In August 2023, I noticed that an insider had recently bought £400k of stock in Dr Martens (LSE:DOCS), the FTSE 250 footwear brand.
Kenny Wilson, the chief executive, paid 129p a share for his stake.
Six months later, the company’s share price is now around 88p, and he’s sitting on a paper loss of approximately £127k.
Since floating in February 2021, the stock has lost 80% of its value.
A difficult period
The apparent gloom surrounding the share price reflects a declining top line, particularly in North America, which is adversely impacting earnings.
In November 2023, the directors admitted trading had been “mixed“.
In January 2024, they reported December sales as being “softer” than expected and described the retail environment as “volatile“.
These are words that investors don’t like.
The company’s final results for the year ended 31 March 2023 (FY23) disclosed revenue of £1bn, and a profit before tax (PBT) of £159m.
Analysts are not expecting sales to return to this level until FY26.
Reduced earnings
However, by then, PBT is forecast to be 16% lower at £134m.
The consensus forecast is for earnings per share (EPS) of 8p in FY24, 8.9p in FY25, and 10.2p in FY26.
Although this shows an improving trend, all are a long way behind the 12.9p achieved in FY23.
No sales growth for 2023-2026 — and a 21% reduction in EPS — doesn’t make a great investment case.
Improving margins
But Dr Martens has one thing going for it that’s difficult to value — its brand. I think it’s fair to say that it’s a British icon.
However, this can only be pushed so far.
In common with all manufacturers, the company has faced a significant increase in its production costs since the pandemic.
But despite this, it’s managed to increase its gross profit margin from 59.7% (FY20), to 64.4% (six months to 30 September 2023).
This suggests it’s been increasing its prices by quite a lot.
Looking at its website, its original eight-hole boot is now selling for £170. When it was launched in 1960, it was priced at £2 (equivalent to £58 in 2024).
At first glance, an improving margin seems like a good thing. Raising the price of a pair of boots and making more from each pair sold, is a retailer’s dream.
But as a consequence, it’s selling fewer boots and shoes than previously — 5.7m during the first six months of its 2024 financial year, compared to 6.3m for the same period a year earlier.
If further price increases are implemented, customers may go elsewhere.
To put things in perspective, LVMH, which owns ultra-expensive luxury brands like Dior, Givenchy and Bulgari, achieved a gross profit margin of 68.8%, in 2023.
That’s only a few percentage points higher than Dr Martens, whose products were originally worn by factory workers.
I think the company needs to decide whether its products are for ‘the masses’ or a high-end fashion item.
All this means it’s caught in a vicious cycle of increasing prices to improves its profits, but then having to implement further price rises as sales volumes fall.
I don’t think this is sustainable.
For this reason, I wouldn’t want to invest at the moment.
