Operational mistakes and a tough macroeconomic environment have made Dr Martens (LSE:DOCS) one of the worst FTSE 250 shares to own recently. But that might be changing.
The stock jumped 13% on Thursday (28 November) after an earnings report that the market took positively. So could this be the start of a strong turnaround?
What was so good?
The headline news that caused the share price to jump is that revenues were down 18%. That’s right – revenues fell by almost a fifth and the stock is moving higher as a result.
It’s not immediately obvious why that should be a cause for investor optimism. But the reason is that it’s actually in line with what management had been forecasting for the period.
That’s been unusual for Dr Martens since the company went public. It’s regularly issued profit warnings and these are why the stock has been falling over the last couple of years.
Against that backdrop, things actually being no worse than expected is a relative positive. And there are other signs management’s starting to get things under control as well.
Actual positive news
The report wasn’t just about a decline that was no worse than anticipated. There are some genuinely encouraging signs for investors, not just ones that were better than very low expectations.
These included lower inventory levels, reduced staffing costs, and an improvement in the firm’s net debt position. And management indicated there might be more to come in the near future.
End markets are still weak, but there isn’t much Dr Martens can do to change that. What it can do however, is get itself in the best position possible to profit when things pick up.
It looks as though this is exactly what the company’s trying to do. And that’s why the stock has started climbing again despite sales continuing to fall and the firm reporting a net loss.
Recovery timeline
At the start of the year, I was optimistic about Dr Martens’ shares. I thought the business had made it through the worst and that it was just a matter of waiting for a recovery.
I might still be right about that, but the recovery hasn’t materialised yet. And investors should note the outlook from here is complicated by a couple of issues. One is the change in CEO. There’s a lot of optimism about Ije Nworkorie’s marketing abilities, but with things starting to improve, a change of leadership represents something of a risk.
Another is the potential threat of tariffs in the US. This is the company’s largest market and the effect of higher prices might delay the anticipated recovery even further.
Time to buy?
I sold my Dr Martens shares in April. Rumours of a potential takeover caused the stock to reach 92p and I figured it would need a pretty optimistic view of a recovery to justify that price.
Even after this week’s bounce, the share price is still well short of where I sold it. So I think I can afford to wait a bit longer and see how things take shape before considering buying again.
The post Up 13% in a day, is this FTSE 250 stock set for a comeback? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
