The FTSE 250 index can be a great place to go bargain hunting for undervalued UK shares. This begs the question: could the next comeback kid be the worst-performing FTSE 250 stock in recent years?
After an 85% share price fall since January 2021, famed footwear maker Dr Martens (LSE:DOCS) is the firm in this unfortunate position. Yet despite what looks like a rock-bottom valuation, I’m not tempted to buy the shares today.
Here’s why.
Profit warnings
Failing to live up to market expectations can be devastating for a firm’s share price. Dr Martens has made a nasty habit of doing exactly this, having issued five profit warnings during its time as a public company.
Weak US sales are the primary cause of the group’s latest woes. It announced a 24% plunge in its FY24 stateside revenues back in May, which drove total sales 12% lower to £877m.
Worryingly, the company doesn’t expect any material improvements this year. Investors will likely have to wait until FY26 for a return to growth, provided the business can succeed in its turnaround mission.
The transition plan seems to involve inventory reductions, a £20m-£25m cost-cutting effort with possible job losses, and increased marketing investment in the US. Streamlining the company while simultaneously boosting marketing spend won’t be an easy feat.
But it will be necessary. Net debt increased from £288m to nearly £358m last year, so repairing the balance sheet is an urgent priority.
Pricey products
There’s no doubt that Dr Martens boots are popular products, famed for their sturdiness and trademark yellow stitching. However, I think one of the biggest challenges facing the group is that it has potentially reached the limits of its pricing power.
Currently, the classic boot is on sale in the UK for £170. That’s not a cheap purchase for consumers still struggling in the ongoing cost-of-living crisis. Brand strength can only take the company so far.
It seems the business recognises this, evidenced by the fact that it doesn’t intend to raise prices this year. However, the board admits that this means it will be “unable to offset cost inflation as we have in prior years“. I fear the company might be stuck in a Catch-22 situation.
Recovery hopes
While there’s plenty that concerns me, the valuation’s beginning to look more attractive. The stock’s price-to-earnings (P/E) ratio has fallen to around 9.6. This boosts the investment appeal somewhat.
Plus, if the transition plan proves to be successful, I think there’s potentially room for a share price recovery. One factor that could spur a rebound is a possible takeover.
There are reports that major fashion conglomerates, such as LVMH and VF Corporation, are eyeing up the British bootmaker. Such a move has the backing of some major Dr Martens shareholders too. It’s worth monitoring developments on this front closely.
I’m treading carefully
The shares might look cheap today, but there are good reasons the valuation’s taken a kicking.
With profits proving hard to come by, dividend payments slashed in half, and a weak balance sheet, I wouldn’t invest until I see concrete evidence of improvement.
Overall, I think there are better FTSE 250 shares to buy instead.
This post was originally published on Motley Fool
