the half year, we had seen early data for the Black Friday side of -- trading weekend in the U.S., and that was a good performance. And I think I shared that as the only data point to support that we had at that moment in time, the benefit from availability.

Next question today is from the line of Edouard Aubin of Morgan Stanley.

Hello Kenny and Jon. So 2, 3 questions from me. So first of all, you mentioned the hit from the etailers, 3% to 4%. Why the change of mind regarding your distribution strategy? What's happening there? Is it because these guys are too promotional and impacting the brand? Or just curious to have an explanation there, so that would be number one. And then just to follow up on the question about volume because with mid-single-digit organic, it looks like your volumes are now flat to down or you're expecting them to be flat to down -- is it -- and then you've mentioned many times before on this call that you wanted to act as curators of the brand, which is obviously great for the brand equity, desirability at long term. But have you -- are you now in a scenario where most of your competitors are heavily discounting and that's impacting basically, I mean, the value proposition is maybe not as attractive as you've raised prices over the past few months? And then sorry, a third small technical one, just to clarify. I think, Jon, you said that your DTC growth in the U.S. was up 12%, if I understood correctly in Q3. But did you also mention that wholesale sellout was at 32%? And if so, why is the difference.

Edouard. I'll take the question around etailers and your point about heavy discounting in the market, and I'll let Jon take the financial and technical questions. In terms of the question about etailers over the last -- it's a European point just to be super clear, and it's not relating to the other territories. So in Europe, the brand awareness is growing, and it's growing every quarter. And there's no doubt that our wholesale strategy has helped us to introduce more consumers to the Dr. Martens brand. What we've discussed with our key etail partners in Europe is the fact that we want to focus them on a different product range from some of the products they have been selling and focus some of those products on our own DTC channels. So we'll continue to trade with etailers going forward. We're not eliminating etailers, and we've got some good strategic partnerships there. But we will curate the products that we put into that channel and we will direct consumers for other products towards our own DTC channel. So that's really what we're trying to do. It's a product and brand point, which is we want to direct different products to different channels. Then in terms of discounting, yes, you're right. There was a lot of discounting out in the marketplace across December, in particular, but really from the Black Friday weekend through to Christmas. We only participated in that in a very small way through some seasonal markdowns that we took in our 2 biggest markets in EMEA and in North America. And we've said all along, we don't discount the iconic product of the Dr. Martens brand because we believe that the way to build long-term brand value is to have an honest relationship with consumers, but if they want to buy a pair of Black of Dr. Martens, they know what the price is always going to be. I still believe that is absolutely the right decision for the long term, but will consumers have spent their pound or their euro or their dollar on something that was so heavily discounted. Yes, but I don't think that's the right way to manage the brand for the long term. So we will not be in an environment of heavy discounting. It's not the right thing to do.

On your second question on volume, at what -- the way to think about it is -- the volumes will be probably flat to lower next year depending on the expectations primarily because of taking out the volume that we sell into European etailers. A way to think or a simple bridge for next year's growth would be along the lines of -- we've announced price growth of 6%. We've got -- we'll have the benefit of annualizing approximately 44 stores that we've opened this year, including the Japanese transfer into next year. Then there's obviously the reduction from etailer volume. There will be a DTC mix shift, and I said to date 9 months this year, it's plus 2. And then that will be one's view of what is underlying growth in core markets, depending on the economic environments there, and that might be flat pair marginal reduction in pairs or increasing the pairs depending on which market you look about. But that's the way to look about the key driver for volume reduction next year, lower volumes is the volumes we're taking out of European etailers. With regards to your final question on December trading for the Americas business, the classification, you're absolutely right, in the month of December, DTC in America grew revenue by 12% at constant currency, which is about pay as up as much flat to up as much. Wholesale sellout to the wholesale final customer was up 32% in December, and that was volume. And as Kenny answered your first question, that was volume all at full price as we have mapped pricing in the U.S. So payers to final customers in the U.S. in December was essentially probably combined B2C and B2B up mid-20s, something like that. So that gives us confidence that we can sell in. Our hypothesis of what happened in December is that the extreme cold weather it's incredible what happened there. But we have almost seen news about snow and cold weather. That pushed people away from the larger cities where our stores are located to more local shopping, which is where the vast majority of the wholesale distribution is where the thousands of stores, and we've got what about 50 stores that are in the bigger cities. That's our hypothesis of what happened. But the key is pairs growth into the market DTC and wholesale together to end consumers up mid-20s, and that's a positive.

[Operator Instructions] Our next question is from the line of Richard Taylor of Barclays.

I've got 3 questions, please. One is again on the U.S. I know you just described in great detail in December, but can you just talk in general about the U.S. business? Because it looks like the other territories you're sort of satisfied with, but the U.S. has been poor overall just standing back, what is it that you're unhappy with in that business or perhaps it's not hitting well as with other markets? Secondly, globally, what's reordering been like from wholesale accounts into FY '24. What's the sell-through been like? And are they reordering at the higher prices? And how does that inform your revenue growth guidance for next year? And then finally, you've not talked about margins for next year. We can work out roughly a margin range for this year, given the data you've given today, but what are the thoughts on EBITDA margin into next year, please?

Yes. I mean I think in your first question, Richard, the businesses in Asia Pacific and EMEA came in exactly in line with what we'd expected. In fact, EMEA did a little bit better than we expected. The U.S. business. Clearly, the performance is not where we want it to be across the whole -- I think the quarter rather than the month of December. The quarter was disappointing. And as we said, when we stood up in November, we felt at that point that, that was due to unseasonably warm weather. December, our sales out through our own channels at 12% up, was up, but it wasn't up as much as we wanted. So we're disappointed in that. And then actually, our sales out to consumers through wholesale at plus 31% actually was very strong. Our sales into wholesale, which you can see from our numbers, we're terrible based on the distribution issue. And overall, we didn't deliver what we said we were going to do in the U.S. business. So we've got to be disappointed in our own performance there. But the fact we sold significantly, more payers in December says people still wanted to buy the Dr. Martens brand. So that would be my view on it. We've got work to do clearly. If you don't deliver your numbers, then you've got to be disappointed in your own performance. In terms of your point about global reordering, we know the order file for spring/summer '23 because that -- those bookings have been taken for Jan, Feb, March, April, May, June -- we're in a situation where we're happy with those orders. The United States, as we've said today, we won't be able to ship all the orders we've got ironically because of the issue we've got in the Los Angeles distribution center. So we're going to have to pick and choose exactly which orders out of those we were able to ship. If we look at the Autumn Winter '23 season, which is still the biggest part of financial year '24, but at a point of a little visibility, unfortunately, at the moment. And what I mean by that is it will be another 3 or 4 weeks before we really firm up the order file. Hence, why in our guidance for next year, we're being cautious on payers because we don't know the answer yet. But usually, people ordering is a function of how they're selling out. So I've got nothing to believe that in the guidance Jon has given we won't meet the payers' numbers that we've got embedded in there, but we won't know the true answer until we take all of the orders that will come into '23.

And building on that and picking up on your last question, we purposely have not guided around EBITDA margin for the next financial year because of -- as Kenny said, we're at the point of minimum visibility. The current issue is here is really fast this week, and we need to work through what all of this means in much more detail and we'll come back at an appropriate time.

Just on the second point on the wholesale reordering. I mean I think in the previous statement, Jon sort of noted to the position of the key wholesalers. What is that like? Your points of low visibility, I understand that, but have they sold through well, your prices are going up. What are the conversations like with those wholesalers? What's your degree of confidence in them reordering next autumn winter at those higher prices given their balances at the moment?

Yes. I mean -- I think if you look at the situation, Richard, we mentioned that people had healthy inventories going into peak wholesale. And I think the plus 31% payers in the United States in December demonstrates they had the stock. We're in the ironic situation that people will be sold out of certain sizes on certain products. But we've got an order file, which was pre-booked that we have to ship first. So we won't be able to replenish everything that people have sold out. We have visibility on our inventories of our top 10 accounts. Again, because we saw good sales in December and our U.S. team updated us at Wholesale, the December momentum has continued into January, that will further bring down inventory in the wholesale channel. So as Jon said in November, we believe that we'll exit this financial year end of March with our key wholesale accounts with our inventories in better shape than they were at the same time the previous year. So that's America. I think for Europe, Europe's wholesale sales were absolutely in line with expectations. A couple of accounts did better. We haven't got all the sellout numbers yet for Europe in the way that we've gone through in infinite detail for the United States. But I'm very comfortable we get the inventory week on week, and I'm very comfortable with where we are on wholesale inventories in EMEA. So other than the payers that we are going to take out with our retailer partners. I think -- again, I don't have the order book yet. But I feel pretty good about how the order book is evolving in EMEA, and they're actually slightly ahead on timing versus the Americas business on getting those orders in. And then in Asia Pacific, there's only real one big, what you call a wholesale customer which is the Australian distributor and their sales have been extremely good in the last quarter. So we feel very confident about that number. So given the fact that wholesale sellout in December has been good, we feel okay about that number, but the fourth quarter of this year, we will not be able to replenish all of our sales in the United States because of our distribution issue. I want to be super clear about that.

And if you think back in terms of order book build, we've -- at the year-end last year, we shared with you the order book status for Autumn/Winter '22, and this is what we have been early June. And we think more collections, we are about 70% sold in than we did it again with expectation to be 100% by the end of September. We'll be able to share those same stats when we get round to the year-end. But at the moment, as Kenny has said, the order book is just starting to be built. So we can't talk much about it.

Understood. And then just moving on from sort of the inventory comments playing into your net debt estimates. I don't -- is there's anything given the statement on that debt, but perhaps you can refer to a consensus range on net debt and what you're comfortable with that, please?

I have not looked at the net debt number at this moment in time. However, from a net debt cash point of view, I have got no concerns. But can I get back to you on that point, please.

Our next question today is from the line of Kate Calvert of Investec.

Two questions from me. Will the issues in the U.S. DC impact upon your new store plans in FY '24? And my second question is just on Asia. Do you think it will return to growth in FY '24?

So I think on the first one on -- will the distribution center issues impact the -- their opening plan. We plan to go ahead with a similar number of stores next year in America, Kate, that we've done this year. So I think we'll end up the year at about 15. I might be wrong by one either way. And our plan on a similar number of stores in the United States next year. And as we've said before, we're very happy with the overall performance of stores we're opening in North America. So as a strategic lever, we feel good about that. We currently, at the moment, the LA DC which ships all product codes to our direct-to-consumer business and our existing New Jersey DC ships a collection of product codes, 2 stores on the East Coast. So we already shipped direct to consumer in the United States from 2 DCs. And as I said earlier, we already had a plan in place. It was part of our strategic plan that we were broadening out the capability of that New Jersey DC. First of all, we were going to expand the full direct-to-consumer range in that New Jersey DC. That was already an action, was in progress. As I've said today, for wholesale, we're going to further expand that. Some the long-winded way of saying direct-to-consumer shipments, either e-comm or stores, we put them first. So therefore, on the fact that we've got 2 DCs it won't impact it. So the store openings will move ahead. In terms of Asia Pacific, Jon can talk a bit more on the detail on this. I mean, what do I think we see, the Japan business, as we mentioned in the statement is performing well. Everything is going on plan to transfer over the 14 franchise stores in Japan owned and operated, and that will happen as we said, before the end of the financial year. So we feel very good about the business in Japan. China right now with the removal of zero-COVID, it's a small business for us. A high percentage of our employees in China have COVID, which probably means most people in China have COVID. You would assume the situation will get better in China as the year goes on. And then we also feel cautiously optimistic about the business in Korea. And as I mentioned, the Australian business, which is run through a distributor, which is one of our biggest businesses in Asia is also doing well. So that was a long-winded way of saying I think we feel pretty good about Asia for next year.

Yes, just to build -- essentially Asia growth next year will be driven by Japan, return on investments in Japan. I think Japan is old school, mainly physical retail country. We've got a small website along with the -- same as lots of other companies, but I think old school retail. Footfall in Japan is still about 25% below pre-pandemic levels. So there's opportunity for footfall growth. And we've got the annualization of the 14 stores that we're taking back, and I think we've opened 4 or 5 stores in Japan this year as well. So there's a big annualization benefit in Japan as well as still got some good headway on for full recovery. So we feel confident that Japan will drive the returns we get from Asia Pacific next year.

[Operator Instructions] And it appears we are having no further questions registered. So I'd like to hand back to Kenny for any closing remarks.

Okay. Thank you very much. As we said, we've accelerated this call today because of the reduction in our forecast. I just want to emphasize how disappointed we are about that. And the fact that some of this should have been within our control, we're not pleased about that, and we will be putting the fixes in place to make sure that we move this forward. I just want to thank everyone for joining this call because, obviously, we've had to call it a short notice. So thank you. And obviously, we'll be available in the days ahead for follow-up questions. Thank you very much, indeed.