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Production Issues Take a Toll at Dr. Martens

Dr. Martens saw double-digit sales growth during the final three months of 2021 despite wholesale weakness stemming from the summer’s Covid-related factory closures in Vietnam.

The British boot brand’s 11 percent increase in sales was not enough to soothe investors’ anxieties, however. Dr. Martens’ stock price sank 14 percent after it released its latest earnings report Thursday. Leadership, though, remained optimistic about the future when discussing the company’s results with investors.

“Despite all the challenges that we’ve had to deal with this year, we remain confident in achieving market expectations and doing exactly what we said we were going to do at the time of our IPO,” Dr. Martens CEO Kenny Wilson said.

In a Nutshell: Though Dr. Martens entered its current fiscal year—the 12-month period began April 1—with “relatively high” inventory levels, Wilson said, Covid restrictions in South Vietnam last year forced the company’s largest manufacturing area to essentially shut down for three months. These closures, coupled with extended shipping times, constrained inventory levels during the third quarter, the CEO added.

“Against this backdrop—and reminding ourselves of the fact that our third quarter is our key direct-to-consumer trading period—we took the decision to prioritize the inventory that we had towards direct-to-consumer and that has resulted in wholesale being down 14 percent,” Wilson said.

For now, it appears Dr. Martens’ wholesale business will stabilize in the fourth quarter. According to Wilson, “the vast majority of Q4 wholesale pairs” are in transit by sea to the brand’s distribution centers.

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“The pairs that we need now are on boats,” Wilson said. “The great news is that the demand is still there for the brand from the wholesale channel, so we’ve not received any significant cancellations for stock.”

One added component that could have affected the company’s wholesale partnerships was a planned price increase. Last month, Dr. Martens announced it would raise its U.S. prices $20 in Autumn/Winter 2022. The U.K. and Europe also will see prices increase, though only by 10 pounds ($13) and 10 euros ($11), respectively. Prices in the Asia-Pacific region will remain static. A month and a half later, Wilson said the brand feels “very good” about how wholesale partners have received the price hikes.

Though all Dr. Martens’ factories have reopened, production levels in Vietnam remain at 80 percent of the pre-lockdown norm, presumably because of difficulties related to regaining workers who have not returned since the summer. Factory owners, however, believe this will change once next week’s Tet holiday passes, with capacity building back into the 90s, Wilson said.

The big unknown moving forward is how exactly Omicron will play out in Asia, particularly in China, where officials continue to insist on a zero-Covid strategy. Though Dr. Martens has “no production issues as we sit here today,” Wilson said, the company is not counting on this continuing to be the case the rest of the year.

“We can make more pairs in Spring/Summer than the business actually needs, and clearly, with uncertainty, we will make as many pairs as we possibly can right now,” Wilson added.

Net Sales: Dr. Martens recorded 307 million pounds, $410 million, in revenue during its fiscal third quarter, an 11 percent increase compared to the prior-year period and a 15 percent bump in constant currency. Compared to two years earlier, sales were up 21 percent. Year-to-date, sales revenue was rose 14 percent—20 percent in constant currency—compared to a year earlier. On a two-year basis, year-to-date revenue grew 30 percent.

The boot brand’s direct-to-consumer (DTC) business saw revenues rise 33 percent year over year, and 50 percent against two years earlier. Retail improved 72 percent and 16 percent on one- and two-year bases, respectively. Looking at the first three quarters of Dr. Martens’ fiscal 2022, retail sales climbed 81 percent year over year and 9 percent against two years earlier. Its e-commerce business, meanwhile, continued to build on last year’s substantial gains, with the channel up 16 percent versus fiscal 2021 and 85 percent against fiscal 2020. Year-to-date, e-commerce was up 13 percent year over year. On a two-year basis, digital sales rose 97 percent.

As Dr. Martens prioritized DTC, wholesale sales suffered, falling 14 percent year over year and 10 percent against two years earlier. Year-to-date, the company’s wholesale segment is down 1 percent versus the prior year, but up 15 percent versus fiscal 2020.

By region, Europe, the Middle East and Africa (EMEA) saw best sales comps, with revenue up 40 percent, or 45 percent in constant currency. Dr. Martens attributed the performance to “solid” e-commerce growth and the recovery of retail. In the Americas, the company’s biggest wholesale market, sales rose 4 percent, or 6 percent in constant currency. Asia-Pacific revenues fell 28 percent, or 24 percent in constant currency, as Australia and China saw the impact of renewed Covid restrictions and concerns, Wilson said.

CEO’s Take: Though all Dr. Martens’ factories are now open and making as many pairs as possible, Wilson conceded the brand is unsure when exactly it’ll have enough inventory to meet demand.

“We don’t know what we don’t know right now,” Wilson said. “But, if all things go well and there are no major Omicron incidents, yes, in the second half of the year, we’ll be more close to the situation we want to be in.”