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When scanning the UK stock market’s winners and losers last month, one name jumped out: Dr Martens (LSE: DOCS). The famous bootmaker was the third-best performing UK share on the FTSE 350 in June, its share price rocketing 31%, beaten only by Spectris and WAG Payment Solutions.
But before getting too carried away, it’s worth remembering that the bootmaker’s share price is still down a staggering 82% over the past five years. So the big question on my mind is whether these recent gains mark the start of a lasting turnaround, or if it’s simply a false dawn.
Why has the share price surged?
The catalyst for June’s rally was the release of Dr Martens’ full-year 2024 results on 6 June. At first glance, the numbers hardly look inspiring. Revenue fell to £787.6m, down from £877m a year earlier, while earnings per share slid to 2p from 7p. Net margins also collapsed, from 7.9% to just 0.57%, underlining how squeezed profitability has become.
However, investors seemed more focused on the company’s newly unveiled growth plan. Management intends to rein in aggressive discounting in key markets, aiming to rebuild brand strength and protect margins. This strategy appears to have convinced several analysts. Peel Hunt upgraded the stock to Add, while Berenberg and RBC both raised their price targets.
In a market often driven by forward-looking sentiment, this optimism helped fuel the sharp rebound.
A closer look at the finances
Peeling back the layers reveals a more complicated picture. Currently, the stock trades on a price-to-earnings (P/E) ratio of 166, which looks painfully high. However, this drops to a forward P/E of 17.5 when accounting for future earnings expectations. And its price-to-sales (P/S) ratio of 0.92 suggests the brand still generates healthy top-line sales relative to its market valuation.
It currently offers a dividend yield of 3.3%, which is slightly below average but adds some value. But dig deeper and the payout ratio stands at a whopping 542%, implying the dividends aren’t covered by earnings and could be at risk of a cut if trading remains weak.
Looking at the balance sheet, Dr Martens has £401.7m in debt, offset somewhat by £159.8m in free cash flow and £478.9m in long-term assets. While not disastrous, it highlights the importance of improving cash generation to comfortably service debt and support future dividends.
So is it time to buy?
I think there are two main risks here. First, the stock looks expensive given its fragile earnings base. That towering P/E ratio could come crashing down if the company fails to execute its turnaround plan. Second, its substantial debt pile, combined with low margins, leaves little room for error — particularly if consumer demand weakens.
For investors seeking exposure to UK shares with strong growth prospects and healthier balance sheets, there may be better opportunities to consider elsewhere right now.
That said, Dr Martens is a powerful global brand with loyal customers. If management can restore profitability by tightening discounting and stabilising margins, it could achieve a meaningful recovery in the long term.
For now, I’d prefer to watch from the sidelines until there’s more concrete evidence of a sustained recovery. As such, I wouldn’t consider buying the shares just yet.
This story originally appeared on Motley Fool
