DOCS Dr. Martens Plc

28 November 2024

Dr. Martens plc

First half results for the 26 weeks ended 29 September 2024

RESULTS IN LINE WITH EXPECTATIONS AND DELIVERING ON OUR STRATEGIC OBJECTIVES

"Our first half performance was in line with expectations and we remain confident in our ability to deliver on our plans and the targets we set for FY25. As we shared in May, this is a year of transition and we have made good progress with our four main objectives: pivot our marketing to a relentless focus on our product, turn around our USA DTC performance, reduce our operating cost base and strengthen the balance sheet. Our new marketing campaigns are showing encouraging early signs, with strong sales of new product, giving us confidence that we will return USA DTC to positive growth in the second half. We took swift action to implement cost savings and now anticipate the benefit of this in FY26 to be at the top of the previous guidance range of £20-£25m, alongside an ongoing focus on tight cost control throughout the business. We have delivered a significant reduction in both inventory and net debt, together with successfully refinancing our debt facilities. The early success of our new product ranges provides a strong foundation as we enter the important peak trading period and as I prepare to hand over the reins to Ije in the new year."

Kenny Wilson, Chief Executive Officer

1. Alternative Performance Measure (APM) as defined in the Glossary on pages 29 to 31.

2. Constant currency applies the prior period exchange rates to current period results to remove the impact of FX. Previously, we presented this by applying current period budgeted rates to both the current and prior period.

3. In previous periods EBITDA was presented. However, this has been replaced with EBIT as it is considered a more relevant performance measure for the business. The Group has also introduced the use of adjusted performance measures which are exclusive of the impact of exceptional costs and currency gains/losses. Refer to the Glossary on pages 29 to 31 for further explanation of these changes. Prior period amounts have been updated to reflect this change and were therefore unaudited in the prior periods.

• Revenue down 18% (16% constant currency (CC)), in line with guidance for 20% decline. DTC revenue down 7% (5% CC) and Wholesale revenue down 29% (27%CC), as expected. Within DTC, Retail revenue was down 9% (7% CC) and ecommerce was down 4% (2% CC)
• All regions performed in line with our expectations, with EMEA revenue down 16% (actual and CC), Americas revenue declining 22% (20% CC) and APAC down 12% (7% CC)
• Swift action taken to implement our cost savings plan, which will now deliver £25m in FY26, at the top end of previous guidance. Tight cost control throughout the business, with non-demand generating operating costs down year-on-year
• PBT impacted by reduced revenue, as guided, together with exceptional charges of £9.2m, largely related to our cost savings plan
• Strengthened balance sheet, with significant reduction in both inventory and net debt, in line with our plan. Inventory down £69.1m year-on-year driven by reduced purchases
• Refinance completed successfully, securing a £250.0m loan together with a £126.5m RCF
• Interim dividend of 0.85p, in line with prior guidance

Current trading and guidance

Trading since the start of the AW24 season has been encouraging, with all three regions positive, albeit the peak weeks of trading remain ahead of us. Encouragingly, trading has been driven by good DTC sales of new products supported by our new product-led marketing approach.

Our guidance for FY25 remains unchanged, with results underpinned by the swift cost action taken. In addition, to aid investors' understanding of the impact of foreign exchange rates on our business, we are providing guidance on this for the first time and will continue to do so going forward. Based on currency spot rates as at 14 November 2024, we expect a currency headwind to results of c.£18m to revenue and c.£6m to PBT for FY25.

Detailed financial guidance is on page 13.

Presentation of half year results

Kenny Wilson, CEO and Giles Wilson, CFO will be presenting the H1 FY25 results virtually at 09:00 (UK time) on 28 November 2024 with a live Q&A session for analysts and investors. This can be viewed live on the Dr. Martens plc website https://www.drmartensplc.com. A playback of the presentation will be available on our corporate website after the event, at   https://www.drmartensplc.com/investors/results-centre.

About Dr. Martens

Dr. Martens is an iconic British brand founded in 1960 in Northamptonshire. Produced originally for workers looking for tough, durable boots, the brand was quickly adopted by diverse youth subcultures and associated musical movements. Dr. Martens has since transcended its working-class roots while still celebrating its proud heritage and, six decades later, "Docs" or "DM's" are worn by people around the world who use them as a symbol of empowerment and their own individual attitude. The Company listed on the main market of the London Stock Exchange on 29 January 2021 (DOCS.L) and is a constituent of the FTSE 250 index.

Cautionary statement relating to forward-looking statements

Announcements, presentations to investors, or other documents or reports filed with or furnished to the London Stock Exchange (LSE) and any other written information released, or oral statements made, to the public in the future by or on behalf of Dr. Martens plc and its group companies ("the Group"), may contain forward-looking statements.

Forward-looking statements give the Group's current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as 'aim', 'ambition', 'anticipate', 'estimate', 'expect', 'intend', 'will', 'project', 'plan', 'believe', 'target' and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated products, expenses, the outcome of contingencies such as legal proceedings, dividend payments and financial results. Other than in accordance with its legal or regulatory obligations (including under the Market Abuse Regulation, the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority), the Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader should, however, consult any additional disclosures that the Group may make in any documents which it publishes and/or files with the LSE. All readers, wherever located, should take note of these disclosures. Accordingly, no assurance can be given that any particular expectation will be met and investors are cautioned not to place undue reliance on the forward-looking statements.

Forward-looking statements are subject to assumptions, inherent risks and uncertainties, many of which relate to factors that are beyond the Group's control or precise estimate. The Group cautions investors that a number of important factors, including those referred to in this document, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made and are based upon the knowledge and information available to the Directors on the date of this report.

BUSINESS REVIEW

Performance summary

FY25 is a year of transition for our business as we take action to pivot our marketing approach, improve our USA business so that it can return to positive DTC revenue growth in the second half, reduce our cost base and bring down our inventory balance through reduced purchases, thereby improving our net debt position. On all four objectives we have made good progress in the first half. All of these actions will put the business in a much stronger position, enabling us to return to growth in FY26.

The first half performance was in line with our expectations. Group revenue declined by 16% CC, compared to guidance for a c.20% decline. By channel, DTC revenue growth declined by 5% CC and wholesale revenue declined 27% CC.

Our performance by region was also in line with expectations. EMEA revenue declined by 16% CC, with DTC revenue declining by 8% CC and wholesale down 23% CC. EMEA Q1 was weaker, particularly retail, however trading improved as we progressed through Q2 and entered the Autumn/Winter (AW) season; this resulted in Q2 DTC pairs being back into positive growth. Q1 EMEA DTC was impacted by the early timing of Easter and sale, as previously disclosed. We also saw a weaker sandals performance and a promotional competitive backdrop in the half, particularly in the UK. Our newer conversion markets of Italy, Spain and the Nordics all showed good growth, whilst Germany revenues were broadly flat. The decline in EMEA wholesale revenue was again in line with expectations, being impacted by some shipment timing differences.

Revenue from our Americas region declined 20% CC, with DTC revenue down 4% CC and wholesale down 34% CC. This performance was in line with expectations and we continue to expect positive DTC growth in the second half.

APAC, our smallest region, declined 7% CC, with DTC revenue up 4% CC and wholesale down 24% CC, due to shipment timing differences. We saw a continued good performance in our Japanese business, which remains a significant growth driver.

We tightly managed both COGS and operating costs through the half. Despite inflationary pressures, gross margin declined only slightly, by 0.4%pts, to 64.0%, or by 0.2%pts CC. Operating costs were very well controlled. We invested an additional £1.8m (CC basis) in demand-generating marketing ahead of the AW24 season. Non-demand-generating operating costs declined year-on-year, by £2.3m (CC basis). We will continue to tightly manage costs and seek efficiencies through the second half, in addition to the cost action plan discussed below.

Adjusted EBIT was a £2.4m loss on a CC basis, compared to £39.7m profit in H1 FY24. Adjusted PBT of £16.1m loss on a CC basis was in line with our expectations. Including exceptional costs (which mainly relate to redundancy costs as part of the cost action plan incurred at the end of the half) and currency gains and losses, reported PBT was £27.0m loss on a CC basis.

We have made good progress strengthening our balance sheet in the first half. Reducing inventory, predominantly through reduced purchases, is a key focus of the business throughout FY25, and we are confident in our ability to deliver our target of £40m reduction year-on-year. At the end of the first half, inventory was flat versus the start of the period and down £69.1m compared to the same point last year. Net debt also improved, standing at £348.7m at the end of the half, equating to 2.3 times net debt to EBITDA (covenant calculation basis). This compares to £478.9m net debt and 2.0 times net debt to EBITDA at the end of H1 FY24. The first half of our financial year typically represents our high point for net debt ahead of the peak trading period in the second half.

We also completed a successful refinance of our debt facilities in November, ahead of our previous facilities expiring in early 2026. Our previous facilities comprised a €337.5m term loan and a £200.0m RCF. Our new facilities comprise a £250.0m term loan and a £126.5m RCF, with an initial term of three years, with the option to extend both facilities by two additional one-year terms through to November 2029, subject to lender approval.

Strategy update

Our focus through the first half has been to pivot our marketing to focus relentlessly on product, improve our USA DTC business to set it up for growth in the second half, implement a cost action plan and reduce inventory and net debt levels. On all four objectives we have made good progress.

Product focused marketing: We have pivoted our marketing away from brand storytelling focused on culture to instead focus relentlessly on product. This approach was implemented from July onwards, and as such had limited benefit to the first half, however we are encouraged by the response to date. The first three marketing campaigns since August were showcasing new product, driving strong sales-through performance. In October we launched our 'Boots like no other' campaign, emphasising the strength of our core iconic boots. This campaign will be a regular drumbeat throughout the AW season and beyond to drive sales of our icon products. 

We have also restructured our marketing organisation globally to align our teams with the product organisation, created a Brand Studio to enable global creative leadership and ensure oversight and changed a number of roles and responsibilities to leverage the best of our talent globally.

USA action plan: As we detailed in our FY24 results, the USA is our number one priority across the business and we are implementing a detailed action plan to return this business to growth, with a target of positive DTC growth in H2 FY25. To support this aim we have also increased the marketing investment as a percentage of revenue in the USA. Our USA action plan is centred on three areas:

-      Marketing. Our pivot to product-focused marketing has improved clarity of message. We have increased spend on elevating retail windows, particularly in key locations, and have also worked in partnership with wholesale customers to elevate in-store displays. We have also increased paid social to drive consideration.

-    Digital. Focus during the half has been on improving and enhancing product detail pages (PDPs), including additional video content, virtual try on and dynamic product recommendations. We have achieved a significant, double-digit improvement in site conversion rate, as a result of both the improvements to PDPs together with work optimising the customer journey through the site. We have also implemented order in store across the USA retail store estate.

-   Wholesale. Given the nature of wholesale order books we will have a lag between when our USA DTC performance improves and when we see this benefit our wholesale revenues. Our expectation remains that we won't see an in-market restock driving a recovery in our USA wholesale revenues until Autumn/Winter25 at the earliest, equating to the second half of FY26. We continue to anticipate USA wholesale revenues declining double-digit percentage in FY25. We continue to focus on working in partnership with wholesale customers.

Jennifer Somer, our Americas President, resigned from and left the business in October 2024. A search for her replacement is underway and in the interim Kenny Wilson, together with the Global leadership team, are giving additional support and guidance to the experienced Americas Leadership team.

Cost action plan: We announced in our FY24 results that we would be implementing a cost action plan across the Group, led by CFO Giles Wilson and the leadership team. This targeted £20m to £25m of cost reduction to benefit FY26 onwards, with savings from organisational efficiency and design, better procurement and operational streamlining. We have taken swift action to identify and implement cost savings during the first half, without impacting demand-generating spend and now expect savings of c.£25m in FY26, at the top of the guidance range. Around two-thirds of the savings are from headcount reductions, primarily in Group support roles, with the majority of these roles leaving the business at the end of the first half. The benefit from the cost savings achieved so far underpins our FY25 performance. We have incurred a one-off exceptional cash cost in relation to these headcount reductions; further detail is provided in the Finance Review. The remainder of the cost savings will be from better procurement, where we are making good progress to date.

Our product strategy is 'icons and innovation', meaning that we aim to grow revenue over the medium-term of our iconic continuity products through constant innovation around this core, to drive brand heat and newness. We aim to grow all three categories of boots, shoes and sandals simultaneously. As expected in the first half, pairs declined by 20% year-on-year, with significant decline in wholesale and DTC pairs declining slightly by 3%. By category, we saw good growth in shoes, with DTC pairs up 7% and a weaker sandals performance, with DTC pairs flat, driven by a softer Spring/Summer season, particularly in EMEA. The sandals performance also comes after several years of strong growth. Boots pairs declined by 12% DTC, which was in line with expectations given that the changes to our marketing to drive boots demand are focused on the Autumn Winter season. 

Collaborations act as an incubator for future product success and scale, whilst at the same time driving brand heat and consumer excitement. Collaborations released in the half include Supreme on a pack of rub-off 1461 shoes, continuing our long-standing partnership with this iconic skate brand and with the seminal rock band Nine Inch Nails, with a three-product collection including a 1460 boot. Recently we launched a capsule collection with hit Netflix series Wednesday, incorporating four footwear silhouettes, a backpack and knee-high socks. Included in this range are new models of the Corran Loafer and Ramsey Creeper, with consumer reaction very positive.

We continue to invest in and improve our systems, to enable growth and drive efficiency, and are reaching the final period of implementing crucial core systems for the Group. The two key system projects are the Customer Data Platform (CDP) and the Supply and Demand Planning System. We have made good progress with CDP, which gives a single customer view across both DTC channels, enabling targeted marketing and personalised consumer journeys. CDP is now live across EMEA and Americas, with the benefits from the new system building in the seasons ahead as we capture and utilise increasing amounts of data. The Supply and Demand Planning System is a modern and agile planning system, which will enable us to generate working capital savings and further improve availability. This project is expected to go live by the end of H1 FY26, with benefits building over time.  

We continue to make good progress with our sustainability agenda. Our UK Repair service, in partnership with the Boot Repair Company, has now been operational for a year with very positive consumer feedback.  We are looking to expand this service offering to continental Europe in 2025. Our USA resale offering, Rewair, has now traded for six months, with encouraging performance to date, albeit this is relatively small in revenue terms. A significant proportion of consumers buying second hand footwear through our site are new consumers. Our intention over the medium-term is to expand a resale offering to other major markets, building on the learnings from the USA site.

Researching and developing more sustainable materials continues to be an area of focus for our teams, as part of our long-term target of 100% of footwear made from sustainable materials by 2040. After the successful introduction of reclaimed leather Genix Nappa last year we have expanded the range, with further expansion planned for coming seasons. We are also continuing to research and test a range of lower impact materials, in both early stage and at a larger scale.    

FINANCE REVIEW

Total revenue declined 18.0% (16.1% CC), driven largely by a 29.0% reduction in wholesale revenues (27.4% CC), together with a decline in DTC revenue of 6.8% (4.6% CC), all in line with our expectations. Adjusted loss before tax was £17.9m (H1 FY24: £25.2m profit) and £16.1m loss on a CC basis. The decline was driven by the revenue reduction with COGS and opex tightly managed. Adjusted earnings per share was a loss of 1.3p (1.1p loss on a CC basis), compared to earnings of 1.9p in H1 FY24.

To aid investors' understanding of our performance, we have introduced further disclosure in constant currency (CC). In previous years we referred only to % changes in revenue in CC terms. We now show absolute and % change in CC terms across the P&L. We will adopt this approach going forward.

Results - at a glance

1. Alternative Performance Measure (APM) as defined in the Glossary on pages 29 to 31.

2.  Constant currency applies the prior period exchange rates to current period results to remove the impact of FX. Previously, we presented this by applying current period budgeted rates to both the current and prior period.

3. Wholesale revenue including distributor customers.

4. Own stores on streets and malls operated under arm's length leasehold arrangements.

5. In previous periods EBITDA was presented. However, this has been replaced with EBIT as it is considered a more relevant performance measure for the business. The Group has also introduced the use of adjusted performance measures which are exclusive of the impact of exceptional costs and currency gains/losses. Refer to the Glossary on pages 29 to 31 for further explanation of these changes. Prior period amounts have been updated to reflect this change.

PERFORMANCE BY CHANNEL

Revenue decreased by 18.0% or 16.1% on a CC basis. DTC revenue declined by 6.8% or 4.6% on a CC basis, representing 56.4% of revenue mix. Wholesale revenues declined by 29.0% or 27.4% on a CC basis, in line with expectations and driven principally by USA wholesale. Volume, represented by pairs sold, declined 19.7% to 4.6m pairs with the reduction largely occurring in wholesale, down 29.9%. Given the lag in wholesale performance in our business, the more meaningful metric is DTC pairs which declined 3.1%.

Ecommerce revenue was down 4.4% or 2.4% on a CC basis to represent 27.0% of revenue mix (H1 FY24: 23.2%). Double-digit growth in APAC was offset by weaker trading in EMEA. In EMEA we saw an improved ecommerce performance in Q2, driving Group ecommerce Q2 revenue growth of 1.6% on a CC basis. In Americas across the first half, ecommerce revenue was marginally positive on a CC basis. Ecommerce conversion improved in both EMEA and Americas. Following the successful implementation last year of an order management system ('OMS'), enabling a full omnichannel offer across all UK stores, we have now expanded this capability to the majority of our EMEA stores with the remainder to go live by the end of FY25.

Retail revenue fell 9.0% or 6.6% on a CC basis. Retail was challenging in all regions, particularly in Q1, driven by weak footfall, however we saw an improvement in the latter part of Q2. During the half year we opened 10 new stores and closed 11 stores to end the period with 238 own stores. Of the 11 stores closed during the half, four were as a result of site relocations. The remainder were spread across multiple markets and were the result of normal store portfolio management.

Wholesale revenue was down 29.0% or 27.4% on a CC basis. This was driven by the USA where, as previously disclosed, there has been widespread caution amongst wholesale customers, resulting in a significantly weaker order book year-on-year. We continue to expect that it will be H2 FY26 at the earliest, corresponding to AW25, before we see a positive performance in USA wholesale. EMEA wholesale declined by 23.0% CC, predominantly impacted by shipment timing differences.

PERFORMANCE BY REGION

We have changed our segmental reporting from EBITDA to EBIT. We believe that EBIT represents a more relevant underlying earnings indicator given it includes depreciation and amortisation, including IFRS 16 lease depreciation. Regional EBIT therefore shows the results of core operations excluding only income or charges related to capital and tax costs. For comparative purposes, historical regional EBIT is disclosed on page 13.

1. Alternative Performance Measure (APM) as defined in the Glossary on pages 29 to 31.

EMEA Revenue declined 16.4% to £162.4m, or 15.5% on a CC basis. DTC declined by 8.6% (7.8% CC) with retail and ecommerce down 8.1% and 9.3% respectively (7.1% and 8.6% CC). EMEA DTC was impacted by the early timing of Easter and sale (which both impacted Q1), together with a weaker sandals performance and a highly promotional competitive backdrop, particularly in the UK. We saw good growth in the newer conversion markets of Italy, Spain and the Nordics, whilst Germany revenue was broadly flat in H1. EMEA wholesale revenue declined by 23.9% as expected, being impacted by some shipment timing differences. EMEA DTC mix grew by 4.5pts to 53.6%.

During the half year we opened four new stores: one store in each of France, Austria, Sweden and the Netherlands. We closed five stores, with four of these being relocations.

EMEA adjusted EBIT was £23.1m (H1 FY24: £40.0m) driven by the revenue decline, with costs tightly managed.

Americas Revenue declined 22.3% to £114.7m, or 20.2% CC. DTC revenue declined by 6.3% (4.4% CC), with broadly flat ecommerce revenues (down 1.7% reported or up 0.6% CC) offset by retail decline of 11.4% (9.9% CC) driven by weaker footfall. Americas wholesale revenue declined 34.0% on a CC basis in line with our expectations, as previously disclosed, due to the order book reflecting caution from wholesale customers.

During the year we opened one new store in LA and closed two underperforming stores where traffic had permanently changed post covid.

Americas adjusted EBIT was a loss of £6.6m (H1 FY24: £17.3m profit) due to the decline in revenue combined with increased marketing investment.

APAC Revenue declined by 11.9% to £47.5m or 6.9% CC. This was driven predominantly by a wholesale reduction of 25.8% (23.5% CC), as expected, with wholesale revenue declines in Japan (due to shipment timing) and Korea. DTC revenues fell 2.8% but grew 4.0% CC. DTC mix increased by 6.3pts to 66.7%, as a result of the decrease in wholesale revenue. Retail declined 7.4% (flat CC), whilst ecommerce revenue was up 4.8% (10.5% CC). The retail decline was driven by weak traffic across the region, with the largest impact seen in China and Hong Kong. Ecommerce growth was driven by a good performance in Japan.

During the half year we opened five new stores, with three in Japan and two in China. In Japan, in addition to the owned store openings, we opened two new franchise stores, with a healthy pipeline of both DTC and franchise stores in this market. We closed four own stores and seven franchise stores in APAC as part of normal store portfolio management.

APAC adjusted EBIT was £2.7m (H1 FY24: £7.7m) due to deleverage as a result of the revenue decline.

Adjusted group support costs were tightly managed, declining 7.1% to £23.5m.

RETAIL STORE ESTATE

During the half year, we opened 10 (H1 FY24: 25) new own retail stores (via arm's length leasehold arrangements) and closed 11 stores (H1 FY24: 4) as follows below. Four of the closures were the result of relocations.

The Group also trades from 21 (FY24: 22) concession counters in department stores in South Korea and a further 76 (FY24: 77) mono-branded franchise stores around the world with no stores in China (FY24: none) due to the end of the distributor contract in H2 FY24, 19 in Japan (FY24: 19), 23 across Australia and New Zealand (FY24: 24), 34 across other South East Asia countries, the Nordics and Canada (FY24: 34).

ANALYSIS OF PERFORMANCE BY QUARTER

Our DTC performance was in line with expectations. Q1 was impacted by the earlier timing of Easter and sale, which fell in Q4 FY24 (as opposed to Q1 as is typically the case). DTC Revenue in Q2 showed an improvement from Q1 driven by ecommerce performance, which grew 1.6% CC in Q2, compared to a 7.1% CC decline in Q1. Retail also showed an improving trend, albeit still negative in both quarters.

Wholesale also performed in line with expectations, with a weak order book in Americas, as previously guided, together with some shipment timing differences in EMEA.

PROFITABILITY ANALYSIS

Gross margin declined by 0.4pts to 64.0% or by 0.2pts on a CC basis. Opex (excluding exceptional items) declined by 1.8%, or £3.2m, to £174.1m on an actual currency basis. Within this, demand generating opex increased slightly due to investment into marketing and digital, particularly in the USA, whilst opex not linked to demand generation was very tightly controlled across the business and declined year-on-year.

EBITDA[1] decreased by 68.6% to £24.4m (H1 FY24: £77.6m), due to the operational deleverage from reduced revenues, despite tight cost control.

EBIT¹ decreased by 137.5% to a loss of £15.1m as a result of the decline in EBITDA together with £1.3m impairment (H1 FY24: £nil) and currency losses of £1.6m (H1 FY24: £0.6m gain).

(Loss)/profit after tax is analysed in the following table from EBITDA: 

Depreciation and amortisation charged in the period was £36.8m, (H1 FY24 £37.9m), driven by intangible asset movement and retail software coming to the end of its useful economic life during the period partially offset by additions replacing these assets, and is analysed as follows:

Foreign currency

Dr. Martens is a global brand selling to consumers across the world in many different currencies, with the Financial Statements reported in GBP. Foreign currency amounts in the profit or loss account are prepared on an average actual currency rate basis for the half year. These exchange rates are calculated monthly and applied to revenue and costs generated in that month, such that the actual performance translated across the year is dependent on monthly trading profiles as well as movement in currency exchange rates. To aid comparability of underlying performance, we have also calculated constant currency movements across the P&L, which is calculated by applying the prior period exchange rates to current period results to remove the impact of FX. Previously, we presented this by applying current period budgeted rates to both the current and prior period, but believe the new methodology provides a more relevant view of performance versus actual prior period results. 

Exchange rates mainly impacting the Group are GBP/USD, GBP/EUR and GBP/JPY. The following table summarises average exchange rates used in the half year:

The Group takes a holistic approach to exchange rate risk, monitoring exposures on a Group-wide, net cashflow basis, seeking to maximise natural offsets wherever possible. While COGS purchases for the Group are predominantly denominated in USD, currency risk is partially offset from USD revenues earned in Americas and from distributor revenues, which are also largely USD denominated. Where a net foreign currency exposure is considered material, the Group seeks to reduce volatility from exchange movements by using derivative financial instruments. During the period, a £1.2m gain (H1 FY24: £0.3m gain) was recorded in revenues related to derivatives partially hedging the net EUR inflows.

Retranslation of foreign currency denominated monetary assets and liabilities in the half year resulted in a currency loss of £1.6m (H1 FY24: gain of £0.6m). This was predominantly due to the revaluation of receivable balances following the appreciation of GBP against EUR and USD.

Interest

The Group's exposure to changes in interest rates relates primarily to cash investments, borrowings, and IFRS 16 lease liabilities. Total Group net interest costs for the period were £13.6m, lower than the prior period (H1 FY24: £14.5m) primarily due to lower interest on lease liabilities. We saw increased interest amounts related to a higher floating EURIBOR rate on the Group's Term Loan, which were offset by an absence of RCF drawing costs compared to the prior period.

Exceptional costs¹

In May 2024, the Group announced it would be undertaking a cost action plan with benefits of savings from FY26. This plan targeted savings of £20-25m on a full year basis. We have taken swift action to identify and implement savings in the first half and now expect annualised savings of c.£25m in FY26.

In H1 FY25, the Group incurred exceptional costs¹ of £9.2m (H1 FY24: £nil), of which £6.1m related to the cost action plan, primarily headcount reduction costs. The balance relates to one-off director joining costs relating to the new CFO and incoming CEO.

Tax was a credit of £7.9m (H1 FY24: £6.8m charge) with an effective tax rate of 27.5% (H1 FY24: 26.4%) which is slightly higher than the UK corporate tax rate of 25.0%, due mainly to overseas tax rates and deferred tax on temporary differences.

Loss per share (basic) was 2.2p (H1 FY24: 1.9p earnings), or 1.3p loss on an adjusted basis. EPS and diluted EPS for the prior period are similar numbers due to the minimal dilutive impact of share options on the total diluted share number. There continues to be a minimal dilutive impact of share options for the current period, however EPS and diluted EPS are the same for the current period due a loss in the first half. The following table summarises these EPS figures:

1. Alternative Performance Measure (APM) as defined in the Glossary on pages 29 to 31.

CASH FLOWS

Operating cash flow¹ generated an inflow of £27.4m (H1 FY24: outflow of £24.4m), impacted by positive working capital cash inflows of £10.5m (H1 FY24: outflow of £87.6m). Inventory levels have declined by £0.4m during the period (H1 FY24: £55.5m increase) due to reduced purchases in line with the target to reduce inventory in FY25. Compared to the end H1 FY24 balance sheet position, inventory levels have declined by £69.1m.

Debtors have increased by £22.1m (H1 FY24: £28.5m increase), predominantly driven by wholesale customer order fulfilment ahead of peak in line with the Group's ordinary trading cycle. Creditors have increased by £32.2m (H1 FY24: £3.6m decrease) due to timing of payments over the reporting date, and accruals recognised relating to the cost action plan.

Trade debtor days reduced to 49 days (H1 FY24: 53 days), largely due to a decline in the Americas region, where debtor days decreased from 65 to 54. This marks a return to normalised debtor days, following a period of inflated debtor days in the previous year.

Capex was £11.0m (H1 FY24: £16.3m) and represented 3.4% of revenue (H1 FY24: 4.1%). The breakdown in capex by category is as follows:

Interest paid was £11.2m, (H1 FY24: £9.1m) higher than H1 FY24 by £2.1m due to higher interest rates. Interest received remained broadly flat, representing interest on short term deposits.

Payment of lease liabilities was £28.4m (H1 FY24: £25.3m) higher than H1 FY24 by £3.1m primarily due to annualisation of additions in the previous year.

Funding and Leverage

The Group is funded by cash, bank debt and equity. Further details on the capital structure and debt are given in note 9 of the Financial Statements. At 29 September 2024, the Group's bank loan was denominated in EUR and valued at £281.7m (€337.5m) excluding unamortised bank fees (H1 FY24: £292.5m). Attached to this was a revolving credit facility (RCF) of £200.0m. Included in this facility was a committed line of £3.4m (H1 FY24: £3.3m) used for guarantee arrangements, primarily in relation to landlord rent guarantees. This loan was originally due for repayment in February 2026, but has since been refinanced; see more information below.

The Group financing arrangements are subject to a total net leverage covenant test every six months. The total net leverage test is calculated with a full 12 months of EBITDA (covenant calculation basis) and net debt being inclusive of IFRS 16 lease liabilities at the balance sheet date. As at 29 September 2024, the Group had total net leverage of 2.3 times (FY24 H1: 2.0 times).

Refinancing

Since the half year end the Group has successfully negotiated with existing and new lenders to refinance its debt facilities, with the new facilities drawn on 19 November 2024. The new debt facilities are entirely GBP denominated and consist of a £250.0m term loan and £126.5m RCF for an initial term of three years, with the option to extend both facilities by two additional one-year terms through to November 2029, subject to lender approval. The facilities are subject to a Net Debt/EBITDA leverage covenant of <3x.

BALANCE SHEET

1. Includes bank interest of £8.0m (H1 FY24: £8.0m, FY24: £8.4m).

2. Other includes investments, deferred tax assets, income tax assets, income tax payables, deferred tax liabilities, and provisions.

3. Includes drawdown on RCF facility at 30 September 2023 of £25.0m.

Inventory

As previously disclosed, inventory levels were elevated in FY24 and reducing inventory by £40m is a key target for FY25. We made good progress on this objective in H1 FY25, with inventory broadly flat compared to the 31 March 2024 position (if FX rates are adjusted for), and down £69.1m year-on-year.

Net Debt

Another focus through FY25 is a reduction in our net debt, and we again made good progress in the first half, particularly given that the net debt position at the half year point typically marks the high point through our annual cash cycle, with overall net debt reducing year on year by £130.2m.

Lease liabilities

New lease commitments and remeasurements during the period were £9.9m, largely relating to £5.9m additions. This was offset by £28.4m of lease repayments. Average lease length is relatively low, at 2.8 years to break, with the average lease length we expect to utilise being 3.3 years reflected on the balance sheet.

Equity of £334.5m can be analysed as follows:

RETURNS TO SHAREHOLDERS

Our capital allocation philosophy guides our view of returns to shareholders and usage of excess cash. The first priority is to use excess cash for business priorities and we will continue to invest in a targeted manner to support long-term growth and resilience of the Group. Beyond this, our priority is to return excess cash to shareholders through a regular dividend and, when possible, further returns.

Dividends 

At the FY24 results in May, the Board shared the intention to hold the FY25 dividend flat to FY24 in absolute terms, at 2.55p, before returning to an earnings payout in line with our dividend policy (of 25% to 35% payout) in FY26 onwards. We also shared that going forward we would adopt a consistent approach to setting the interim dividend, with this dividend set at one-third of the previous year's total dividend. Finally, we announced changes to the dividend payment dates to better reflect the trading cash profile of the Group.

In line with this guidance, the Board declares an interim dividend of 0.85p, being one-third of the FY24 total dividend of 2.55p. This will be paid to shareholders on the register as at 7 March 2025 with payment on 8 April 2025.

HISTORICAL EBIT ANALYSIS

As the Group has moved from EBITDA to EBIT disclosure for segmental reporting, historical data on this basis has been provided below alongside revenue for comparability across periods.

FY25 GUIDANCE

Our key targets for FY25 are unchanged:

-       Positive USA DTC growth in the second half

-       Inventory declining by c.£40m

-       Net debt declining to £310m to £330m (including lease liabilities)

Alongside this, our guidance for FY25 is:

-       USA wholesale revenue declining double-digit percentage in FY25

-       New own store openings of around 15 (previous guidance of 25 to 30)

-       Depreciation and Amortisation of £75m to £80m

-       Net finance costs of £27m to £30m

-       Blended tax rate of c.27%

-       Capex of around £30m, compared to previous guidance for around £40m, with the reduction driven by reduced new store openings planned

-       Exceptional costs of around £15m

In addition to the introduction of constant currency reporting, we are also providing guidance on the potential FX impact for FY25, in order to aid investor understanding of the business. Based on currency spot rates as at 14 November 2024, we expect a currency headwind to results of c.£18m to revenue and c.£6m to PBT for FY25. FX revenue sensitivities are as follows: for every 1%pt movement in US dollar c.£3.5m; Japanese Yen c.£0.5m and Euro c.£2.5m. 

PRINCIPAL RISKS

The Board considers that the principal risks and uncertainties which could impact the Group over the remaining half of the financial year are unchanged from the risks presented in the 2024 Annual Report. The principal risks are summarised as: brand and product; social and environmental; people, culture and change; supply chain; information and cyber security; financial; legal and compliance; and macroeconomic uncertainty. These are detailed on pages 38 to 43 of the 2024 Annual Report, a copy of which is available on the Company's website at www.drmartensplc.com.