Dr Martens stands for “rebellious self-expression,” according to the blurb, so the company isn’t in a position to complain if an independent-minded stock market decides to kick its boot.
Investor reaction to Thursday’s semi-annual numbers was forthright. As the CEO, Kenny Wilson, blathered about “another strong run of results” and the board of directors increased the dividend to shareholders by 28%, the stock price plunged by nearly a fifth. It is now 40% lower than last year’s float price.
To be fair to Dr. Martens, one might call the plunge an overreaction under other circumstances. The numbers were strong in the sense that revenues grew 13%; even a 6% decline in pre-tax earnings to £57.9m could be explained in part by a combination of currency moves and a decision to continue investing in new stores, new IT and so on.
The problem, however, is that it is now obvious that Dr Martens was overpriced when it hit the market with a £3.7bn valuation. A story of years of easy growth – thanks to store openings and expansion in the US and Japan – feels more like a struggle in a colder inflationary climate.
The classic 1460 boot already retails at £159, so there’s certainly a limit to the number of price increases that can be applied to meet rising input costs. Operating profit margins are now expected to decline this year, even as the company sticks to its medium-term goal of 30%.
Context is also the key to quickly rethinking value. Dr Martens was launched by private equity firm Permira, which bought the company for just £300m in 2014. Permira took in £1bn in free float at 370p, cut again in January to 395p to the tune of £257m, but is still sitting on a 36% stake. So what does she do with that big rump?
It is assumed to be a long-term seller but, with the stock now at 221 cents, selling at the new level would further weaken other investor confidence. This is a classic over-quota situation. The only short-term cure would be an incredible run of trading numbers from Dr Martens at Christmas, which is probably not the way to bet.
Common sense wrecks the government’s veto
He won’t make the top 10 political U-turns this year, but let’s not overlook Rishi Sunak’s about-face on Wednesday night. In the world of financial regulation, it’s a big deal that the government has abandoned its plan to allow ministers to override city regulators.
The so-called “power of intervention” seemed like a dead certainty to add to the financial markets and services bill because Sunak himself, when he was chancellor, proposed the idea. It was part of the way the UK would pursue those elusive ‘Brexit opportunities’: if pedants at the Bank of England or the Financial Conduct Authority got in the way of UK competitiveness, the government would be able to nudge them down the path favorite.
But no, Andrew Griffith, the Treasury’s economic secretary, was prompted to say the plan was abandoned: “The government has decided not to proceed with the intervention power at this time.”
Thanks for the belated outburst of common sense. The original plan was always wrong and counterproductive. A government veto over specific decisions would have created a statute for offended and well-connected chief executives to trot about Downing Street grumbling.
The two key arguments were made by Sam Woods, the bank’s head of prudential regulation, in a speech last month. First, the link between the operational independence of regulators and financial stability is well established. Secondly, an intervention power would not actually increase competitiveness.
“My view is that over time it would do just the opposite, undermining our international credibility and creating a system where financial regulation was blowing far more with the political wind: weaker regulation under some governments, tighter regulation under others.” Woods said. Absolutely right.
The Bank and the FCA may be wrong from time to time, but there is nothing wrong with the general design of the current set-up: parliament sets the targets and regulators have day-to-day operational independence. The possibility of political interference in individual decisions would have injected uncertainty and confusion into the system.
The government’s U-turn will inevitably provoke the usual shouts from Tory MPs about ‘overpowering’ regulators. Ignore them. It was important that the Bank and the FCA win this power struggle. An independent regulation system must be considered independent.