Description

You likely know Dr. Martens boots regardless of your age. Either from punk rock, the 1990s grunge days or if you are really young, from the recent popularity of 1990’s fashion. What you might not know is that DOCS LN looks like an attractive investment for a few simple reasons: it has rabid and loyal customers, great unit economics (60% gross margin), minimal fashion risk (80% of products are non seasonal), strong demand tailwinds (1990’s fashion is back), a reasonable valuation and an exciting plan to keep expanding the brand globally.

Dr. Martens has been around since the 1960 when the Griggs family (who owned DOCS LN until about a decade ago and are still shareholders and get a 2% royalty on sales) came up with their signature “Airware” boots. Originally worn by postmen and factory workers (they were standard uniform for the UK police in the 1970’s), they became an icon after being worn by The Who and in Punk culture. In the 1990’s they took off in the US along with the grunge movement, growing sales to £250mm. Unfortunately, the company was not well run by the family which had a wholesale strategy that didn’t control the brand leading to oversaturation and low quality growth in addition to high costs from keeping manufacturing in the UK. The high manufacturing costs made them pursue a growth at all costs strategy, which included a massive increase of SKUs including the ones below which of course killed the brand and revenue. When combined with channel stuffing and discounting, they almost went bankrupt in 2003.

In 2014, they were acquired by Permira for £300mm and had sales of £160mm. Permira changed DOCS LN from a manufacturing business that was wholesale led to a brand focused, multi channel retailer with a focus on DTC, product innovation and international presence. They changed CEOs in 2018 to the current Kenny Wilson, who used to run Cath Kidson, with the entire management team now new from when Permira got involved. Kenny was the architect of the current strategy which has been very successful:

·       Refocus on the core: Bags and t-shirts are out, focus on the core boot was in. Dramatically reduce SKUs, and push the 1460 boot (which has gone from 30% to 43% of sales)

·       Change the distribution: DTC has gone from 26% to 43%, they reduced wholesale accounts by 15%, with a doubling of sales per wholesale account along with much higher percentage of full price sales. Today, DOCS LN supplies slightly less product than wholesalers want.

·       Improve supply chain: Diversified and invested in better capabilities, which helped then reduce costs by 5% of sales.

·       Enhance digital capabilities: Went from 3 FTEs to 47 as they improved ecommerce capabilities.

They call the current strategy DOCS: DTC acceleration, Operational Excellence, Consumer Connection, Sustainable growth.

The results of the strategy have been impressive. From FY15 – FY21 (March), sales are up from £235mm to £774mm which is largely all driven by number of pairs sold with growth in all major regions (to be clear, DOCS LN was growing very well prior to the pandemic). Importantly, when they flip a market from being wholesale driven to being DTC driven, sales accelerate (Germany went from 20-30% growth to ~80% growth after they flipped the country). They are currently changing Italy, Spain, the Nordics, and the US to being DTC, while laying the groundwork to eventually do the same in Asia. From CY17 – CY20, sales growth was stronger than just about any peer you can find (LULU, DECK, Moncler, CROX, etc). Even prior to the pandemic, ecommerce sales has gone from 7% to 30% with overall DTC at 43% with the goal of getting to 60% (DTC is online and owned retail stores). That is critical, as a pair sold DTC generates  £124 of revenue compared to £50 at wholesale. Gross margin has expanded from 46% to 61%, while EBITDA margin has gone from 17% to 29%. In addition, FCF is very impressive, with only 3% of sales in CapEx compared to a 30% EBITDA margin, leading to 16% and 19% FCF margins in FY19 and FY20. Those metrics are better than LULU, DECK, CROX and NKE, being only slightly outpaced by Moncler. Amazingly, DOCS LN has generated that growth while only spending 5.7% of sales on marketing (although they want to increase that), compared to Adidas at 13%, CROX at 7% and LEVI at 7%.

So how do they generate growth without spending? Because so many celebs wear the product without being paid they don’t have to. And they already have incredible metrics around social engagement, with Instagram engagement at more than double LULU, Moncler, Vans and Uggs. They have almost as many followers as LULU and Moncler, with double the amount as Uggs. Keep in mind that LULU has a $60B mkt cap, Moncler is at $20B, CROX at $10B and DECK at $12B. They have the highest NPS score out of any footwear brand and very high brand awareness as well. Interestingly, 49% of sales are to women, and only 35% of sales are to people under 35 with over 60% of purchases being repeat buyers. More than 92% of sales are full price.

As a result of the above metrics, I suspect DOCS LN is still significantly punching below its weight. They only have 34 stores in the US for example, but are going to ~100. In the EU they have 68 stores, with 37 in the home UK market. They would have to go to 185 stores in the US to have the same number per capita. There are a total of 135 worldwide stores which will continue to increase which they have observed drives an increase on DTC as well. There is room for growth: 31 pairs in the UK per 1,000 people versus 19 in the Netherlands, 12 in the US, 7 in Germany and 5 in France and less than 1 pair in China. The company itself thinks that over the very long term there is room to grow the brand to £6B in sales, from the £773mm in FY21. That seems a little crazy but not impossible as Timberland and Birkenstock generate $1B of sales each. Puma and Vans both are at $3B. Additionally, their core 1460 boot is priced at £149, compared to Timberland at £180 and UGG’s at £160. Add into this some anecdotal evidence that Docs are “in” the current fashion cycle and you could have a recipe for some great years ahead. Website traffic would agree, with the latest data we have up over 60% YoY (which is on top of 50%+ growth already in 2020).

In terms of risks, they will be impacted somewhat by logistics. They are well diversified in manufacturing as they are in 6 different countries with Vietnam being the biggest at 43%. This could be a risk from costs / sourcing but less so given their pricing power and diversified base. They have already said that supply chain savings from this year will be offset by raw material costs. Of course changes in fashion trends is something to worry about, along with an economic slowdown and lookalike DTC competitors. 

So how about valuation? We believe DOC LN can grow at 20% per year for the next 3 years ending up with 1.4B in sales and a 30% EBITDA margin. DOCS LN currently trades at 13.5x forward EBITDA (20x P/E, using 3/23 for forward) compared to DECK at 16.2x (23x) and SHOO at 12.5x (17x, note that SHOO just reported really good earnings). If DOCS LN can trade at a similar multiple in 3 years and add in 750mm of FCF, that gets us to around a 800p price, or a 3 year double.

Catalyst

Growth from new DTC markets and fashion tailwinds overwhelm concerns around rising input costs causing DOCS LN to beat estimates.