Dr. Martens is synonymous with “rebellious self-expression,” according to the blurb, so the company can’t complain if an independent-minded stock market decides to jump in.
Investor reaction to Thursday’s half-year figures was brutal. As Chief Executive Kenny Wilson spoke of “another strong set of results” and the board increased the dividend to shareholders by 28%, the share price crashed nearly a fifth. It is now 40% lower than last year’s floating price.
To be fair to Dr. Martens, in other circumstances one might call the plunge an overreaction. The numbers were strong in the sense that revenues increased by 13%; even a 6% drop in pre-tax profits to £57.9m could be partly explained by a combination of currency movements and a decision to continue investing in new stores, new information technology , etc.
The problem, however, is that it is now clear that Dr Martens was overvalued when he hit the market at a valuation of £3.7billion. The story of years of easy growth—thanks to store openings and expansion in the United States and Japan—is more like a struggle in a colder inflationary climate.
The classic 1460 boot already sells for £159, so there is surely a limit to the number of price increases that can be imposed to match rising input costs. Operating profit margins are now expected to decline this year, although the company sticks to its medium-term target of 30%.
The backdrop is also key to quickly revamping value. Dr Martens was brought to market by private equity firm Permira, who bought the business for just £300m in 2014. Permira took in £1bn at float at 370p, reduced again in January at 395p to the tune of £257m but is still sitting on a 36% stake. So what does he do with that big butt?
He is presumed to be a long-term seller but, with the shares now at 221p, selling at the new level would further undermine other investors’ confidence. This is a classic stock overhang situation. The only short-term cure would be a searing run of Dr. Martens Christmas trading numbers, which probably isn’t the way to bet.
Common sense prevents government veto
He won’t be in the top 10 political turnarounds this year, but let’s not forget Rishi Sunak’s about-face on Wednesday night. In the world of financial regulation, it is a very big deal that the government has abandoned its plan to allow ministers to override city regulators.
The so-called “power to intervene” seemed like a dead certificate to add to the Financial Services and Markets Bill because Sunak himself, when he was Chancellor, had proposed the idea. This was part of how the UK would pursue those elusive ‘Brexit opportunities’: if the pedants of the Bank of England or the Financial Conduct Authority hampered the UK’s competitiveness, the government would be able to push towards the preferred path.
But no, Andrew Griffith, the Treasury’s economic secretary, was kicked out to say the plan had been scrapped: “The government has decided not to proceed with the power of intervention at this time.”
Give thanks for the belated burst of common sense. The original plan was still misguided and counterproductive. A veto power for the government over specific decisions would have created a charter allowing aggrieved and well-connected CEOs to go to Downing Street to complain.
The two key arguments were made by Sam Woods, head of prudential regulation at the Bank, in a speech last month. First, the link between the operational independence of regulators and financial stability is well established. Second, a power of intervention would not really boost competitiveness.
“My view is that over time it would do the exact opposite, undermining our international credibility and creating a system in which financial regulation blew much more with the political wind – weaker regulation under some governments, more harsh under others,” Woods said. Absolutely right.
The Bank and the FCA may screw up from time to time, but there is nothing wrong with the overall design of the current setup: parliament sets targets and regulators have day-to-day operational independence. The possibility of political interference in individual decisions would have created uncertainty and confusion in the system.
The government’s U-turn will inevitably provoke the usual cries from Tory backbenchers about ‘overpowered’ regulators. Ignore them. It was important that the Bank and the FCA win this power struggle. An independent regulatory system should be seen as independent.