Within the flaky crop of post-lockdown flotations in London in early 2021 – think Made.com (bust) and Deliveroo (shares down 76%) – Dr Martens was supposed to be a beacon of solidity. The company arrived spouting standard management babble about the strength of the brand and the global opportunity, but the pitch sounded more grounded than the hopeful boasts from the techie brigade.
The classic eight-holed 1460 boot, after all, has been around since 1960 and has proved its ability to survive fashion cycles. The company had had a rinse through private equity’s wringer, which is rarely a good sign, but Permira during its seven years of ownership had also pushed international expansion from Japan to the US.
The promise to new investors was healthy profit margins plus “mid teens” growth in revenues as distribution is switched from wholesalers to company-owned stores and the website, especially in the US. The chief executive, Kenny Wilson, when he wasn’t droning on about “inspiring rebellious self-expression”, used the language of clinical execution. The second letter of his “DOCS” strategy, he said, stood for “organisational and operational excellence”. The market lapped it up. Floated at 370p, for a £3.7bn valuation, the shares quickly hit 500p.
Price now: 145p, down almost a third on Thursday as Dr Martens followed November’s downbeat half-year report with a full-on profits warning. In place of operational excellence, a picture emerged of almost comic confusion in the warehouse department.
Somewhere in Los Angeles, it seems, there are three temporary facilities stuffed with boxes of Dr Martens boots because the main US distribution hub in the city is overflowing. “The bottleneck is significantly impacting throughout, limiting our capacity to meet wholesale demand and our Q4 shipment forecasts,” said a statement that threw in a bleat about the weather.
The good news, of a kind, is that extra operatives should eventually sort the size 9s from size 10s. The bad news is two of the three reasons given for the logistical cock-up were self-inflicted: Dr Martens confessed to moving inventory from the old Portland centre to the new LA facility faster than it originally planned; and it accepted requests from US wholesalers to store stock on their behalf.
The result is wrecked profit forecasts for this financial year and next. The £25m whack from the LA setback means this supposedly growth company now thinks its top-line earnings will go backwards from £263m to “between £250m and £260m” this year. Meanwhile, the “mid teens” revenue growth has become “11%-13%” and the impact will still be felt in the financial year that starts in April.
The mood of investors may not be improved by the memory that Permira cashed out £1bn at float plus another £257m soon afterwards. On the other hand, it’s no consolation that the private equity firm still has a 36% stake, which it presumably doesn’t want to own for ever. There is an overhang.
The wider moral of the tale is another blow to the reputation of the London flotation, or IPO, market. The late-2020 and 2021 vintage also included the likes of THG (down 90%) and Moonpig (off 68%). Yes, there is a whiff of tech going out of fashion in those declines; and, yes, investment involves accepting risk. But the skew towards flops is striking.
Julia Hoggett, the new chief executive of the London Stock Exchange, told the FT the other day, that the UK market needs to be “young, scrappy and hungry” in attracting new companies and capital. She’s almost certainly correct, and obviously can’t be blamed for fund managers’ strange willingness to overpay, but it’s not a good look if the only clear winners from the IPO machine recently have been well-padded City advisers, lawyers and publicists via their fees.
Growth-seeking investors, circa September 2020, would have been better off tuning out of the London IPO market altogether and looking instead at such boring FTSE 100 names as Ashtead, Bunzl, Croda, Relx and Spirax-Sarco, which have all performed superbly while generating a fraction of the hype. Cazoo, let’s be thankful, performed its 97% car crash in New York – but it’s not much to cling to.
