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LA Warehouse Backlogs Getting Expensive for Dr. Martens

Dr. Martens expects a 6 percent rise in fourth-quarter revenue, though the iconic grunge boot maker hit a snag at a major distribution center that slashed wholesale revenue and cut into its profit outlook.

Bottlenecks began in December when too much inventory flooded into the company’s Los Angeles distribution center earlier than expected.

In a scheduled conference call, Dr. Marten CEO Kenny Wilson told investors that “DC throughput is now back to normal levels in Los Angeles, adding the company has “fixed the operational problem.” Inventory “is now correctly stored,” he continued. “It is the right product and it is not a seasonal markdown problem.”

Wilson first discussed the three-pronged problem in January. Along with overseas shipments coming in faster than anticipated, the company known for its iconic 1460 black boot also was overwhelmed by product flowing in from both its then-closing distribution center in Portland, Ore. and key customers allowed to redirect orders to manage their own capacity.

Those problems meant that “it took longer to ramp up pick, pack and dispatch capacity [at the distribution center], which resulted in lower than expected revenue across the quarter,” outgoing chief financial officer John Mortimore said in the call on Friday.

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As a result of the L.A. logjam and China tweak, wholesale revenue fell 4 percent and 11 percent on a constant-currency basis. Overall revenue growth was driven by strong direct-to-consumer (DTC) growth in EMEA and APAC, offset in part by continued soft DTC in the U.S.

Dr. Martens opened the third-party-operated distribution center in Los Angeles last year to support e-commerce fulfillment and the 14 new U.S. retail stores it added last year. The L.A. center replaced the Portland facility that closed on Oct. 31.

The footwear manufacturer did not confirm which third-party logistics (3PL) provider owns the facility, but a rep for logistics and warehousing services provider NRI confirmed to Sourcing Journal that it is a partner of Dr. Martens. NRI, which operates multiple warehouses in the Los Angeles area, did not confirm whether it operates the specific facility where the boots seller’s delays occurred.

In the investor call, Wilson described how the company got L.A. facility’s shipment volumes back to normal.

The Supreme collaborator sent its most experienced supply chain team experts to Los Angeles to take control of operations and implement the recovery plan. It also opened three temporary warehouses near the L.A. facility to release excess shipping containers and store inventory away from the distribution center, and added a third work shift to unblock the bottleneck and transfer overstock to the temporary warehouses.

Dr. Martens also expanded and reconfigured its New Jersey distribution center so it can store, pick and pack for both DTC and wholesale channels in the U.S. in line with plans. The company ran a successful test shipment out of the N.J. distribution center in March, according to Wilson.

“We are on schedule to have this DC fully operational for the autumn/winter ’23 season, which starts in July,” Wilson said.

In fiscal year 2023, total incremental costs associated with the Los Angeles distribution center were 15 million pounds ($18.6 million), more than the initial expectations of 8 million ($9.9 million) to 11 million pounds ($13.6 million), due mainly to higher than anticipated container costs.

Mortimore said it took “longer than expected to clear the container backlog.”

The steep costs impacted EBITDA for the year, which Dr. Martens now expects to be approximately 245 million pounds ($303.3 million), down from its earlier forecast of 250 million pounds ($309.5 million) to 260 million pounds ($321.9 million).

The company expects fiscal year 2024 (which began April 2023) incremental costs associated with the Los Angeles distribution will be approximately 15 million pounds ($18.6 million), due mainly to rent annualization because it plans to keep the temporary warehouses for the full year.

For the final quarter, DTC revenue grew 20 percent, or 13 percent on a constant-currency basis. In the channel, brick-and-mortar retail sales were up 36 percent (28 percent in constant currency) and e-commerce grew 8 percent (2 percent in constant currency).

And for the full year, revenue grew 10 percent to approximately 1 billion pounds ($1.2 billion), and 4 percent on a constant-currency basis. DTC revenue was up 16 percent and 11 percent on a constant-currency basis, while wholesale was up 4 percent, but down 3 percent on a constant-currency basis. Within DTC, retail sales were up 30 percent (25 percent in constant currency) and e-commerce was up 6 percent (1 percent in constant currency).

As of March 31, Dr. Martens said inventory totaled 258 million pounds ($319.3 million), with cash of 158 million pounds ($195.5 million).

“This year, we have higher levels of inventory than optimal, although last year, the comparable was too low. Year on year, we’ve got too much this year, and had too little last year,” said Mortimore. “What we’re looking at is obviously inefficient working capital rather than anything else. In broad terms, we plan to have a much more optimal level of inventory by the exit period of FY 2024—so March 2024. We’ll achieve that by essentially buying less than we plan to sell, because of the lead times involved in the business. That optimization will take place predominantly through the second half.”

The company said it will share more about its full-year results on June 1.

Ahead of the 2024 fiscal year, Dr. Martens expects mid-to-high single-digit revenue growth on a constant-currency basis.

Mortimore said in the call that he will retire after seven years with the business, and will stay in the role until the company finds his successor.