Shareholders in Dr Martens (LSE:DOCS), the iconic FTSE 250 bootmaker, have endured a torrid time lately. The value of their shares has more than halved since May 2023. And they’re now worth 80% less than the IPO price of 370p.
Given that the company has issued five profit warnings since making its stock market debut in January 2021, the poor price performance isn’t surprising. The latest cautioned that its earnings for the year ending 31 March 2025 (FY25) could be a third of the FY24 level.
An aggressive approach
Now that the company is worth £3bn less than when it floated, it could be vulnerable to a hostile takeover. But management teams don’t like to lose control. To fend off an unsolicited approach, the execs will be assessing how they can create additional value for existing shareholders. They’ll aim to improve the company’s profitability.
One solution is to cut costs by moving production overseas. But although the company still manufactures some of its products in England, the overwhelming majority are already made in Asia.
If it’s not possible to materially change its cost base then the company could increase its selling prices. But in the face of aggressive inflation, Dr Martens has already done this. And it has proved to be a double-edged sword.
Balancing act
Yes, its margin has improved. During the six months ended 30 September 2023 (HY24), the company achieved a gross profit percentage of 64.4%. For its 2020 financial year, it was 59.7%.
But it’s now approaching that of a high-end fashion house, like LVMH. The luxury brand owner achieved a margin of 68.8%, in 2023.
And the outcome is that Dr Martens is selling fewer boots, shoes and sandals. During HY24, it sold 5.7m pairs, compared to 6.3m, in HY23.
If the existing management team is restricted in its scope to cut costs and raise prices, I can’t see why anyone else would want to buy the company.
A new owner could insist on using lower-grade materials to boost profits. But I think this would damage the brand that has established a reputation for quality and durability.
It might be possible to achieve some small post-merger cost synergies through the sharing of overheads but I don’t think these would be transformational.
Another option
In my view, the only possible way to increase earnings is to try and sell more by cutting prices. But a 20% reduction would require a 25% increase in sales volumes, just to leave gross profit unchanged.
Some point to the company’s IPO value of £3.7bn and blame investors for not understanding the intrinsic value of the business. However, with the benefit of hindsight, it’s easy to believe that it was heavily overvalued. On flotation, it was valued at over 30 times its profit after tax (ignoring exceptional items) for FY23.
If FY25 earnings are at the lower end of expectations, the stock currently trades on a forward earnings multiple of 15. This is higher than, for example, Next. A bit like its boots, I think Dr Martens shares are expensive.
To be honest, I’m not sure how the existing management team — or a new one — is going to resolve the company’s problems. My personal view is that a takeover is unlikely. But I could be wrong.
