- Latest in a string of earnings disappointments from former private equity asset
- Profit margin expectations lowered for new fiscal year
- Company has yet to prove it can swiftly liquidate bulging inventory
- Long-term margin targets look further away than ever
“Investors could be forgiven for sighing and dismissing Dr Martens as just another dud to be sold onto the unwary by private equity, given that the shares stand more than 60% below their 2021 flotation price of 370p after the latest set of disappointing results,” says AJ Bell investment director Russ Mould. “The issue is not the numbers for the year that ended in March 2023, but the guidance from chief executive Kenny Wilson for the coming year, which signals increased investment in the business and therefore lower profit margins. That is the latest in a string of disappointments and one which could feed the prejudice that private equity firms squeeze costs and investment too hard when they own a business and then leave the next owners to pick up the tab.
“Even a £50 million share buyback is offering little by way of comfort to shareholders, who are responding to the new profit forecast downgrades by giving the shares a fresh kicking, especially as management’s forecast of even a one to two percentage point drop in its preferred profit margin metric relies heavily upon a second-half recovery.
“Using Dr Martens’ preferred measure profit, EBITDA (or earnings before interest, taxes, depreciation and amortisation) came in as expected, at £245 million for the year to March 2023 for a 24.5% return on sales.
“Analysts had pencilled in £250 million for the year to March 2024, and a 23.9% margin, but that now looks optimistic given Mr Wilson’s suggestion that sales will rise by a mid-to-high single digit percentage in the coming year, but that EBITDA margins will slide by one or two percentage points. That implies an EBITDA number of £242 million at the mid-point, assuming a 1.5-point margin decline.
Source: Company accounts. *2024E based on mid-point of management guidance alongside 2023 results. Fiscal year to March.
“That is a downgrade of 3% and suggests the heavy share price falls in early trading are a bit of an over-reaction.
“But the latest cut to estimates will niggle for three reasons.
“First, it is the latest of a series of downgrades and one that implies a second consecutive drop in profits.
“Second, Dr Martens also still has to prove that it can resolve the difficulties with its distribution centre in Los Angeles and whittle down its bulging £258 million inventory pile. That year-end figure equates to 246 days’ sales and raises the risk that the company has to discount to shift the stock.
Source: Company accounts. Fiscal year to March.
“Finally, any need to cut prices – something which the power of the much-cherished brand may help the company avoid – could weigh further on margins and leave the 30% EBITDA margin target brandished by Dr Martens when it first came to market looking even further away.”
