Doc Martens ::UPDATE:: ADD

One of our core positions, Doc Martens (LSE:DOCS), dropped 34% today before slightly recovering a few percentage points to close down 29% on the day. We have added to our position. The market responded to two significant announcements:

1. DOCS issued a trading update forecasting a challenging year ahead for wholesale revenue in FY 2025, continuing the difficulties faced in FY 2024. The market had anticipated better news on the wholesale front. Additionally, the company has experienced single-digit inflation in its cost base, which will not be passed on to consumers in the form of higher prices.

2. CEO Kenny Wilson will be stepping down, to be succeeded by Ije Nwokorie, the current Chief Brand Officer. While management changes typically raise concerns, we believe any concerns are mitigated by the 40% ownership of private equity firm Primera, which assists in ensuring continuity.

Kenny Wilson stated,

We have built an operating cost base in anticipation of a larger business, however, with revenues weaker, we are currently seeing significant deleverage through to earnings. Against this backdrop, we will be laser-focused on driving cost efficiencies where possible. We also have a number of ongoing investment projects which will deliver results in the coming years. We continue to believe in our DTC-first strategy and the considerable headroom for growth. Our brand remains strong, and we have a compelling product pipeline. These all give us confidence as we look beyond this transition year into future years.

Management estimates that PBT (Profit Before Tax) will be a third of what it was in FY 2024. Docs is undergoing operational volatility that is temporary in nature. Yes, their wholesale channel is struggling, and yes, they are still finding their footing as a DTC-led brand. Good businesses encounter challenges—these are normal occurrences and do not warrant this level of sell-off. We find it shocking that this business should be trading this far below 10x normalized earnings. We believe the brand is strong enough to recover from these challenges and have added to our position—DOCS is now one of our largest positions.

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