Shares in Dr Martens (LSE:DOCS) jumped 8.5% on Monday (18 August). And I think it could well be anticipating the start of a long-awaited recovery for the FTSE 250 company.
A lot has gone wrong for the firm since its IPO in 2021, but there are clear signs things are changing. And the current situation reminds me of Rolls-Royce back in 2023.
Darkest before the dawn
In 2023, Rolls-Royce was in a difficult position. A lot of that was due to an unusually difficult trading environment, but some of it was of the company’s own making.
Travel restrictions during Covid-19 were obviously a big problem. But the firm had already been having trouble with its engines before the start of the pandemic.
In other words, more or less everything was going wrong. But as air travel returned and a new CEO took over, all of the negative forces began to change at the same time.
The results have been spectacular. And I think Dr Martens might be in a similar position to where Rolls-Royce was just before things started getting better.
Out of fashion
The footwear market has clearly been tough recently. Nike, Deckers Outdoor (which makes Hoka trainers) and VF Corporation (which makes Vans) have all seen sales falter.
Given this, it’s probably not a big surprise that Dr Martens has seen revenues decline in the last couple of years. But the firm has also made problems for itself.
The company’s move to sell directly to consumers (rather than through retailers) has created inventory issues with well publicised problems at an American distribution centre. And this has driven up costs, cutting into profits.
Nike has also been demonstrating the risks of focusing on distribution over product development. But, in the case of Dr Martens, I think there’s reason for optimism.
Making a comeback
First, there are positive signs for the wider industry. VF’s earnings report last month was better than expected and JP Morgan analysts have upgraded Nike shares to Buy.
On top of that, Dr Martens has a new CEO and a new strategic direction. Ije Nwokorie is looking to focus primarily on products, rather than distribution channels.
If it works, this could fix a lot of the FTSE 250 firm’s recent problems. And while there are no guarantees, I think the business is on the right track – and I’m not the only one.
The latest move in the share price was largely driven by broker Peel Hunt upgrading its price target from 80p to 112p. That’s 38% higher than where the stock is now.
The next Rolls-Royce?
The big risk is that the challenges Dr Martens has been facing prove more durable than I’m expecting. And that possibility is something investors have to take seriously.
I’ve been following the company for some time and I’ve probably been a bit too optimistic. But there are signs things are finally starting to turn around.
I think the similarities between Dr Martens now and Rolls-Royce in 2023 are striking. An improving trading environment is one part of the picture.
Another is the new CEO’s shift in strategy. I’m not forecasting a 1,000% return for the FTSE 250 stock, but I feel it’s worth considering at today’s prices.
