It has been a tough few years for Dr. Martens (LSE:DOCS). The FTSE 250 stock has dropped in value by 84% over the past three years. Over a shorter one-year timeframe, this is reduced slightly to a fall of 52%. Either way, a significant amount of value has been wiped off the company. Yet based on my view of the company and the market, I think it could be a value buy right now.
Problems galore
Let’s first address the main reasons behind the sharp fall. Part of the problem has come from operational issues, particularly in the US. Problems with a distribution centre in early 2023 meant that it didn’t have capacity to meet orders, causing revenue and profit forecasts to be slashed.
Earlier this year, another profit warning was issued, this time relating to “weak US consumer demand”. With wholesale demand in that market weak, along with persistent inflation price pressures, the overall outlook was pretty bleak. In fact, it expects that in a worst case scenario, profits for this year could come in at just a third of levels seen in the previous year.
Finally, if things couldn’t get any worse, it was announced in April that the CEO would step down before the end of the year.
Everything in the public eye
With all the bad news out there, let’s move on. In fact, that’s one reason straight away that makes me think this could be the right time to buy. All of the bad news is out there in public. It really feels like we’re at peak pessimism right now. Besides the company going bust, I don’t think anything can now come out that would provide much of a negative surprise.
As a result, this acts to put a bit of a floor under the current share price. I’m not saying that this is exactly the lowest it’ll go. But I believe the risk of a further 50% drop in the coming year is low.
Further, despite the profit warnings, it’s important to note that the business is still profitable. Even with the outlook for this year being down, it’s still likely to make a profit. We’re not talking about a company that is losing large amounts of money and taking on debt in order to survive.
Talking of finances, the firm is also cutting costs. We will get more information on how this is going in November, but it’s a sizeable efficiency drive. This should act to help to offset any fall in revenue.
Building an investment case
Finally, there are some problems that will ease off in the coming year. For example, inflation. In both the US and the UK, inflation has fallen this year to much more manageable levels. In fact, interest rates have already started to fall here in the UK as a result. So the pricing pressures that the management team are facing should ease off.
One risk is that many investors might have been burnt already in buying the stock and losing money. Therefore, even though the company might turn a page, some might be reluctant to actually invest. This could cause the share price to remain low for longer than it should do.
I like the investment case right now and so am seriously thinking about buying the stock.
