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Doc Martens a bargain after its share price slumps by 25%


Investors in footwear company Dr. Martens [LON:DOCS] have taken a bit of a kicking since the start of the year. The firm’s share price has slumped by 25% following the release of a profit warning. This takes its decline in market value since being listed two years ago to around 57%.

The FTSE-250 stock opened trading today (1st February) at 155p, offering a year-to-date return of -16.5%, a one-year return of -47.7% with its shares ranging between 134.2 and 316.4 over a 52-week period.

The company, originally listed in January 2021, has a market cap of GBP1.5bn.

However, the problems faced by the firm are not terminal. Indeed, their negative impact on its market value provides an excellent opportunity to buy a high-quality company at a bargain price.

There were several reasons behind the firm’s profit warning. Notably, it experienced weaker than expected demand in its US direct-to-consumer (DTC) channel. This was partly due to unseasonably warm weather in October and November from which it was unable to fully recover in December.

Additionally, the company experienced a significant operational problem at its Los Angeles distribution centre. In essence, this created a bottleneck that limited its ability to fulfill wholesale orders.

Changing environment

The firm also announced in its third-quarter trading update that it has revised plans to sell to pure play wholesale e-commerce accounts. This will have a negative impact on its sales volumes over the coming months, but has the potential to strengthen its DTC performance over the coming years. This could lead to higher margins and greater profitability over the long run.

In addition, Dr Martens stated that a more uncertain economic environment could negatively impact on its performance in the 2024 financial year. This, though, does not represent a major surprise given the challenging global economic outlook.

Margin of safety

Crucially, these problems are very likely to be short term in nature. While they will reduce profitability in the 2023 financial year, and potentially in the 2024 financial year, Dr Martens is still expected to produce EBITDA (earnings before interest, tax, depreciation and amortisation) of GBP250m to GBP260m in the current year. This compares to a figure of GBP263m last year.

Given that the stock trades on a price-to-earnings ratio of around 9x, investors appear to have adequately factored in slower growth and reduced profitability versus previous expectations.

Long-term catalysts

A low valuation creates a buying opportunity for investors who can look beyond short-term risks. After all, the firm has an excellent financial position through which it is set to overcome near-term challenges. For example, it has a net debt-to-equity ratio of roughly 50%, while net finance costs were covered around 15x by operating profit in the first half of the current year.

In terms of long-term catalysts, the company has a high degree of customer loyalty that means it is likely to find it easier to pass rising costs onto consumers in an era of rampant inflation. It is on track to open 30 new stores during the year, while continuing to expand its digital presence. And with its DTC channel growing as a proportion of total sales, it has the potential to generate higher margins and further improve brand loyalty.

Investment appeal

Clearly, Dr Martens’ share price could come under further pressure in the short run should its recent challenges persist for longer than is currently expected. But their temporary nature, when combined with the company’s low valuation and sound business model, mean the stock offers a long-term buying opportunity following its recent slump.

Deshe Analytics, rates Dr. Martens as ‘Underperform’. The company said: “Dr. Martens published concerning results on 24th November 2022. Their growth, value, and income factors indicate a poor execution and strategy, which isn’t generating exciting growth. Typically, results like these translate into sustained negative momentum and strong downward pressure on stock price. Correspondingly, Dr. Martens received a ranking of 57 and an ‘Underperform’ recommendation.”

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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