It’s a cute gimmick that shares in Dr Martens trade under the stock market ticker “Docs” (Miles Costello writes). This, along with DMs and Airwear, is the term affectionately used to describe the boot and shoemaker’s central product. The stock symbol has been in regular use since late last month amid strong interest among investors in the retailer’s eye-catching multibillion-pound flotation.
The cuteness ends pretty swiftly after that, though, with the listing attracting attention for being a means for Dr Martens’ previous owner, Permira, the private equity group, to make an exit and for the punchy level at which the shares were eventually priced.
Dr Martens traces its history to the turn of the 20th century and a family business based in Northamptonshire. The brand in its recognisable form emerged at the end of the Second World War, when an injured soldier developed a prototype boot with a padded sole. Now the company, which contracts out the manufacturing of its boots and shoes, operates in more than 60 countries, selling 11 million pairs over the year to the end of last March for revenues of £672.2 million and a pre-tax profit of just over £100 million.
So should investors be worried about the private equity history? Well, there are two main warning signs in these situations: heavy indebtedness; and the worry that the selling owner thinks the business is running out of growth.
On the first of those, the signs look good. Dr Martens comes to market with a £300 million loan and a £200 million revolving credit facility, equating to net debt of 1.5 times its earnings before interest, taxes and other charges. That’s by no means excessive and it is aiming to reduce that further over the medium term.
It may be disappointing that the group didn’t raise any capital at the listing to fund growth, but that isn’t a deal-breaker if it doesn’t need the money. Dr Martens has been operating with positive cashflows for at least the past 18 months and had £146.8 million of cash at the end of September, which also looks encouraging.
So what about growth? There’s been plenty of that historically. Revenues rose by just under 48 per cent in the year to the end of last March and pre-tax profit was up by nearly 250 per cent over the period. Even after the pandemic forced it to shutter stores, turnover between April and September last year was up by 18.4 per cent and profit was just under 60 per cent higher than over the same time in 2018.
Moreover, there is plenty of growth to chase, especially overseas, where Dr Martens’ market share is minuscule. While many of us would prefer to try on a new pair of boots before buying, it has been making an increasing success of online sales and is expecting more. Ecommerce generated a compound annual growth rate of 77 per cent at Dr Martens over the three years from 2018 and accounts for about 40 per cent of group sales, which the company wants to lift to 45 per cent.
The business, then, looks to be in pretty good shape, which probably explains the valuation. The shares were priced at 370p, valuing Dr Martens at the time of the listing at £3.7 billion. That equates to 5.5 times last year’s revenues, which, on a like-for-like comparison, is higher than Burberry, the luxury retailer.
The shares have risen further since, up 27p, or 6.1 per cent, to 472p yesterday. With no forecast earnings yet but the promise of a reasonable dividend to come in a year’s time, traditional valuation metrics don’t come in to play, so investors have to take growth on trust. It may well deliver, but the price feels too high.
ADVICE Avoid
WHY Business is in good growth mode with a strong management team but the high valuation is a big deterrent
Stock Spirits Group
When Stock Spirits was listed on the stock exchange in 2013, it badged itself as a “mini-Diageo” (Dominic Walsh writes). At the time, it sounded a bold claim that could easily leave the Polish vodka maker looking a little silly and, sure enough, its early record as a quoted company was punctuated more by profit warnings and shareholder activism than the deals it had promised.
In fairness to Stock’s management, the profit alerts have largely been to do with the imposition of punitive, often unexpected duty and tax increases in Poland.
In recent years it has sealed the odd acquisition, notably in Italy and the Czech Republic and in a nod to its pre-IPO claim, it has become Diageo’s distribution partner in the Czech Republic. Having previously handled its Captain Morgan, Johnnie Walker and Baileys brands, from next month it will take on the full range of Diageo’s premium and super-premium brands, including Tanqueray and Bulleit. On top of that, last year its Italian business signed a distribution deal with Beam Suntory, the owner of Jim Beam.
While taxation still merited its own section in yesterday’s trading update for the past four months, the main message was that the pandemic-related closures and heavy restrictions affecting its sales to bars and restaurants are not a big issue. Together they account for about 11 per cent of group revenues, below expectations but largely offset by strong retail trading. As a result, its performance was in line with forecasts for the full year.
In Poland, the company’s biggest market, additional taxes on small-format bottles will be offset by “a range of commercial and operational actions” and shouldn’t have a material impact. Its lift in market share from 29.7 per cent to 30.1 per cent is its highest December share for five years.
Stock Spirits also saw off the latest attempt by Western Gate, an activist shareholder, to get David Maloney, the chairman, and John Nicolson, the senior independent director, voted off the board. Based on yesterday’s AGM vote, its views are not widely held and even Western Gate has praised Mirek Stachowicz, the chief executive, for his stewardship.
ADVICE Buy
WHY The shares should benefit as the pandemic eases
