Dr Martens (LSE:DOCS) has been a publicly-traded company for less than four years. But the FTSE 250 stock has fallen 83%, due to difficult trading conditions and a series of unforced errors.
The company still has its best asset – its brand – and a balance sheet that looks reasonably strong. So could this be the time to be greedy when others are fearful?
How bad’s the damage?
Dr Martens has had two main problems – weak consumer spending and poor execution of its e-commerce expansion. And the effects show up in the company’s financial position.
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Inventory levels have increased from £123m in 2022 to £255m this year. While it shows up as an asset on the balance sheet, excess inventory isn’t something businesses want.
When a company has more products than it can sell, it has to work out how to store them. That’s expensive and rising costs are bad news for profitability.
On the liabilities side, Dr Martens has also seen its debt levels increase. Net debt has risen from £53m to £175m and interest payments rose from £17m to £31m.
As a result, interest payments now eat up 25% of the company’s operating income. At the start of 2022, it was 6%.
Dr Martens is clearly in a worse position than it was when it first launched on the UK stock market. But there’s reason for thinking the share price might have fallen too far.
Value territory
Arguably the main problem is weaker demand in the US. But this issue isn’t specific to the company and isn’t one it can directly do anything about.
Across the board, consumer discretionary businesses have been struggling with depressed consumer spending in the US. It’s the biggest reason shares in Nike are down 31% over the last year.
At a price-to-earnings (P/E) ratio of 20, I think Nike shares are still some way from bargain territory. But the situation with Dr Martens might be different.
The stock currently trades at a P/E ratio of 11. And that’s based on earnings per share that have fallen 44% from where they were a couple of years ago.
If Doc Martens can get back to earning 18p per share, then the current share price implies a P/E ratio of 4. That’s a bargain by anyone’s standards, but it’s a big ‘if’. And there’s another issue.
The big question is when are things going to start improving? And management’s forecasting another weak year before this happens, meaning shareholders are going to have to wait for some time.
A risk worth taking?
Weak US demand isn’t the only reason shares in Dr Martens have crashed since going public. But a macroeconomic recovery has the potential to turn the company’s fortunes around.
The big question is when this will happen. Management doubts that improvement is imminent, but investors with a long-term view might think the shares are worth considering.
I think considering the stock at today’s prices could turn out to be a good decision, over time. But given the risks, I’d look to keep it as a part of a diversified portfolio.
