For something associated with an air cushion, the Dr. Martens (LSE: DOCS) share price has had a very hard landing today (30 November). In early trading, the shares plummeted 25%.
What caused this – and ought I to be scooping the shoe shares up for my portfolio?
Disappointing first-half results
The main reason the share price crashed today was the release of the company’s interim results.
Revenue was 5% lower than the same period last year, while basic earnings per share more than halved. The interim dividend was held at the same level as last year.
At face value, a 5% decline in revenue seems bad but not catastrophic. So why the share price crash?
In the section of its interim report dealing with how the business fares as a going concern, the company said: “The Directors will maintain a cautious outlook through the second half and beyond and will react appropriately.”
It added that in, in a “severe but plausible” scenario, while the business could maintain adequate liquidity, the dividend could be at risk.
Where might things go from here?
That is already quite something for shareholders to consider. Indeed, I think it helps explain why the share price plunged in early trading today.
But what might it mean from a long-term perspective?
I have my concerns.
While the company says it is confident that it can maintain sufficient liquidity, there are clear signs of challenge in the business. In fairness, the dividend has been maintained.
Nonetheless, given the current trading environment and business outlook, I think there Is a real risk that the dividend could be cut in future if trading continues to be challenging.
On the other hand, Dr. Martens benefits from a unique brand that is strongly associated with its distinctive product. That should give it pricing power that could help support profitability over the long run.
Indeed, even though the pre-tax profit at the interim stage more than halved compared to the same period last year, it still came in at £26m. For a company with a market capitalisation of under £900m, I think that is decent.
Why buy now?
Nonetheless, I have no plans to buy even after the share price plunged.
Why is this, given that I think the firm’s distinctive design could help fuel demand far into the future?
Basically, I think the interim results amount to a warning signal about likely short- and mid-term demand. The revenue decline may have been fairly modest, but things could yet get worse from here.
I feel no rush to invest. I would rather wait and see what happens to the business prospects for Dr. Martens. For now, at least, I am happy to stay on the sidelines.
