The Dr Martens (LSE: DOCS) share price was under the cosh again this morning. By noon, the value of the company had tumbled another 12%. What on earth’s going on?
Why investors are walking away
As one might expect, this isn’t just some random capitulation. Today’s trading update contained what I believe to be pretty worrying news for investors.
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Not that this was immediately apparent. After all, revenue rose 11% to £307m in Q3 — up from £275.6m over the same period in 2020. Direct-to-consumer sales came in 33% higher — a record for the company. Retail sales were particularly buoyant and benefited from more people striding into the stores in October and November.
“So, what’s the problem?“, you might ask. Well, that 11% mentioned above is actually down on the 16% growth achieved in the first half of its financial year. The reason for this probably won’t come as a surprise.
Like many other listed businesses, ongoing supply chain issues are starting to kick Dr Martens where it hurts. A move to prioritise the higher-margin DTC trading led to a 14% reduction at its wholesale arm. So, the company has essentially taken one step forward and one step back.
To make matters worse, revenue in the Asia Pacific region fell by 28% due to Covid-19 restrictions in countries such as China and Australia.
Has the Dr Martens share price fallen too far?
The Dr Marten share price hit a record low of 266p earlier today. Is this simply a case of the market over-reacting? Could the bootmaker turn out to be a canny contrarian buy in time?
Well, no one knows where share prices will go in the near term. However, my gut tells me that things might get worse before they get better, especially as the company said today that February and March are regarded as “quieter trading months“. Regardless of how confident it is in being able to meet current expectations for its full year, that’s hardly bullish talk. Oh, and the latter is only the case if there is “no significant Covid impact in Q4“. Now, I’m as hopeful as the next person that we’ve reached the pandemic’s endgame. I wouldn’t like to bet on it though.
For balance, I do recognise this is a brand loved by millions of people around the world. And it’s clear that the company is holding its own online. Sales here made up 39% of the total mix in Q3; that’s far higher than it used to be just a couple of years ago. Year-on-year e-commerce revenue also climbed 16% in the quarter, despite a “tough comparative“.
Is this enough though? I don’t think it is. Just knowing that I don’t replace my own pair of boots very often is sufficient to make me question the investment case here. And the £2.9bn cap valuation.
I questioned the valuation of Dr Martens not long after it came to market almost exactly one year ago. Today’s update only serves to make me even more bearish. The shares may be down 36% from where they were one year ago but I think they could get even cheaper, especially with the company’s peak trading period now behind it.
Regardless of how highly I rate its products, Dr Martens looks to me like a falling knife. I won’t be attempting to catch it.