Dr Martens stock was down nearly 13% last week – is it time to buy or sell?

Dr Martens stock, the iconic bootmaker, registered a noteworthy drop in its share price last week and I want to know if this is time to take action.

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As one of the most recognisable footwear brands, Dr Martens (LSE: DOCS) was a new addition to the London Stock Exchange in 2021. While results are impressive, recent selling leaves me curious. For the week commencing 10 January 2021, the share price is down nearly 13%. Let’s take a closer look.

Encouraging results

Since its IPO in January 2021, Dr Martens stock has been volatile. From a yearly high of 521p, the share price currently sits around 365p. Not long after the IPO, the company released quarterly figures for the year ending March 2021. This was to provide greater clarity on where the share price might go in the future. The results showed year-on-year changes of -14% (Q1), 42% (Q2), 9% (Q3), and 19% (Q4). These positive results continued with a 64% increase in revenue in a trading statement in June 2021.

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The main reason for these impressive recent results was the reopening of Dr Martens stores around the world. This is especially true in the US and Europe, with Japan still lagging. The US has been the most lucrative market for this stock, registering 106% growth in sales. Indeed, Barclays upgraded the company in December 2021 because of its ability to continue to grow revenue through its recognisable products. The first-half results in 2021, for the six months up to 30 September, gave me a lot of confidence as a potential investor, because global profit expanded by 65%. In addition, interim earnings-per-share increased 60%. With a dividend of £0.012 per share, I am pleased that most of the profits attributable to shareholders are being kept within the company. This enables further growth.

Why the drop in share price?

In spite of good results, the share price tumbled 11% in one day in early January 2022. This was solely due to the sale of 65m shares by private equity firm Permira. This company was in fact responsible for the listing of Dr Martens in January 2021. On closer inspection, the sale amounted to about one-seventh of Permira’s original holding. The private equity firm now owns 36% instead of the original 42%. This is hardly something I’m worried about.

While sales in the US are growing at a phenomenal rate, supply chain issues are starting to eat into the operation. This is likely due to the hangover from the Covid-19 pandemic and should subside in the near term. Nonetheless, the management has decided to add £10 to the price of boots to offset this problem. This price rise will also go some way to alleviating cost increases in raw materials and shipping. Furthermore, Dr Martens’ price-to-earnings (P/E) ratio of 68 is only slightly above the industry average of 64. Barclays has, however, hinted that given the company’s short track record it is difficult to currently value this stock.

I like this product and the recent growth of the company around the world is a very good sign. It seems that more results are required to achieve an accurate company valuation. While I won’t be buying these shares just now, I will not be ruling them out in the future.    

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Andrew Woods has no position in any of the shares mentioned. 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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