Dr Martens‘ (LSE:DOCS) share price fell over 3% early today (27 January) after the company released a trading update for the 13 weeks ended 31 December.
This is despite the chief executive of the FTSE 250 legend saying that the group’s performance during the period was “as expected”. Encouragingly, he reported that the outlook for the year ending 31 March (FY25) was “unchanged”.
Good progress was reported in turning around the business in the United States. Revenue from sales made directly to consumers (DTC) was up 4% in constant currency terms, compared to the same period a year ago.
The best-performing region was Asia Pacific, particularly Japan. Overall, direct to consumer revenue in the territory was up 17%, versus 12 months earlier.
However, in Europe, the Middle East and Africa (EMEA), it fell 5%. The company said there was significant discounting in several markets which it refused to copy.
Devil in the detail
But the reporting of revenue in constant currency terms, and focusing on DTC sales, can be unintentionally misleading. Taking into account foreign exchange movements and considering all types of sales – including those through third parties – overall revenue was 3% lower compared to the same period in 2023.
Using the same measure, sales in the Americas and EMEA were both down 4%. But Asia Pacific revenue was still higher, albeit by a more modest 6%.
Perhaps this explains why investors didn’t appear too impressed by the group’s Q3 performance. While useful for making direct comparisons between periods, removing the effects of currency movements doesn’t reflect reality. International businesses have to deal with fluctuating currencies and manage the associated risks. When the company’s FY25 accounts are published later this year, Dr Martens statutory results will have to reflect this.
However, taking into account foreign exchange movements, wholesale revenues across the group were 3% higher. Other ‘positives’ in the statement included confirmation that the business continues to “actively manage our costs” (shouldn’t all companies do that?) and that it was “on track” to reduce stock levels.
The elephant in the room
But the statement failed to address a potentially devastating issue for the company. Should President Trump go ahead and carry through on his threat (promise?) to apply significant import taxes on goods brought into the United States from Asia, it would have huge adverse consequences for Dr Martens.
That’s because the group has manufacturing operations in China, Vietnam, Laos, and Thailand. This makes it particularly vulnerable to Trump’s tariffs. During FY24, the Americas contributed 37% to revenue.
Although I think Dr Martens has lots going for it — it’s an iconic brand with a global following – I believe this issue is too big to ignore. And I suspect this uncertainty could weigh on the company’s share price. Although given the speed at which Trump’s implementing executive orders, I don’t think it’ll be too long before the company (and its long-suffering shareholders) will know where it stands.
At this point, I’ll revisit the investment case.
