Looking across the FTSE 250 recently, one share that caught my eye is a well-known consumer brand. The share yields 7.9% and I reckon the company has potential for a lot of sales growth in years to come.
Despite that, the share currently sells for pennies. Should I buy?
If the shoe fits…
The FSTE 250 share in question is Dr Martens (LSE: DOCS). For many British shoppers, the Dr Martens brand needs no introduction. The iconic footwear has long been a wardrobe staple of groups from students to musicians.
Dr Martens has its origins in Britain, but the appeal of the brand (as well as much of its manufacturing) has long since spread internationally.
Brands and business
However, just because a brand is popular does not necessarily mean it makes for a good business.
Dr Martens is highly reliant on its boots. So if they step in or out of fashion, that can have more impact for sales.
The heavy boots may also have less appeal to shoppers when weather is warm. Indeed, the company suggested that was a factor in sales weakening in the first half of its current financial year.
The first half also saw US wholesalers carry low levels of inventory compared to company expectations. That might suggest they will reorder soon to bring inventory levels up. But, alternatively, it could be a sign that an uncertain economy is affecting customer demand for pricy footwear and wholesalers are planning accordingly.
In that case, I see a risk to future revenues and profits at the FTSE retailer. Earnings per share in the first half fell almost 60% compared to the same period a year earlier.
Juicy yield
Against that context, it is understandable the interim dividend was held flat. Despite the lower earnings, they more than covered the cost of that dividend. For now, Dr Martens has a yield of 7.8%. That certainly grabs my attention.
But for a dividend to be sustained, the company needs to generate enough free cash flow.
Dr Martens shares have only been trading on the London market for three years, so there is a limited amount of information available on how the business has done historically across the course of a full economic cycle.
The first half results showed weaker sales and profits. For a premium brand with pricing power and a loyal customer base, I do not see that as an encouraging sign.
I think the strong brand is a massive asset that could help generate sales for decades. I also reckon there is more scope to increase sales internationally.
For now though, I am in no rush to buy. I am concerned that if earnings fall, the dividend could be cut at some point. I would rather wait to see how sales and profits hold up in a weak economy before making any move on this FTSE 250 share.
