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Earnings: why Dr Martens’ share price just crashed

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The Dr Martens (LSE: DOCS) share price fell by 20% when markets opened this morning, after the company warned that profits will be lower than expected this year due to problems with its US operations.

Shares in the fashionable bootmaker have now fallen by over 60% since its January 2021 flotation. Should investors snap up a bargain, or is this business likely to face further problems in the months ahead? I’ve been taking a look.

US chaos: what’s gone wrong?

Dr Martens’ new distribution centre in Los Angeles has been suffering “significant operational issues” caused by faster-than-expected deliveries of stock. This has created a major bottleneck.

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

To make the situation worse, sales through the company’s own shops and website have also been lower than expected in the US, although performance has been stable elsewhere.

The big picture: should investors be worried?

In today’s update, the firm says that total sales rose by 5% to £755m during the nine months to 31 December, 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 31 March, excluding currency effects. After taking into account the impact of price rises, I estimate that the number of pairs of boots sold will probably be similar — or slightly lower — than last year.

2023/24 outlook

Last year’s supply chain problems left companies struggling to get stock. We’re now seeing the opposite problems. Shipping times have fallen, and sales have stabilised. As a result, many companies have been left with too much stock.

My guess is that Dr Martens will get its warehouses working correctly again over the coming weeks.

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

What I’m doing now

I always stay away from recently-floated companies, because they very often seem to run into problems.

Last year, I thought that Dr Martens might be an exception. Unfortunately, it isn’t. Today’s warning is the second time in three months that the firm has cut its profit guidance.

Despite these problems, I still think this is a good brand with a solid future. I also think there’s a chance that China’s reopening could help boost sales next year.

My sums suggest that after today’s slump, Dr Martens shares might be trading on around 10 times forecast earnings. That could be attractive, in my view.

On balance, I think there’s still a risk of further problems. I’m not going to rush in and buy just yet. But I am going to keep a close eye on this situation over the coming months.

The post Earnings: why Dr Martens’ share price just crashed appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.