Dr. Martens stands for “rebellious self-expression,” the blurb says, so the company isn’t in a position to complain if an independent-thinking exchange decides to put the boot in.
Investor reaction to Thursday’s half-year results was blunt. While the CEO, Kenny Wilson, babbled about “another strong set of results” and the board increased the dividend to shareholders by 28%, the stock price collapsed by nearly a fifth. It is now 40% lower than last year’s float price.
To be fair to Dr. Martens, in other circumstances you might call the jump an overreaction. The numbers were strong in that sales were up 13%; even a 6% drop in pre-tax profit to £57.9m can be partly explained by a combination of currency fluctuations and a decision to continue to invest in new stores, new IT and so on.
The problem, however, is that it’s now clear that Dr. Martens was too expensive when it hit the market with a valuation of £3.7 billion. A story of years of easy growth – thanks to store openings and expansions in the US and Japan – looks more difficult in a colder inflationary environment.
The classic 1460 boot is already on sale for £159, so there’s certainly a limit to the number of price increases that can be made to match rising input costs. Operating profit margins are expected to fall this year, even as the company sticks to its medium-term target of 30%.
The background is also key to the rapid rethinking of value. Dr. Martens was marketed by private equity firm Permira, who bought the company in 2014 for just £300 million. Permira took £1bn on float at 370p, trimmed back to 395p in January for £257m, but is still sitting at a 36% stake. So what’s it doing with that big tail?
It is believed to be a long-term seller, but with the shares now at 221p, selling at the new level would further undermine the confidence of other investors. This is a classic share overhang situation. The only short-term remedy would be a stormy series of trade numbers from Dr. Martens at Christmas, which is probably not the way to bet.
Common sense overrides government veto
It won’t make the top 10 of this year’s political turnaround, but let’s not overlook Rishi Sunak’s turnaround on Wednesday night. In the world of financial regulation, it’s a very big deal that the government dropped its plan to allow ministers to override city regulators.
The so-called “intervention force” seemed dead proof to be added to the financial services and markets bill, as Sunak himself, then chancellor, had proposed the idea. It was part of the UK’s way of pursuing those elusive “Brexit opportunities”: if know-it-alls at the Bank of England or the Financial Conduct Authority got in the way of the UK’s competitiveness, the government would direct them towards of the desired path.
But no, Andrew Griffith, the Treasury’s economic secretary, was wheeled out to say the plan had been scrapped: “The government has decided not to proceed with the intervention power at this time.”
Give thanks for the belated burst of common sense. The original plan was always wrong and self-defeating. A government veto over specific decisions would have created a charter for aggrieved and well-connected chief executives to trot down to Downing Street to grumble.
The two main arguments were advanced last month by Sam Woods, head of prudential regulation at the Bank. First, the link between operational independence for regulators and financial stability is well established. Second, a power to intervene would not really increase competitiveness.
“My view is that over time it would do just the opposite, undermining our international credibility and creating a system where financial regulation is much more politically driven – weaker regulation under some governments, tougher regulation among 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 set-up: Parliament sets the 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 turnaround will inevitably provoke the usual cries from Tory backbenchers about “overpowered” regulators. Ignore them. It was important that the Bank and the FCA won this power struggle. A system of independent regulation should be seen as independent.