Dr. Martens plc (DOCS) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining our full year results call, at both here and on the webcast. I'm joined today by Jon, our CFO, and also from Dr. Martens, we have Paul Mason, our Chairman; Emily Reichwald, our Company Secretary. And I'm pleased to say back from a maternity leave, Bethany Barnes, who is our Head of IR. So our agenda for today, I'm going to give you an overview of the year, and then I'm going to spend some time talking to you about our USA business. This has been the big disappointment of our FY '23 performance, so I think it's really important to address this upfront as this is our #1 focus area going forward. Jon is then going to take us through a financial review. And then I'll come back and talk about the successes from this year and crucially, our thinking on the future, the investments that we are making to underpin our growth and the white space opportunity we have, which gives us confidence in our ability to capitalize on that growth opportunity. So firstly, an overview of the year and then as I've said, a review of our USA performance. So what are the key messages from the last year? Well, firstly, while our DOCS strategy is implemented well, it is delivering results, and we can see that in both EMEA and in Japan. We have had execution issues in the United States. We are clear on what these are, and we have started to fix them. We can and we will do better. The backdrop has been challenging with the consumer under pressure, high inflation, COVID still impacting Asia Pacific in the last 12 months and also war in Ukraine. However, all of our indicators tell us that the Dr. Martens' brand is stronger than ever. Global [ meant ] net intent i.e. I see myself buying Dr. Martens in the future is up 2 points to 17%. So what are the reflections on the year? But later, I'm going to talk about what went well. We achieved GBP 1 billion in revenue for the first time in the company's history. Our brand is strong. We delivered good performance in EMEA and Japan. Our product strategy is working, and we made progress in sustainability. However, we have areas to address in the United States. We've told you before of the operational challenges we faced at our LA DC. And while these are now operationally fixed, there will be a cost impact in FY '24. The weather impacted our performance in the third quarter, and at times, the consumer backdrop in the U.S.A. was challenging. However, as the year progressed, we were not happy with either our marketing or e-commerce execution in the U.S.A. The USA performance also impacted our overall group results. While we increased prices as planned, the U.S.A. underperformed versus our expectations, and hence, price did not offset inflation across the group. Boots volumes were lower in the year. This was a combination of planned reductions in Latin America and China, plus the impact of the LA DC issues and poor marketing focus in the U.S.A. So if we just go into the U.S.A. in a little bit more detail. Firstly, our brand is strong, and we see this in both our October and January consumer studies. In the last 2 years, we've sold over 1 million more pairs in the U.S.A. or growth of 20% in pairs on a 2-year basis. You see this metered here in our consumer research with last 24 months purchased up 5 percentage points to 13%. USA Net Intent, the intention to buy Dr. Martens going forward is also up 4 points to 17%. Future consideration of our brand is up 1 point to 10%. We sold more pairs in the U.S. this year, driven by shoes and sandals. Taking all these things combined, our brand is strong, but our execution has been weak. So what have been the execution challenges in the United States. Firstly, the move to the LA DC, which I'm going to discuss in just a moment. As the year progressed and we did a deep dive view into our U.S.A. business, we identified other areas of weak execution. Our marketing was too focused on shoes and sandals and not enough on boots. Our e-commerce execution was weak and our inventory levels are too high. Most importantly, though, what have we done? Our USA President identified that we needed to strengthen our USA leadership team, and we've done that. We've hired a new Vice President of Digital, a new Vice President of Marketing, a new Vice President of HR, and we are out to hire for a Vice President of Operations. Our new VP of Marketing has refocused our marketing plans towards boots, and we expect to see performance improvement from Q3. Our shoes and sandals have performed very strongly and we expect that to continue going forward. Our new VP of Digital joined us in late February, he started to make a real difference, and we are seeing an improving trend of performance in USA Digital, although I would point out that it is still negative. We expect to see an improvement in digital performance in the second half. We made a decision early last year to consciously increase USA inventory levels. The consumer backdrop weakened, and we did not execute at the levels we expect of ourselves, so we have too much inventory in the United States. However, this inventory is in core, black, best-selling boots and shoes. Therefore, we do not need to take any significant markdown actions. Avoiding markdown means that we will run with higher inventory throughout this year, but this is absolutely the right thing to do for long-term brand health. We talked about the LA DC situation in detail in our April call. The LA DC continues to operate well with throughput performing now at expected levels. We accelerated the expansion of our New Jersey DC. We have successfully run trial wholesale orders from that facility, and we are on schedule to have this DC fully operational for both direct-to-consumer and wholesale from the Autumn/Winter '23 season. We are now better set up to serve our USA business into the future. Also, we've improved the processes and controls between our sales, operations and logistics functions. In addition, we've strengthened our organization by hiring high-caliber directors of logistics for both the LA and New Jersey facilities. Through the fourth quarter and into the beginning of financial year '24, we have continued to have some of our best people on the ground in LA to ensure a well-managed handover to our new USA logistics team. So in conclusion on the United States, we're disappointed in our performance. We can and we will do better. However, we're confident in our brand in the USA and this is demonstrated by our growth in pairs and our brand health metrics. We have made leadership changes to improve our performance. We have fixed the DC operational issues, and we've invested in infrastructure and people to support future growth. With that, I'm now going to hand over to Jon, who is going to take us through the financial review.

Thank you, Kenny, and good morning, everyone. I'll walk you through the financial performance for the year to the 31st of March 2023. So revenue grew by 10% to GBP 1 billion, representing 4% constant currency growth. This was driven by DTC, which grew by 16% or 11% constant currency, increasing the mix by 3 percentage points to 52%. So the majority of our revenue is now through our own controlled channels, which are higher margin. Volumes declined by 2% to 13.8 million pairs. This was all due to our decision to exit South America distributors in FY '22 and also our decision to not renew the distributor contract in China from June '23. Excluding these, volumes would have been up by 2%. Gross margin declined by 1.9 percentage points. And in OpEx, we continue to make targeted investments. Due to a combination of slower revenue growth, higher OpEx investments and the LA DC costs, EBITDA was 7% lower than last year at GBP 245 million. Profit before tax was down 26% and was also impacted by higher depreciation and amortization and impairment charge and at the back end of the year and FX translation charge on a euro denominated bank debt. I'll return to each of these topics over the next few slides. Boot shoes and sandals sold via own retail or e-commerce generate approximately 2x more revenue per pair and 4x the gross profit of wholesale. DTC growth was driven by strong retail with a combination of traffic recovery and returns from investments made in new stores. Retail traffic remains meaningfully below pre-COVID levels. In the year, we opened 52 new stores, including 14 stores transferred from franchisees in Japan. We also closed 6 stores. In the prior year, we opened a net 23 stores. So the annualization benefit from FY '23 openings into FY '24 were expected to be higher than the benefit of the FY '22 openings into FY '23. We've got double the stores. E-commerce was marginally up on a constant currency basis and was led by a good performance in EMEA and in the -- and Japan part offset by poor trading in America. Wholesale declined by 3 percentage points on a constant currency basis, mainly due to shipment -- lower shipments in America and our decision to cease supply to the distributor in China. The quality of a wholesaler account base improved in the year, with revenue per account up 15% as we continue the strategy of closing accounts to focus on higher margin, higher brand-enhancing customers. Revenue grew 10%, 4% constant currency. Price grew by 5%. The price growth was 1 percentage point below our expectations due to a lower uplift from America. Here, prices were increased as planned, but with slower trading, the aggregate mix of price increases globally was lower. Retail space grew 3% of growth and is represented by new stores opened in the year and the annualization of stores opened in the prior year. Channel mix, represented by like-for-like store [ estate ] growth at e-commerce grew 1%. Finally, full price mix. The second half of FY '23 was pretty much the first normal post-COVID trading period we've experienced. We know that to sell Black boots, we also need seasonal variations and color. The second half saw a normalization of our seasonal product offer, which is typically marked down to clear at the end of a season. The full price mix, therefore, normalized in the year and is broadly in line with pre-pandemic FY '22 mix of around mid-80% full price. As I mentioned, gross margin was 1.9 percentage points lower and was mainly due to the negative impact from America performance and normalization of full price mix resulting from seasonal ranging. DTC mix expansion drove 1 percentage point of margin improvement and was all EMEA and Japan. Price did not fully offset inflation and the LA DC cost of containers impacted margin by 1.1 percentage points combined. FX represented by stronger U.S. dollars compared to the pound or euro or yen negatively impacted gross margin by 0.8 percentage points. As I explained at our half year, we have a natural hedge with the mix of merit profits funding our U.S. dollar requirement for COGS purchases such that at EBITDA, the FX impact is broadly neutral. A custodian mindset means doing the right things for long-term growth. We will continue to invest to support scale and underpin our growth potential. During the year, approximately 2.5 percentage points of EBITDA margin were future-facing investments. The investment of 0.4 percentage points in new retail space will generate positive returns in future years and particularly in FY '24. The investment of 0.4 percentage points in marketing will drive both brand and product awareness. The investment in DCs will underpin increasing scale with other investments being mainly people and process in group products, brand marketing and IT. The LA DC issued cost GBP 14.5 million, with the LA DC now operationally fixed. We will maintain the 3 satellite warehouses in Los Angeles through FY '24 with a cost of around GBP 15 million. This is expected to fall away in FY '25 as we rightsize inventory through the second half of FY '24. Japan is the highest margin market we have globally. Following the investment and transferring 14 stores, which was underpinned by implementation of Microsoft Dynamics during the year, we expect Japan to drive APAC growth through FY '24 with Asia Pacific growing very strongly. America is our biggest market. As Kenny said, we are disappointed with the performance here, and fixing performance is our #1 priority. The U.K. is our second largest market. And during the year, revenue grew by 12%. Given this is our home market where the brand has been established for the longest time, the growth shows the potential white space opportunity we have in all markets from a combination of both brand awareness and product awareness with the latter mainly driving U.K. growth. Of note, the previously mentioned reduction in etailer volumes in EMEA will mainly impact the U.K. and Germany. In FY '24, I would expect DTC to grow in these countries, but wholesale to be negative such that the pairs per capita will be lower. The first quarter in America was strong. From mid-Q2, however, we saw an increasingly challenging consumer environment, which was compounded by poor execution of strategy. In the year, revenue declined by 1% constant currency with DTC growth of 2%. DTC growth is all new store related, like-for-like retail and e-commerce were negative. Wholesale declined by 4% at constant currency, mainly due to LA DC bottleneck issues. EBITDA declined by 17% to GBP 100 million due to LA DC costs, incremental marketing and the in-year investment of doubling new store openings compared to the prior year. EMEA grew revenue double digit and was driven by strong DTC growth, which was up 20%, resulting in DTC mix expansion of 4 percentage points. We executed the DOCS strategy very well in this region. We opened 13 new stores in the year, which were predominantly in Continental Europe. We also closed 5 stores, which included 3 relocations in Dublin, Glasgow and London. EBITDA grew 2% and was impacted by the annualization of investments in the setup of conversion market infrastructure in Italy and Spain, investment in an order management system and FX due to the strength of the U.S. dollar compared to the pound and the euro for COGS purchases. During the year, we saw very good DTC led growth in Germany, Italy and Spain. Germany was converted 4 years ago in FY '19. We grew DTC revenue here by 26%, expanding mix by 8 percentage points to 42%. Italy was converted last year. Here, DTC revenue grew by 80% to 33% mix with Spain, which was also converted last year, growing DTC from particularly small base to a mix of 50%. The very strong DTC performance in these countries compared to the average demonstrates the profitability of this strategy. Germany performance also highlights the multiyear growth opportunity of conversion with significant white space headroom still available. FY '23 was a year of investment in Asia Pacific with performance also impacts across the year by COVID restrictions which have only been very recently lifted. We invested in Microsoft Dynamics in Japan such that 95% of all global revenues are now on this platform. We invested in 25 new stores across the region, including 14 franchise stores transferred in the fourth quarter in Japan. We also took the decision to fully implement the DOCS strategy in China and not renew the distributor contract. Asia Pacific is now set up for high-margin DTC led growth through FY '24. Profit before tax was GBP 159 million, which was down 26% compared to the prior year. Depreciation was GBP 17 million higher with GBP 8 million of the increased higher CapEx-related depreciation and the balance amortization IFRS 16 capitalized leases. Of the increased depreciation, about half is new store related with the balanced infrastructure spend in DCs and IT projects. The retail depreciation will [ then ] generate returns in FY '24. The logistics and IT spend will underpin scale ambitions. We have a very profitable retail store estate with [ formal ] return on sales including rent of 37% in FY '23. As this usual practice as part of the year-end close procedure, we have impaired 3 stores in the U.S. where traffic recovery has permanently shifted away from the store and taken a charge of GBP 4 million. The euro strengthened compared to the pound at the back end of the year. Our bank debt is held in euros with functional reporting currency in pounds. The translation-related noncash charge is GBP 11 million and compares to a translation-related noncash credit in the prior year of GBP 3 million. Finance expense increased in the year was all higher market-led interest rates. And lastly, the majority of the group's earnings are taxed in the U.K. and the net -- the tax rate will, therefore, be close to the U.K. underlying rate of corporation tax. In the year, operating cash conversion of EBITDA was low at 20% compared to 79% in the prior year. This was predominantly due to purchases of inventory and our decision to increase availability in America and Japan. This was successful in Japan and follow the success of this strategy in EMEA. Weak trading and mistakes in America have resulted in inventory being too high in that market. We will rightsize inventory through the second half of FY '24 by purchasing less than we plan to sell. This will result in strong cash generation in the second half of FY '24 with annual cash conversion expected to be more than 100%. Around 80% of inventory is black continuity product and always in the line. The balance is seasonal product. All our products have very rich DTC margins such that any markdown below cost is extremely rare. At March '23 stock turn was 1.5x with historic weeks cover of around 35 weeks. This is inefficient. At March '22, stock turn was 2.7x with historic weeks cover around 19 weeks. This was too tight and driven by COVID-related factory supply constraints. We believe a reasonable target based on current systems and processes is for a stock turn of between 1.8x to 1.9x, which represents around 30 weeks historic cover. At March '23, average cash leverage was 1.1x. If stock efficiency had been at target stock turn, cash would have been around GBP 50 million higher. This would have improved average cash leverage metric to 0.9x. Our first use of cash is investment in the business. Second is dividends. The Board is confident in the group's long-term prospects and cash generation potential, such that we will return to 35% payout ratio from 45%. We are therefore recommending a final dividend level with the prior year. Third, excess cash will be returned to shareholders. We have satisfactory cash to invest in the business and confidence in future growth to hold dividends. Our target average cash leverage ratio is met on a pro forma basis given we will rightsize inventory through the second half of FY '24. We have therefore announced an intention to commence our first share buyback program. We said our H1 announcement that Autumn/Winter '23 supply chain inflation was set at 6%, and we'll be raising prices for Autumn/Winter '23 season by 6% in aggregate. We are finalizing Spring/Summer '24 factory costs with average increase expected of around 2%. This is a reflection of lower freight costs and only slight increases in the cost of leather and oil-based granulars. The benefit of this in FY '24 will only be marginal as spring/summer season is small. However, this is a reasonable indicator, all things being equal to where the larger autumn winter '24 season factory costs may go. Our economic model is for price to fund inflation. Lower forward inflation indicators would suggest future price increases will be low. For DTC, we have positive Q4 exit momentum into FY '24, particularly in EMEA and in Japan. As planned, the wholesale order book is below last year, due to a combination of etailer reductions in EMEA, managed lower orders with some customers in the U.S.A. and the exit from the China distributor. This channel mix shape of good DTC growth and lower wholesale is reflected in trading to date. For FY '24, we maintained revenue guidance at mid- to high single-digit growth. Performance in the year just finished has led us to reevaluate the pace and timing of our investment plans. As a result, we expect EBITDA margin to decline by 1% to 2% in the year. For the first half of FY '24, we expect revenue to be broadly level with FY '23. Cost annualization from FY '23 and further investment in the first half will mean we expect EBITDA margins in the first half to be between 5% to 6% lower than the prior year. For FY '25, we guide to high single-digit revenue growth. This is followed by medium-term double-digit revenue growth. We maintain a DTC mix milestone of 60% with DTC mix expansion driving EBITDA margin improvements. In summary, before I hand back to Kenny, the business is highly cash generative and the balance sheet is strong. We maintained the final dividend and have announced our first share buyback program. Revenue growth is expected to improve to double-digit in the medium term. Margins will steadily improve, driven by DTC mix expansion. And finally, I still believe this brand will become a GBP 2 billion revenue brand business. Thank you.

Great. Thank you very much, Jon. So now we'll move on to a business review of the year. So I've already addressed the U.S.A. So what I'm going to focus on now is where we've executed well across FY '23, and then I'm going to cover our thinking as we look to the future. This is our DOCS strategy framework. The approach is consistent globally, but each region develops its own tactics below the D, the O, the C and the S and that's due to different market maturity so that they can drive implementation. If I start with the C, which is consumer connection. Globally, our brand remains strong, and we remain #1 in unprompted awareness for boots. I've already shared that the brand metrics for the U.S.A., and we are confident that Dr. Martens' brand is in good health there. As we roll out the DOCS strategy in Europe, we continue to see growing brand awareness with significant growth in Germany, up 4 points to 66% awareness. In the U.K., where sales grew double digit this year, we see net intent to buy up 1 point to 19%. Our home market is in good shape. In Japan, where we've spent the last 12 months heavily focused on brand equity, net intent is up 6 points to 13%. Moving on to product. Our product strategy is rooted in our iconic timeless products with the 1460 as our absolute bull's eye product. Our strategy is to grow our icon products with a focus on boots [ for ] simultaneously growing beyond our icons. We expect shoes and sandals to grow fastest, but we want to grow in all categories. If we look over the last 5 years on the bar chart, we see the strategy in action. We've grown by 22%. We have grown all product categories, and we are building the business beyond boots. We have the opportunity to sell people their first pair of our icons around the world while getting people to buy into their first pair of Dr. Marten sandals. In 4 years, we've gone from #26 in sandals to #14. And and in shoes from #10 to #9, we still have a real opportunity to grow further. Moving to product innovation. As we look forward in terms of our product pipeline, I'm more excited than any time in my 5 years at Dr. Martens. We have significant innovation coming through for financial year '25, and we have very commercial new product news in quilon material delivering for quarter forward FY 2024. In order to continue to drive [ branding ] is absolutely vital that we continue to focus on driving new product news which in turn will support our original icons. Moving on to where we've implemented the DOCS strategy really well. EMEA has had a good year and has implemented our proven doc strategy well. I'm not going to walk through everything that is on this slide, but I do want to call out some of the highlights. We opened 13 new stores across the EMEA region. We developed omnichannel capability and launched a 6-store trial in March. This will be rolled out across the United Kingdom this year. We built out our distribution centers in the Netherlands and the U.K. to support our future growth. We grew boots and shoes and sandals. Our product strategy well implemented. We started the process of reducing etailer volumes, and this will continue in FY '24. And as you heard from Jon, we continue to grow all of our conversion markets. Moving on to Japan. Japan is our leading DTC market globally and we will be approximately 80% direct-to-consumer share in FY '24. In the last year in Japan, we successfully transferred 14 franchise stores to company ownership, whilst opening 4 new stores. We launched our first company-owned Amp store globally and focused on building a community in Tokyo. We implemented Microsoft Dynamics 365 to better support our growing Japanese business. And we continue to build the quality of our wholesale account base. We closed doors with existing accounts to only present the brand in their best doors and we closed e-tailer accounts. We are well set up for a very strong FY '24 in the Japanese market. Moving to sustainability. In FY '23, we made good progress on our sustainability agenda: planet, product and people. Today, I'm going to talk mainly to product but also a little bit about people. In March, we announced an investment in and our partnership with Gen Phoenix, a leading producer of recycled leather. I'm really excited about this product as not only as it recycled but it's highly durable and passes our very exacting quality standards. Before the end of FY '24, we will launch a product made from this material in the market. We also launched a successful e-commerce trial with [ Depot ] this year. We always knew that there was a strong market for secondhand DOCS. And during FY '24, we will launch e-commerce in the United States. During this year, our teams nominated charities to receive grants from the Dr. Martens Foundation totaling 2.4 million. But even more importantly, our people participated in employee volunteering to support the causes that we truly believe in. So moving from this year to the medium term. We have always talked about our custodian mindset being the guiding principle on how we run our brand. We always think about the long term and we never take shortcuts. This has been especially important to us in FY '23. When the market was highly promotional in Q3, we chose not to participate. We continue to close accounts this year and to upgrade our distribution. We started the process of reducing e-tailer volume to drive DTC. I could go on. However, when I reflect on the last year, both the progress that we've made in breaking through GBP 1 billion in revenue and the challenges we faced in the United States, we are clear that we need to make incremental investment in our business to enable us to grow from a GBP 1 billion brand to our new mission of a GBP 2 billion brand and to enable that increased resilience in our business. So let me share some examples with you of where we're going to make investment. In order to unlock future growth, we are going to make significant investments into our supply chain. This is primarily in the expansion of our distribution center network, putting in new demand and supply forecasting systems and in strengthening our supply chain team globally. In e-commerce, we will invest in an order management system to enable omnichannel capability in our USA business. We will also invest in a customer data platform to give us a single view of the consumer thus improving personalization and our marketing capability. In FY '24, we will also invest in a product life cycle system to improve both our visibility and our speed to market. Also, we are going to invest in both our product and marketing teams to continue to build our core brand capability. Turning to some of the high-level numbers. In FY '24, 70% of the investment will be in OpEx which short term, impacts our EBITDA margin, as John has described. For FY '25, the incremental investment means that you will not see the full benefit of the unwind of the GBP 50 million LA DC costs. As previously communicated, we will continue to invest in both marketing and our Dr. Martens store rollout. The investments that I've outlined make us expect double-digit growth beyond FY '25 and will help us building towards becoming a stronger business. Moving to the opportunity that these investments will help us unlock. I mean this is what really excites us as a Dr. Martens team. We still have significant growth opportunity ahead of us. The U.K., as you see here, is our most developed market but we are still growing per capita consumption within the U.K. We have opportunity in our European conversion markets where we have made real progress over the last 3 years but we're still below U.K. levels of per capita consumption by some way. In Germany, we stepped back slightly in FY '23 and this is due to us reducing pairs sold into e-tailers and I would expect that to continue in FY '24 before growing payers again thereafter. For the first time, we've included Spain on this chart which is a recent conversion market and we expect to see growth in the year ahead in per capita consumption there. In Japan, this year, our focus was in transferring peers from wholesale to direct-to-consumer and we will grow overall payers in the Japanese market in FY '24. In the U.S.A., despite all of our challenges, we grew per capita consumption by shoes and sandals and our goal for the second half of FY '24 is to ignite boots in the marketplace. We will increase brand presentation globally in the years ahead. So in conclusion, FY '23 was a mixed year for Dr. Martens. Our performance in the U.S.A., as I've said, was disappointing, but we have taken action. And our number 1 priority is to improve our performance there in the year ahead. Most importantly, though, our brand is strong and we are very confident in our product pipeline, where we have implemented our dock strategy well, most notably in EMEA and Japan, we are driving growth and performance is strong. We will invest going forward for future growth as there is still a lot of opportunity ahead of Dr. Martens' brand. Just want to take the opportunity to thank you for your time and attention, both here and on the webcast. And we're now going to turn it over to questions. I think we're going to take questions in the room first and then we'll take any questions that people have got on the webcast. And there's somebody walking around with roving mics.

David Roux from Bank of America. Just a quick question on the FY '24 guidance for the margins to be down 1 to 2 points. Could you tell me what the gross margin move is embedded in that guide? And then secondly, on the investments, the incremental investments into infrastructure, as you mentioned, are there -- is there anything else one-off related that we should think about? And then my second question is on the U.K. business. I think at the trading update, you mentioned double-digit growth in pairs for FY '23. Could you perhaps just give us a sense of what volumes are doing year-to-date, if they're still positive?

So if I do the gross margin future way, I think if you look at what happened in FY '23 as a start of a 10, we had gross margin expansion from DTC mix. We've opened more stores in FY '23, annualizing FY '24. That's positive. And one would anticipate and view like-for-like e-commerce to be better because we've had strong momentum from Q4 into the first half. Price, net inflation, we didn't quite get price to fund inflation last year because of the U.S., I would anticipate price to fund inflation this year. Full price mix expansion, again, that will be driven by space and one's view of DTC mix. So those will be positive. The LA DC costs in gross margin of GBP 6.6 million, which is the containers, that falls away in FY '24. So that was a one-off coming or bounce back. I'll let you do currency. And then the final one to think about would be the full price mix. That was a normalization to pre-COVID levels. That's now stepped down. I would not anticipate that to move materially again. So if you think about that, the definite up is containers won't be there. The rest, I'll let you come to your own confusion but they should be up as well. So what we think -- where the guidance works would be the extra investment, the incremental investment of GBP 20 million, a chunk of that is funded by improved gross margin.

In terms of your question on the U.K., and you're right. The U.K. did grow double digit last year. In terms of the start of this year, I'm going to caveat what I'm about to say here by the fact that it's April and May and it's a very small -- Q1 is very small for Dr. Martens. But the trends that we saw of very strong trading across EMEA, including the U.K. in the fourth quarter have continued into the first quarter. So we've got very encouraging numbers for the U.K. and EMEA, but it's early days and it's a small quarter.

But I'll just draw your attention as well to the reduction in e-tailer volumes, as I said, will impact -- overly impact the U.K. and Germany through FY '24. So payers are unlikely to grow in those 2 markets in FY '24.

Alison Lygo From Numis. Actually, just following on from that in terms of volumes, so clear EMEA and U.K. likely to be backwards. How are you thinking about volumes progressing through the U.S. for next year?

Yes. I mean I think Jon mentioned in his presentation that in the United States in the first half, we've taken planned reductions with a couple of big wholesale accounts and that -- we have ongoing strategic discussions with our big accounts. We've done that. We would expect that you're going to see that in our first half results, so reduced volume. As I said, in terms of our direct-to-consumer performance in the United States, we've seen an improving trend from the fourth quarter into the start of this year online. It's still negative, though. So it's still our lowest performing region but DTC performance in the U.S. is improving. Wholesale payers are selling in, in the first half of the year will be down, but that's a planned reduction and that is embedded in our guidance of mid- to high single digit.

And just one more for me. In terms of the store pipeline and the 30 new stores, you're looking at this year, midpoint of guidance, how are you thinking about the split in terms of regions on that?

Yes. I mean in terms of store rollout, I think what you'll see is you'll see a number of stores in continental Europe. The new stores that we're opening are performing very well. And we'll continue to push on that. We'll also continue to push on openings in the Japanese market. Again, it's about finding the right sites in Tokyo and Osaka specifically. And then in the United States, across the full year, I think we've communicated that we'll probably only open 7 to 8 stores this year. And that's because we want to give the USA team time to focus on their existing business rather than adding a lot more stores. But longer term, we still believe in the numbers in the U.S. that we talked about before of 100 to 120 stores. So that was a long-winded answer of saying, expect Europe, expect Asia Pacific and so 7 to 8 in the Americas.

Kate Calvert from Investec. A couple from me. The first question is, could you elaborate on the different tactics which are employed in EMEA in marketing and online compared to the U.S. in the last year? Because you talked about not being happy with what happens in the U.S. The second question is, has some of the investments in the new systems such as demand forecasting, customer data platform, et cetera, has that been delayed because of COVID? Or were they due to kick in? And can you give some sort of guidance in sort of the time line of when they come on stream, you think they may impact performance?

So if we start with the -- what's different in EMEA at marketing point, I think the single biggest thing that the European business did differently to the U.S. business was the amount of money that we allocated towards the boots business. And we've always said that our product strategy is to sell boots and shoes and sandals. I think the U.S. business did a really good job of growing shoes and sandals but they didn't do a good enough job of growing the boots business. If I look even through the summer months last year, the EMEA business we're investing in, for example, marketing at festivals and amplifying that because they were like Dr. Martens or Warren doing the summer as well, the boots. So that was the single biggest difference, Kate. When we really -- we got the teams together and we compared and contrast what was done. And I think that's a learning for our U.S. business that our new VP of marketing is now allocating money differently for the second half of the year ahead. So I think you'll see us balance the money better between boots, shoes and sandals. In terms of did we delay investments because of COVID, I think probably in the big year of 2020, when the world slowed down, did we delay investments? Probably, yes. I think probably most companies did that because we preserved cash. But since then, we've got back into really investing against the business. Some investments we didn't stop during COVID, so things like store expansion, we kept opening these stores. When will things start to pay off, I think it depends versus which investment you're looking at. So if you look -- if I take a real-life example, we invested in an order management system in Europe this year. We haven't got the benefit of that. Those omnichannel sales yet because we've got a trial of 6 stores. You'll get the first benefits of that in the U.K. this year because we'll roll out omnichannel services to all stores in the U.K. And then the year after, we'll roll that out to the European business. America will make the investment in the order management system in this financial year but you won't really see the financial payback of that starting to happen until the year after. So there's just a time lag between -- it's exactly the same with new stores. You invest in a new store, you take the hit in the first year but you get the benefits in the outlying years.

I think a lot of these big systems is also we were on a journey of investment until you put in your ERP system, you can't import an IMS system and you can't then do omnichannel. So there's a natural order of things. Like some of these system investment being global, really difficult and long term to put in. So they've taken a natural period of time. So do I think we could have done things faster? We're talking a few months here or there because of the first few months of COVID, nothing material.

John Stevenson at Peel Hunt. Just a question on margins in terms of, I suppose, what's the right margin for Dr. Martens over the next, sort of the medium-term forecast? You obviously came to market at 30. The world's changed. And now we're sort of leaning into investments. So we're saying that the margins are sort of low 20s EBITDA for the next few years while we do these investments to get back into double-digit growth? Or do you think some of the tailwinds start to come through to change that?

I think it's a really good question. I mean, I think you're right, the world has changed from the point where Dr. Martens IPOed. There's no doubt about that. I think what we're seeing is that and what outlining today is there's some significant investment that we think we need to put in the business over the next couple of years. And then I think we'll start to see margins grow thereafter. The biggest driver of what's going to build out the EBITDA margin is the expansion of DTC. And I think that's going to be the biggest single driver of how the margin -- EBITDA margin will build over time. And then over my last 5 years with the company, what have we seen, usually, you have a period of you've got to put investment in it and then you get leverage off of that investment, which is a bit to Kate's question. There's investments we've got to put in and we'll start to get leverage, but the biggest driver of the margin expansion is DTC.

So DTC side, we should expect a similar kind of margins over the next few years when the investment cycle rules?

That will be valid. But again, you can't really say DTC as a side because that's an integral part of the business and we're driving the whole strategy is to drive D2C and we have been successful in that even through the last year. So it's D2C growth and where do you think D2C will get to. That's the core driver where the EBITDA margin of this business will end up.

Yes. I mean I think, Jon, the way I think about it is, it goes back to the -- what you said in your question, which is the world has changed since IPO. I mean, inflation is higher, consumers under more pressure. We don't think we'd have a war in Ukraine and all the rest of it. Does the end destination ultimately stay similar but the shape of the journey changes because of what's happened, I think that's right. I mean, if you model out DTC mix, those higher 20s numbers, et cetera, that we were at, I mean, that's very realistic.

And actually, just an easy question one here. On net debt for this year, you've been very specific on guidance. I guess the number of missing would be working capital inflows. You alluded to sort of GBP 50 million of stock benefit for the year ahead. Is that where you see sort of working capital inflows this year?

Yes. It's mainly inventory related, correct.

There's a question over here. [indiscernible]

Piral Dadhania from RBC. I'm just wondering, for the FY '24 revenue guidance, it obviously implies a second half weighted acceleration based on what you said for the first half. Could you give us an indication of what the wholesale order book looks like, particularly for the U.S.? Obviously, there's reduced order intakes for the first half. But I just wanted to understand how the Autumn/Winter order book is shaping up for now. And secondly, just on the fashion cycle and I know that, that's a term you don't really like, but some of your distribution partners in the U.S. have talked around a slight change in trend where the boots category is showing some signs of softness and sort of other categories as you alluded to, are accelerating as well as customers looking for a lot of newness versus kind of more classical product, if you like. So I just wanted to understand whether there is any change in the mindset and a perhaps increase in your seasonal product focus, if you like, over and above the original lines just as you try to address some of the changes that are taking place in the U.S. market.

So if we start with what's going on with the order book and how does that pertain to revenue guidance. Obviously, we've come out today and we've said, our revenue guidance remains at mid- to high single digit and obviously, embedded there is a knowledge of what our Autumn/Winter '23 order book is in the United States. Also in there is the knowledge of how we are trading from a direct-to-consumer perspective in Europe and in Asia Pacific and the order books in those regions. The only bit we don't know right now is -- obviously, you don't know what's going to happen with DTC but the bit on the order book that we don't know is we don't know what's going to happen in January, February, March because we haven't taken those orders yet. But the orders that we've got still leads us to believe that we will be mid- to high single digit. In terms of your question around the fashion cycle and what's happening with core and seasonal. I spent my entire career in this industry. And there will always be a period where this is being talked about, that's not being talked about. That's the nature of it. If you look at WGSN at the moment, they're saying, yes, shoes and sandals are on trend, but actually, they're saying next year, boots are going to be more on trend again. And that always happens. If I look at what we're seeing, everywhere in the world, we've said we're growing faster in shoes and sandals. But in our European and Japanese businesses, we are also growing in boots. The only business that we didn't grow boots in was the U.S. and that was a combination of the fact that we walked away, the Americas. We walked away from Latin American boots and our DTC boots business declined. I think it goes back to Kate's earlier question of the fact that we don't believe we did a good enough job as the #1 brand in boots. Your job is to keep boots relevant and our European teams and our Japanese teams did that well and American team didn't and we've got to learn from that. But I think in terms of what the trend forecasters are saying, they're saying that this year will be a big year still for shoes and sandals. Great, we're going to grow those categories but they're actually saying that next year will be a big year in terms of boots. In terms of our product strategy, are we going to suddenly become a seasonal business? No. It's what I said in the presentation, which is, in order to keep the most iconic product relevant, what do you have to do? You've got to drive newness interest and innovation. And if I look at our product pipeline, both in terms of true innovation whether that be new sole development or color of material innovation, I think we've got the best product coming down the line that we've had in my 5 years at Dr. Martens. But if I look at our best sellers around the world, you've still got in all regions, 6 of the top 10 that will be core brand by selling boots. Why? Because this is the #1 brand in the world for boots.

Just a little build on Kenny's first comment, your first question, Piral, in the U.S. The U.S. is seeing weak consumer environment, a lot of other brands are seeing and we saw on your note and I wouldn't disagree. But I think we saw a weak consumer environment from about August, September last year, compounded by warm weather because we're a boots brand. And then obviously, we had some mistakes that Kenny described. So we track against the weak base in the U.S. from pretty much the beginning of the second half that other businesses might just be seeing now. So that's why what you kind of a difference between what we see mid- to high single digit versus what other brands are seeing. So we see a weak base in the U.S. DTC from the second half.

Have we got questions on the WebEx or more questions in the room?

Thank you, Kenny. We will now begin questions from the phone line. [Operator Instructions] We will take our first question from Richard Taylor of Barclays.

I've got 3 questions, please. Firstly, on EMEA, U.K. revenue double digit, I think Germany, Italy, both up 10% revenue growth overall constant currency. So given those factors in other countries where revenue went down, are there any problems? Or is the balancing factor there for the wholesale being down? Secondly, on EMEA margin, the DTC mix was up quite considerably but margins went down. What are the reasons behind that, please? And how should we think about that going forward? And then finally, what's the sellout in wholesale globally, but especially in the U.S.? And as far as you can track, what is the trend on full price sales through wholesale?

Okay. Richard, I'll take 1 and 3, and I'll give Jon the middle question on margin. So on European DTC, yes, you're right. All markets traded positive and we did take payers out in the second half of the year in wholesale which was the star of the move that we're making to reduce the e-tailer business. You saw that specifically in Germany where there's some big e-tailer accounts there that we reduced volume with. And what you also saw in Jon's slides was that gave us a big spike in DTC business in Germany. So that's something we'll continue to do as we go into the next year. And as Jon indicated, we'll pull wholesale pairs out in Germany and U.K. primarily. They are the 2 markets where we're really focused. In terms of what we're seeing in sellout wholesale, so I've got the numbers in my head up to the end of the fourth quarter which is this financial year that we're talking about today. European wholesale peer sellout is up. It's up single-digit positive. So not quite as good as our own DTC but trending in the right direction. It varies slightly customer by customer and it varies depending on who that account is and what they're selling is, but it's an overall positive trend. Up until the end of the financial year, so to end March peers in USA wholesale in the top 20 accounts that we track, peers were up year-on-year. They were up more in shoes and sandals and they were down marginally in boots. So actually, U.S. wholesale in the fourth quarter performed better than our own DTC which was the same trend that we saw in Q3. As we've moved into the start of the new financial year in the U.S., it's similar. Boots are down, shoes and sandals are up. And as I said, we're actually seeing a slightly improving trend but in decline in our own DTC.

The principal driver of gross margin decline in EMEA was FX, Richard. 95% of our cost of goods are purchased in U.S. dollars. We use pounds and euros to buy those U.S. dollars. The dollar appreciated within the year. And you've seen on the group gross margin bridge, the FX cost 0.8 percentage points of margin. That was the vast majority was in the EMEA with a bit would have been in Japan but the vast majority in EMEA. But because we've got a pretty good natural hedge, that lower margin in EMEA is offset by the translation benefit from the U.S. such that global EBITDA pretty much nets out but it was a FX [ make. ]

Okay. Just a quick follow-up on the U.S. wholesaler. I think there were a couple of specific accounts where you're trying to manage things a bit more carefully. So just any further comments on that U.S. wholesale piece? The kind of with the rest and those 2 key ones that we should think about in terms of those trends you just discussed.

Yes. I mean I think what we're saying is we've planned down orders for the first half of the year in the United States. We've said many times that we take a long-term view on this and we never want to sell more so that customers end up with too much inventory. So we agreed with those accounts that we would take the order base down for the first half of the year and we've done that and that is planned into our guidance. We know the answer to that now. So therefore, when we've quoted mid- to high single digit, that includes a lower order book for America in the first half. And we don't expect, as Jon said, not just with Dr. Martens, everybody is talking about the fact that the North American business is the toughest business right now for most major brands. And that's what we're expecting through this year. We are expecting our Asia business and our European business to perform better than our U.S. business.

Got it. I'm sorry, I forgot full-price sales, U.S.?

Yes. I mean it's in line with the answer that I gave you. Because we have an MEP policy in the United States, we've not taken any promotional activity in the U.S. other than seasonal markdowns. So we did have an end of season sale in DTC like we'd always do. And our key wholesale accounts do that. And we had -- we did have [ one MEP ] violation in the spirit of full transparency that a U.S. investor emailed me about. And we called that account immediately and they rectified it. So we don't have a problem with promotional sales in the United States through any channels, Richard. So the numbers I'm quoting you were -- we had good sell-out to consumers in the fourth quarter in U.S. wholesale, predominantly driven by shoes and sandals that was at full price.

[Operator Instructions]

Okay. So that looks like we've exhausted the questions for today. Thank you very much for giving us your time and attention. We really appreciate it. Thanks.

Thank you.