Invest-ability daily 30/09/21: If the boot fits

Should you give Dr Martens shares the boot?

Bank breaking

What do celebrities wear on their feet? Flick through any pap-mag and the answer would appear to be a pair of Dr Martens. The iconic brand made famous as the go-to footwear of working class subcultures from mod to punk throughout the 1960s and 70s and sported by the likes of the Who’s Pete Townshend and The Blockheads’ Ian Dury, has enjoyed a renaissance in recent years as so-called ‘influencers’ have espoused their virtues. With two fashion obsessed daughters, my bank balance has suffered the scars as a result.

Indeed, the DMs you can buy these days cost a lot more than the £19.99 they did in 1982, when Alexei Sayle sang about them on the Young Ones. In fact, they are in many cases eye-wateringly expensive – the standard men’s Chelsea boot that I used to buy in the Army & Navy surplus shop in Forest Gate for a few quid now retails for £149. The most expensive shoe they sell – the 1461 Bex Rick Owens Shoe – is priced at a staggering £269. Luckily, that model didn’t catch my daughters’ eyes.

Looking at the company’s figures, there are lots of people prepared to cough up a small fortune for a pair of Docs, though. It sold 12.7m pairs in 2021, generating revenues of £773m and underlying pre-tax profits of £151.4m – nice margins indeed, and unsurprising given the preces it charges. Its recent rapid growth is expected to continue, too – according to SharePad, revenues are expected to hit £1.2bn by 2024, by which point it’s expected to be making pre-tax profits of £283m. Returns on capital are also strong, and the company says it’s built a scalable infrastructure that will underpin further growth, including a significant expansion of its e-commerce channels.

Nevertheless, the shares have lagged since its flotation in February, hitting a low of 384p this week, 15 per cent below its IPO price. That’s despite a solid update on Q1 trading in which the company said it was sticking to its 2022 guidance of just under 16p a share – a third higher than the previous year – and a maiden dividend of just over 4.6p. True, there have been some concerns over its valuation, but a forecast PE of 25 isn’t asking a great deal for the growth on offer.

Perhaps investors were spooked by the company’s admission that it was “experiencing inbound shipping delays” because of Covid 19 – it’s not alone; as I wrote yesterday, the squeeze on shipping is becoming extremely acute, to the point that large retailers are resorting to chartering ships to ensure their shops are filled for Christmas.  Indeed, while Dr Martens still produces some products at its original factory in Wollaston, Northamptonshire, and very much trades off its iconic British tag, the vast bulk of its boots and shoes are in fact made in – you guessed it – China.

It would be very unfair to point the finger at the company for this fact, given that most of what we buy in the shops comes from the Far East.  And it is bringing some manufacturing back to the UK – anecdotal evidence suggests its Made in England ranges are better quality and more comfortable, although the company disputes that all its factories follow the same processes and that there aren’t any differences in quality.

But, in the current geopolitical climate, a dependence on offshore manufacturing, particularly in China, is starting to look like an increasingly risky approach. In its first annual report, Dr Martens itself says that it’s de-risking its supply chain by diversifying production away from China, a major operation indeed but one that would perhaps help it build rapport with more discerning customers who are increasingly inclined to ‘Buy British’ and have the budgets to pay a little extra (I’ve got my eye on a pair of hand made Chelsea boots from Conker Shoes in Totnes).

That might also protect it from a more general problem with fashion: what’s popular today might not be popular tomorrow. Let’s not forget that before its was rescued by private equity Dr Martens almost ceased to exist altogether, facing bankruptcy in 2003 after losing its popularity in the late 80s and 90s – a shirt sponsorship deal with West Ham perhaps the clearest sign of it having lost its way (white trainers were the terrace staple by then). I’ll be keeping a close eye on my daughters’ footwear to see if and when that moment comes.

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