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Shares in Dr Martens (LSE:DOCS), the FTSE 250 bootmaker, crashed 19% on 20 September after it was reported that a group of investors had collectively sold approximately 7.3% of the company, at a 9.8% discount (57.85p) to the prevailing market price.
Until news of the placing was released, the share price had never been below 63p. So unless these shareholders invested before the company listed on the stock market, I suspect most of them have taken a large loss.
Although the stock has recovered a little since, the result of this turbulence is that the British legend’s market cap is now (25 September) only £515m.
And a look at its balance sheet at 31 March 2024, suggests this could be something of a bargain.
Loads of stock
That’s because at this date, the company held stock of £254.6m which is ready to be turned into cash.
Accounting standards require inventories to be included in financial statements at the lower of cost and net realisable value.
We know from the accounts for the year ended 31 March 2024 (FY24), that Dr Martens made a gross profit margin of 65.6%. If this were to continue, it means £254.6m of stock would generate £485.5m of gross profit.
| Measure | Projected |
|---|---|
| Revenue (£m) | 740.1 |
| Inventories at cost (£m) | 254.6 |
| Gross profit (£m) | 485.5 |
| Gross profit percentage (%) | 65.6 |
In other words, the company’s now valued at only 6% more than the earnings (before overheads) that its stock should generate.
In fact, the position is probably even better. I suspect most of the costs incurred in producing this stock have already been invoiced by suppliers and paid. In cash terms, it’s therefore worth £740.1m.
Other considerations
Of course, this is rather simplistic. A company isn’t valued on one asset alone. There are also liabilities that need to be taken into account.
And earnings are important too.
In April, it warned that its FY25 profit before tax could be one-third of its FY24 level. This means earnings per share might be as low as 2.3p. Even at its current share price, the stock’s trading on a forward multiple of 23.6. On this basis, it’s not cheap.
All this illustrates how much investors appear to have fallen out of love with the company.
And the level of stock points to a wider problem.
Due to lower than expected sales, particularly in the US, the company’s inventory has been higher than anticipated.
At 31 March 2024, it was carrying the equivalent of 44 weeks of product sales in stock. For comparison, at 28 April 2024, Frasers Group had 22 weeks of inventory on its balance sheet.
As well as tying up cash, there are warehousing costs involved in holding too many goods for resale.
My view
With its strong brand and global appeal, I’m optimistic that the performance of Dr Martens will start to improve.
And the company’s doing everything I’d expect in a turnaround situation. Actions include changing its leader, addressing its stock issue and reinvigorating its marketing. It’s also reduced its dividend.
But despite its shares being close to an all-time low, I don’t want to include it in my portfolio. The stock’s too risky for me.
I’d need to see the green shoots of a recovery before parting with my cash.
