Many growth stocks have seen their valuations slashed in half or more this year. Dr Martens (LSE: DOCS) is no exception as the stock lost more than 55% of its value at one point. However, the retailer posted an excellent set of FY 2022 results. Since then, the Dr Martens share price has shot up by 40%. This makes me wonder whether this growth stock is set to explode further.
Just what the Dr ordered
Dr Martens has had a tough year since the business listed via an IPO last January. The stock tumbled after management disclosed a heavy £80.5m in listing costs. Additionally, a £49.1m one-off IPO bonus given to employees soured investor sentiment further, stomping the Dr Martens share price into the ground.
Nonetheless, the firm’s most recent annual results blew my expectations out of the water. I was taken aback by how well the FTSE 250 growth stock did as a business, rather than as an investment, having been initially bearish about the company’s prospects. Sales for the year came in at £908m with a net profit of £181m. This was well above what analysts had forecast at £155m. More impressively, Dr Martens grew its gross margins by 2.8% to 63.7%. The company focused more on its own retail sales and cut wholesale distribution, which helped its bottom line massively.
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A strong tail kick
It’s no secret that strong, in-demand brands fare better in high-inflation environments because these brands are able to pass on costs to consumers who will still buy their products. And Dr Martens has price rises in the pipeline. Its sector is bearing up well too. Despite the latest BRC retail sales data showing a contraction in overall consumer spending, the fashion industry did relatively well.
As such, Dr Martens has a tailwind that could help it ride through the inflationary storm. On the earnings call, CEO Kenny Wilson mentioned that he doesn’t see demand softening. He reiterated the company’s efforts to expand further in America, Germany, Japan, and China where he sees untapped potential for growth. With China also coming out of lockdown, this could be a windfall opportunity for the boot maker.
A big boot to fill
With that being said, I think it’s important to stay realistic about Dr Martens’ goals. Its amazing numbers and lofty ambitions should definitely be commended. However, the manufacturer now has to live up to the high expectations it set out, or risk its stock crumbling again.
Nevertheless, I’m impressed with how the firm has managed to improve the state of its balance sheet. For one, its debt-to-equity ratio is finally below 100%. Secondly, it increased its free cash flow to £159m from £129m last quarter. Dr Martens also has a healthy level of assets to cover its short-term liabilities. Finally, the company increased its dividend to £0.04 per share, giving it a 3% yield. So, with an average price target of £3.32, Dr Martens seems to me like it could be on track for an explosive recovery, making it a lucrative growth stock for me to purchase for my portfolio.
