Here’s why I just bought Dr Martens shares

Dr Martens shares have sold off after releasing earnings for FY21. Ollie Henry explains why he’s buying the shares now.

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Back in February, I wrote an article explaining why I thought Dr Martens (LSE: DOCS) shares were a buy for my portfolio. Recently, the company released its earnings results for fiscal year 2021. Investors initially reacted negatively to the news sending the share price down 17%. In the last few days, the share price has risen 7% but remains 11% below its pre-earnings share price. What happened and why am I now jumping in?

The results

Despite the drop in the share price, the company performed well last year. During FY21, Dr Martens managed to sell 12.7m pairs of boots, up from 11.1m pairs the year before. It also grew revenues by 15% and expanded margins, with EBITDA (earnings before interest, tax, depreciation and amortisation) growing by 22%.

While retail sales fell 40% due to the effects of the pandemic, the company had huge success in its e-commerce business, which grew 73% year-on-year. At the end of the year, e-commerce contributed 30% of the company’s revenues.

Why did the shares fall?

In my opinion, Dr Martens shares tumbled because investors were disappointed by the guidance that was issued. Management reiterated the guidance given when the company first went public at the beginning of the year. Revenue growth should be a high-teens percentage next year and in the mid-teens over the medium term. This growth represents a steep decline from the 48% the company achieved in FY20 and is likely why many investors sold their shares following the news.

These disappointed investors may have a point. If the growth rate can fall that quickly, what’s to stop it falling further in the coming years? Despite these doubts, I still feel confident that the company can achieve its targets in the future.

Why did I buy Dr Martens shares?

As I wrote in my first article, I think Dr Martens is a great business. The company is growing revenues at a quick pace and it has a very strong brand that makes it difficult to compete with. I also think the company is likely to expand its margins as its direct-to-consumer (DTC) business becomes more important. Currently, DTC represents 40% of total revenues. Management is targeting this figure to reach 60% in the medium term.

The recent pullback in the share price also means that the shares are trading at an attractive valuation for me. At the time of writing, the share price stands at 439p. At this price, the company’s price-to-operating-income ratio stands at 39, which initially seems very high. However, when the exceptional costs of the IPO (initial public offering) are removed, this ratio falls to 23. As these costs will not occur again next year, I prefer to use the second figure. Using this ratio, the share price seems attractive considering the expected growth rate and quality of the business. For this reason, I decided to add Dr Martens shares to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Ollie Henry owns shares in Dr Martens. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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