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I don’t believe Dr. Martin’s share price is a bargain. Here’s why

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At first glance, shares in a shoemaker Dr. Martins (LSE: DOCS ) looks like a bargain. Last year, for example, the company generated underlying earnings of 7p per share. With Dr. Martin’s share price at pennies, that means a price-to-earnings ratio (P/E) of about 12. Not only that, but the results reported today (May 30) were actually much lower than last year. If the company can return to its prior-year performance, the valuation looks even cheaper, with a potential P/E ratio of around 8.

But that’s a big ‘if’. The results have done much to ease my concerns about the health of the business. Yet I don’t see Dr. Martin’s share price as a bargain so much as a potential value trap. Right now I have no plans to invest.

Popular business with unique brand

Let’s start, however, with some strengths.

Thanks to its instantly recognizable boot design, along with a strong brand, the company is able to charge a premium price. Although profits after tax fell sharply last year, they still came in at £69m. With revenues of £877m, this means the business delivered a net profit margin of 7.8%.

Direct-to-consumer sales have been strong and grew in the low single digits last year. Dr Martins itself is opening new stores and has increased its store count by 35 in the last year. It has focused on improving its supply chain and today announced a cost-cutting plan.

Struggling with weak consumer confidence

So why am I nervous about investing in the company right now?

Last year’s revenue declined by 12.3 percent. I don’t see this as a sign of a company in robust health.

The main problem was not retail but wholesale business. On the one hand, it can not be seen as a problem. Dr Martins has made changes to its wholesale strategy and said it deliberately plans to ship lower volumes to wholesalers in Europe, the Middle East and Africa.

But short sales are rarely a sign of a consumer business doing well. I think in this case they reflect what the company commented on in its results: the difficulties in the US.

This is the biggest business of Dr. Martins. Weak consumer confidence is hurting spending in general, Dr. Martins pointed out, pointing to a bot market “Especially challenging“Conditions.

This bodes ill. There is a clear risk that continued economic weakness in the US will affect sales this year and perhaps beyond. On top of that, if this economic downturn spreads to other markets, we could see further declines in revenue and profits at the cobbler. The company says that the current year “A year of transition

Others are waiting for the bot to drop.

The core business is attractive and the company is trying to make the most of a difficult market.

But falling revenues, falling profits, low dividends and high net debt all indicate that the business is out of business. The bot market environment makes this a tough challenge. Right now I have no plans to invest.

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