Dr. Martens plc (DOCS) Earnings Call Transcript
January 25, 2024
Earnings Call Speaker Segments
Hello, everyone, and welcome to the Dr. Martens' Q3 Trading Update Conference Call. My name is Nadia and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Kenny Wilson, CEO, to begin. Kenny, please, go ahead.
Thank you very much. Good morning, everyone. And thank you for joining our Q3 conference call. I'm joined here this morning by Jon Mortimore, Our Chief Financial Officer; and also Bethany Barnes, our Head of Investor Relations. If you've got further questions following this call, then please do reach out to Bethany directly. So before we open it up for Q&A session, I just wanted to take this opportunity to share my perspectives on our third quarter. Overall, our Q3 performance was in line with the updated guidance we provided in November. This is not to say that it was an easy operating environment. Trading in the quarter was volatile with considerable regional differences and lumpiness in wholesale. The trends that we saw at Dr. Martens are broadly in line with those experienced by our peers and seen across the industry, including softer December trading globally. But there is no doubt that the consumer backdrop remains challenging, particularly in the United States. We continue to focus on the levers that are within our control to drive growth and to build our product pipeline for autumn/winter '24 and beyond. Our focus remains firmly on our marketing execution through our Made Strong platform and digital marketing to target new consumers. Ije Nwokorie, our new Chief Brand Officer, joins us next week to accelerate our efforts. Direct-to-consumer sales in the quarter were resilient, considering the consumer environment and the abnormally warm weather particularly in October, down 3% in constant currency. We saw a particularly strong direct-to-consumer performance in our Continental European conversion markets, and also in Japan. Growing direct-to-consumer remains a key part of our long-term DOC strategy and the progress we continue to make on this gives me confidence in our future growth and the direction of our brand. Our Retail business was the strongest channel in the quarter, up 3% constant currency, made up of double-digit growth in APAC, solid growth in EMEA, and declining revenue in the U.S.A. Our Ecom business was down 8% constant currency, with a double-digit fall in the Americas, impacting an otherwise stable performance in EMEA and APAC. Wholesale revenue was down 46% in constant currency with significant declines in both Americas and EMEA. Wholesale in EMEA was predominantly as a result of our planned reduction of volumes into EMEA Etail accounts, and there were also some significant differences in shipment timings compared to the prior year. In the United States, we continued to be impacted [Technical Difficulty] across our Wholesale customer base. Looking ahead, the timing and level of Wholesale reorders is unpredictable globally, but we do see lower levels of in-market inventory year-on-year. The regional dynamics in the quarter are consistent with those from half 1. We're delivering good DTC performance in EMEA and Asia, but Americas is more bumpy. Overall, EMEA revenue declined 15% year-on-year, and this was driven by a significant decline in Wholesale as planned. DTC revenue in EMEA grew low single-digit with particularly good performance in our conversion markets, which continue to be an engine for growth and then a slightly softer U.K. result, in line with industry trends. Asia-Pacific recorded revenue down 1% in constant currency with Japan, our largest market in the region, delivering strong overall growth. In the U.S.A., the consumer environment remains challenging. Our operational issues are now well behind us, but we face a different headwind, which is centered on the [Technical Difficulty] consumer. We are doing what we can to optimize performance in a tougher macro with targeted and focused actions. Our U.S.A. leadership team is now fully in place and working at pace. We are continuing to invest in marketing and digital in a disciplined manner, and we are delivering new product innovation into the market, but this is going to take time to ignite and we continue to deliver upgrades to our website to improve conversion. The U.S.A. remains our #1 priority, and we continue to implement significant actions to face the consumer headwinds we see there. Looking ahead, the guidance provided at the time of our H1 results still holds. We expect full-year constant currency revenue decline of high single digit. We've also given some additional guidance on FX impacts today, which you will have seen in our statement. So thank you so much for your attention and for listening in. We're now going to take questions. If you could start by saying your name and where you're from before posing your question, that would be really helpful. Thank you.
[Operator Instructions] And our first question today goes to Kate Calvert of Investec.
Two questions from me. Given your third quarter performance, you do need quite material improvements in the fourth quarter to get to full-year guidance. I do appreciate that the comps are easier, but what gives you the confidence in being able to achieve this? And my second question is on Europe specifically. I guess, it was perhaps a little bit weaker than expected in the third quarter due to the U.K. I'm just wondering if you could give a bit more color on what your expectations are for Europe in the fourth quarter because the comp there actually, I think, gets tougher rather than weaker.
Thanks, Kate. And yes, you're indeed correct that the trends in the fourth quarter needs to be stronger than Q3 in order to deliver the guidance. I think the most important thing here is around Wholesale. The Wholesale business, as I described, has been lumpy throughout the year. So in Q1, it was minus 41. In Q2, it was minus 2, and in Q3, it was minus 46. And we expect to see a stronger performance in Wholesale in Q4 versus Q3. Firstly, the comps are easier year-on-year. And secondly, we have the order book to be able to make these numbers. So therefore, this is now all about getting the product in, getting it through the distribution centers and out to our customers. So that's really on the first one. In terms of European DTC, again, you're correct that Continental Europe had a good Q3. The U.K. was slightly weaker in DTC in the third quarter. In order to make our guidance for the full-year, what we need to see is a continuation of the trends that we've seen over the last 9 weeks. So that's effectively what we have to deliver.
Can you give us a bit more detail on the trends over the last 9 months?
No, we're not giving out the specific detail of the country-by-country detail. I think what we said is overall Europe DTC was up 2.5 in the third quarter. Continental Europe was better than the average, and the U.K. was slightly below the average.
The next question goes to Grace Smalley of Morgan Stanley.
Two questions, please. Firstly, on the Wholesale order book, so you mentioned there that you do expect Wholesale to improve in Q4, partly because of the easier comps. I guess, as you look more through calendar year 2024, what are you seeing in terms of the trend of Wholesale order books? And are there any signs of the Wholesale like destocking cycle, in particular in the U.S. coming to an end? And then my second question, please, would just be if you could comment on what you're seeing in terms of the impact from the Red Sea disruption? And if you could remind us how significant freight is potentially of your sales and your expected exposure to the impacted route? That would be very helpful at all, please.
On the first question regarding Wholesale, the -- we've got the visibility on the order book for Q4, which is what underpins our confidence in the forecast. As we look ahead to next year, I mean, we're still in the process of taking the order book for autumn/winter '24. What would I expect to see? As we said back in November, I don't expect to see that the U.S.A. is going to turn around quickly in terms of pre-booked orders. So therefore, as we look at the second half of 2024, I think you'd expect to see more at-once orders. Europe's a different situation where we see stronger trends in terms of sell-out to [Technical Difficulty]. And as I said at the beginning of the call, what we see is inventory is double-digit down in both regions. And so I think in that regard, we're in a strong position. Regarding the impact of the Red Sea, and what that does to the business, there's no impact on Asia-Pacific or in the United States. Obviously, this is an EMEA issue. What we're seeing at the moment is an impact of about 12 days of shipping, obviously, because it has to go around the Cape of Good Hope rather than coming through the Red Sea. There's obviously a cost implication to that. And then I think really it's more about what would be the impact next year if this were to continue.
Yes. I mean, I think building on that, to read across to what we saw in COVID supply chain constrained days was the ships and containers potentially be in the wrong place. So the length of time potentially increasing, but it's a watchful.
The next question goes to Ben Rada Martin of Goldman Sachs.
I just had 2, if that's okay. The first one was just on channel mix into the fourth quarter. I'm interested, with your revenue guidance, whether you think DTC can be a positive contributor within the final quarter? And secondly, just on your call out that December was a bit of a weaker month. It would be helpful, I guess, if you guys can talk about whether you've seen those trends improving into January or it was December somewhat of an abnormality?
I think on the second one, Ben, I think in terms of -- and we talked -- I talked earlier, I said that in order to make our full-year DTC numbers, we have new trend through the balance of the year. And that 9-week trend was up to 1 week from where we are now. And that took in everything from Black Friday all the way through Christmas and the beginning of January. So if you take the average of all of those things, we have seen that the subsequent week in January. So it's only 1 more week beyond those 9 weeks is in line with our expectations.
And on your first question, we're not going to get drawn into Q4 guidance by channel mix then.
The next question goes to Piral Dadhania of RBC Capital Markets.
If I could just follow-up on the Red Sea question. Could you just remind us what contracts you have in terms of duration and how long you may be hedged for just to try and understand where the cost implication might come through from a phasing perspective? And then secondly, just a question on spring/summer, which I think is being shipped as we speak. With the change in the fashion cycle, perhaps in the U.S. market with boots showing a bit of softness, how do you plan to leverage some of the other categories, which has been doing really quite well, I think, over the last couple of years such as sandals and other summer wear products? Are you making big bets on those categories? Or is there still a bit of a limitation because the marketplace still has a little bit too much inventory? I just wanted to try and understand how you're managing that off-season collection and selling.
So I'll do the first one, Piral, the Red Sea. We have a contract with Maersk. I think it goes on through the rest of this calendar year, but we can confirm that later. The way the contract works is you're right to hedge on normal shipping. But when things get extended, you always do pick up a surcharge. So again, it comes back to our earlier comment, we need to see how this thing progresses through the -- over the next few months.
In terms of your second question around spring/summer, the fourth quarter of this financial year, January, February, March is obviously the start of the spring/summer season. And as I said earlier, we know what the order book is for spring/summer. And to your point, obviously, shoes and sandals were successful for this last year. We grew both of those categories and our performance was impacted by boots. So we've got a strong order book through spring/summer and Boots is still the biggest category, it's all year round, but we've got higher levels of shoes and sandals. So I think that's also part of the reason why we feel confident that we've got the orders for Q4 is the fact that these are product categories, new seasonal products that our wholesale customers want from us.
[Operator Instructions] And our next question goes to Alison Lygo of Numis.
I'm just wondering if you could comment on your expectations for gross margin in the second half, given the weighting we're seeing towards DTC, you could arguably looking for sort of 500 bps or so progression? And so if we put any Red Sea impact side, just thinking about kind of offsets that and how maybe you've seen apparent intensity on seasonal products trend through the half?
In the second half, because of the nature of the second half that is much stronger DTC mix than the first half, one would expect gross margins in the second half to be stronger than the first half. And on a full-year basis, we therefore expect gross margins to be up and -- we are very happy with the consensus gross margin on a full-year basis because the second half figure was stronger than the first half.
Sorry, I appreciate that. I was kind of thinking H2 and H2. Yes.
[Operator Instructions] We have a question from Richard Taylor of Barclays.
Sorry, I'm not sure if this has already been asked, but I had a question on pricing. I think you did a very, very small price increase like GBP 1 or so on some of the major boots and shoes that you sell, but any thoughts on pricing for the calendar year?
Thanks, Richard. No, we haven't had a question yet on pricing. And if we look at the year ahead, we've now locked in prices with all of our factories through autumn/winter '24. What we've seen is a major slowdown in cost inflation of products. So obviously, last year, we talked about 6% cost inflation, depending on the country, the factory or the product, it will be somewhere in the region between 0% and 2%. So you're right, the price increases that we'll go through in this year will be very minimal, and anywhere between 0, i.e., no price increase and a pound in North America, we've got no plans to increase pricing.
When you say 0% to 3% inflation from factory, so you're still seeing some inflation, as not that deflation? Is that what you said 0% to 3%, is that right?
0% to 2%, Richard, is roughly what we're seeing, but it really depends on country, product, et cetera. So you can't apply that across the whole base.
It appears we have no further questions. I'll now hand back to Kenny for any closing comments.
Great. Thank you very much, everyone, for your attention. If anyone has any follow-up questions following this call, please reach out directly to Bethany. Thank you very much for your attendance.
Thank you.
Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
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