Earnings: why Dr Martens’ share price just crashed

At Dr. Martin (LSE: DOCS) share price fell 20% when the market opened this morning, after the company warned that profits would be lower than expected this year due to problems with its US operations.

Shares in the fashionable bootmaker are now down more than 60% since their January 2021 flotation. Should investors buy the deal, or will the business face more trouble in the coming months? I have taken a look.

The US mess: what went wrong?

Dr Martens’ new distribution center in Los Angeles is suffering “critical operational issues” caused by faster than expected stock delivery. This has created a major bottleneck.

As a result, the business is struggling to fulfill wholesale orders and other shipments planned for the first quarter of 2023. Underlying profit for the year ending March 31 is now expected to be £15m-£25m lower than previously forecast.

To make matters worse, sales through the company’s own stores and website were also lower than expected in the US, although performance has been steady elsewhere.

The big picture: should investors be worried?

In today’s update, the company said total sales rose 5% to £755 million in the nine months to December 31, excluding the impact of exchange rates.

The majority of this growth came through the company’s own stores and websites, rather than through wholesalers. That’s good news, in my view – direct sales are generally more profitable and help build stronger customer relationships.

Management now expects to report sales growth of 4%-6% for the year to March 31, excluding currency effects. After taking into account the impact of the price increase, I think that the number of pairs of boots sold will probably be the same – or slightly lower – than last year.

Vision 2023/24

Last year’s supply chain problems left the company struggling to get stock. Now we are looking at the opposite problem. Shipping times have decreased, and sales have stabilized. As a result, many companies are left with too many.

My guess is that Dr Martens will be re-stocking properly in the coming weeks.

In some ways, I am more concerned about the company’s downbeat guidance for the 2023/24 financial year. Due to planned cuts in wholesale volumes, revenue growth will now be in the “high single digits”, compared to around 12% previously.

What I am doing now

I always stay away from recently-floating companies, because they are too often to run into problems.

Last year, I thought Dr. Martens might be an exception. Unfortunately, no. Today’s warning is the second time in three months that the company has cut its profit guidance.

Despite these issues, I still think this is a great brand with a solid future. I also think that there is a possibility that China’s reopening could increase sales next year.

My numbers show that after today’s slump, Dr. Martens is showing can so it trades at around 10 times forecast earnings. That can be attractive, in my view.

On balance, I’m still at risk of more problems. I’m not going to rush in and buy it. But I will be monitoring this situation over the coming months.