Dr Martens PLC (LON:DOCS) has impressed investors with its strong track record as a private company and its growth plans for the coming year, but analysts are divided over whether the shares are worth lacing up.
Barclays on Thursday started coverage with an ‘equal weight’ rating and 480p share price target, saying the valuation is “full but fair” after the shares got a warm welcome since its initial public offer at the end of January.
Over at RBC Capital Markets, meanwhile, initiated coverage with an ‘outperform’ rating and 550p price target, saying the boot-maker and retailer has “meaningful revenue growth prospects in the attractive branded footwear segment, and modest margin opportunity”.
Peel Hunt recently, which wasn't involved in IPO, started with a 'hold' recommendation and 475p target, saying the brand “is in our sweet spot” of compelling consumer brands with a defined USP, attractive return on capital, strong cash generation and good runway for growth but would wait for weakness in the shares due to their high initial rating.
Dr Martens is a footwear brand with “high global brand awareness and distinctive positioning. Its brand is centred around a 'rebellious self expression' concept which is being commercially realized owing to supportive cultural trends, with a balanced gender/age/socio-economic demographic mix and new customers accounting for around 40% of revenues and 50% of website traffic.
A more focused product range in recent years has reduced range complexity and product turnover and led to over 90% full price sell-through in direct-to-consumer (DTC) channels, RBC noted.
With product prices starting at £109 and average prices around £140, DM’s revenues are largely derived from its Originals (60%) and Fusion (25%) ranges, whilst 75% of product is non-seasonal.
The management team, led by CEO Kenny Wilson, has set out medium-term ambitions to at least double revenue in every geography, nudge up underlying profit (EBITDA) margins to circa 30% from 27.4% last year, with 60% of group revenue deriving from DTC, of which around 40% online.
Barclays said the strong revenue and margin growth over the past three years “limits margin expansion upside”, though its forecasts project “attractive” compound annual growth of 16% and 17% for revenue and EBITDA out to 2023.
“We consider this a strong investment case, and believe a premium valuation is justified,” the analysts wrote, but noted that the shares are up 27% since IPO versus the FTSE 250 up 5%.
Comparing with valuation multiples for 2022 for peers Canada Goose, Crocs, Deckers, Moncler, and VF Corp, this would imply fair value of 267-543p for the shares, Barclays said.
“We look for management to build a track record as a public company before arguing DOCS deserves to trade at the top of this range.”
Compared to global footwear peers, RBC said DOCS is in “good shape”, with a significantly smaller revenue base but a DTC mix of 45% compared to a sub-sector average of 36%, which justifies its higher gross and EBIT margins.
From a ‘low’ base of around 11ml pairs of shores per year, the group has a “significant volume led revenue growth opportunity” around the world, RBC reckons.
Revenues and earnings per share are forecast by RBC to grow 14%-plus and 22%-plus out to 2025, while free cash flow “should improve broadly in line with earnings, whilst a progressive 25-35% dividend payout from 1H22 is helpful”.
On RBC’s estimates, the shares trade at 35 times forecast 2021 earnings compared to a peer group at 30 times.