Yahoo Finance Questor: Why Dr Martens is a good fit
Initial public offerings (IPOs) often cause significant excitement among investors. After all, they have sometimes generated large gains in a short space of time.
However, there is never any guarantee that subscribing for an IPO will lead to investment success. An IPO can be priced at a level that is difficult to justify based on the firm’s past performance or future outlook.
Moreover, once the hype surrounding its listing has subsided, its shares can fall as long-term investors scrutinise its prospects.
Indeed, shares in footwear business Dr Martens gained over a third within two weeks of its IPO in January last year.
Since then, the firm’s shares have slumped by 45pc so they now trade 25pc down on their IPO price.
They have been weighed down by factors including recent share sales made by a major investor, supply chain difficulties and Covid lockdown measures.
However, in Questor’s view, the company is in a strong position to capitalise on evolving consumer trends.
Dr Martens’ online sales as a proportion of its total sales have increased from 16pc in the 2019 financial year to 39pc in its latest quarter.
With the proportion of global footwear sales conducted online rising by 12 percentage points to around 33pc in the past four years, and forecast to increase by a further four percentage points by 2025, it could capitalise on digital retail trends.
The firm’s e-commerce sales are contributing to its shift towards a direct-to-consumer (DTC) business model.
Selling via online channels or through its own stores, as opposed to third-party stores, means higher margins and, potentially, a stronger relationship with customers.
The company’s loyal following could allow it to more easily pass on higher input costs during a period of rising inflation.
Its product continuity also means fewer markdowns, which helps to support its gross margin, while supply chain efficiencies have thus far helped to offset a significant portion of rising costs.
The firm’s latest trading update highlighted strong growth in Europe and across the Americas, albeit with some supply disruption in the latter. However, its sales declined by 28pc in Asia due in part to Covid lockdown measures.
As pandemic-related restrictions abate, the company’s own stores and third-party stores could experience stronger trading conditions.
In addition, it plans to open further stores following an 18pc rise in their number in the first three quarters of the current financial year.
This aligns with its strategy to expand in markets such as the US and China, where its per capita sales are a fraction of their UK levels, over the coming years. And, with global footwear industry sales forecast to grow by 12pc per annum between 2021 and 2025, it could enjoy a substantial tailwind.
While the firm’s balance sheet contains a relatively large amount of debt, as highlighted by a debt-to-equity ratio of 189pc, this boosts return on equity.
Moreover, with interest cover of nine in the first half of the current year, the company’s financial standing appears to be sound amid an increasingly hawkish monetary policy outlook.
Even after its post-IPO share price collapse, Dr. Martens still trades on a rather rich forward price-earnings ratio of 17. In Questor’s view, this highlights the excessive valuation placed on the firm upon listing.
However, it can now be justified by its forecast mid-teens sales growth over the medium term and the prospect of an improved margin.
Certainly, factors such as a squeeze on consumer discretionary incomes, the potential for further share sales among major investors and Covid-19 disruption could weigh on its short-term performance.
However, with a sound strategy that is shifting a growing proportion of sales to higher margin DTC channels, an increasingly online focus and a strong brand that is underrepresented in major markets with encouraging growth outlooks, Dr. Martens now offers a relatively attractive risk/reward opportunity.
Questor says: Risky buy
Ticker: DOCS
Share price at close: 274p
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