Dr Martens gets ahead of itself

Dr Martens

Dr Martens (LON: DOCS) has got off to a good start as a listed company. The footwear manufacturer has jumped from the offer price of 370p to 500p in barely more than a fortnight. It may be difficult to warrant any further short-term share price increase.

Dr Martens is undoubtedly a strong and recognisable brand with a loyal customer base. The management team is experienced, and they have been involved in the management of brands, such as Levis, Lacoste and Cath Kidston.

There is a wide spread of international sales and a good online presence. Three-fifths of sales are the original boots.

The strategy is to double revenues, which will significantly boost profit if gross margins can be maintained at around 60%.

Figures

In the year to March 2020, revenues were £672.2m and underlying pre-tax profit was £113m. The profit is expected to improve to £135m on revenues of £783m.  

In 2021-22, a pre-tax profit of £192m is forecast by Peel Hunt. That equates to just over 15p a share of earnings, putting the shares on 33 times prospective 2021-22 earnings. Free cash flow should be in excess of £100m.

The expectations are based on guidance by Dr Martens management, so they should be achievable. The plan is to build the direct to consumer sales and increase sales from e-commerce.

Income

Investors can expect dividend growth on the back of rising profit. The yield is likely to be below 1% following the share price rise.

However, there is the promise of special dividends out of the excess cash generated. This could be a significant amount.

The offer price was at the lower end of the range, so it is no surprise that there has been an enthusiastic reception by investors. It appears to have gone overboard, though.

The share price appears to have got ahead of itself. Dr Martens is a quality company and will be a good long-term investment, but investors should wait for a correction before buying.