Many growth stocks have seen their valuations slashed in half or more this year. Dr Martens (LSE: DOCS) is no exception as the stock lost more than 55% of its value at one point. However, the retailer posted an excellent set of FY 2022 results. Since then, the Dr Martens share price has shot up by 40%. This makes me wonder whether this growth stock is set to explode further.

Just what the Dr ordered

Dr Martens has had a tough year since the business listed via an IPO last January. The stock tumbled after management disclosed a heavy £80.5m in listing costs. Additionally, a £49.1m one-off IPO bonus given to employees soured investor sentiment further, stomping the Dr Martens share price into the ground.

Nonetheless, the firm’s most recent annual results blew my expectations out of the water. I was taken aback by how well the FTSE 250 growth stock did as a business, rather than as an investment, having been initially bearish about the company’s prospects. Sales for the year came in at £908m with a net profit of £181m. This was well above what analysts had forecast at £155m. More impressively, Dr Martens grew its gross margins by 2.8% to 63.7%. The company focused more on its own retail sales and cut wholesale distribution, which helped its bottom line massively.

A strong tail kick

It’s no secret that strong, in-demand brands fare better in high-inflation environments because these brands are able to pass on costs to consumers who will still buy their products. And Dr Martens has price rises in the pipeline. Its sector is bearing up well too. Despite the latest BRC retail sales data showing a contraction in overall consumer spending, the fashion industry did relatively well.

As such, Dr Martens has a tailwind that could help it ride through the inflationary storm. On the earnings call, CEO Kenny Wilson mentioned that he doesn’t see demand softening. He reiterated the company’s efforts to expand further in America, Germany, Japan, and China where he sees untapped potential for growth. With China also coming out of lockdown, this could be a windfall opportunity for the boot maker.

A big boot to fill

With that being said, I think it’s important to stay realistic about Dr Martens’ goals. Its amazing numbers and lofty ambitions should definitely be commended. However, the manufacturer now has to live up to the high expectations it set out, or risk its stock crumbling again.

Nevertheless, I’m impressed with how the firm has managed to improve the state of its balance sheet. For one, its debt-to-equity ratio is finally below 100%. Secondly, it increased its free cash flow to £159m from £129m last quarter. Dr Martens also has a healthy level of assets to cover its short-term liabilities. Finally, the company increased its dividend to £0.04 per share, giving it a 3% yield. So, with an average price target of £3.32, Dr Martens seems to me like it could be on track for an explosive recovery, making it a lucrative growth stock for me to purchase for my portfolio.

The post Is this growth stock set to explode? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. 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.

An unfashionable stock

boohoo (LSE: BOO) is one of the UK’s biggest fashion retailers. The online fashion retailer had already been 30% down this year, but plunged a further 12% after it released its FY22 results. Nonetheless, it’s managed to recover most of its post-earnings loss since then.

The firm had already been starting to see a slowdown in sales growth due to “Significantly longer customer delivery times as a result of the pandemic”. Nevertheless, its new distribution centre in the US is expected to go live in mid-2023. With next day and two-day express delivery options available, this could help ease the supply chain constraints that boohoo is currently facing, and help the stock price.

However, with inflation continuing to weigh on consumer spending, I expect sales growth to continue declining. Management shares my sentiment too, as guidance for FY23 is for low-digit revenue growth. Expensive freight costs have also impacted its bottom line as the firm saw its profit margin decline from 5.2% in FY21 to -0.2% in FY22. For that reason, I won’t be buying this stock for now.

In the eye of the storm

The unfortunate events of the Russia-Ukraine skirmish has battered the Ferrexpo (LSE: FXPO) share price. Commonly known for being a high-dividend yield stock, the stock is now trading at 65% off its all-time-high.

The Ukraine-focused firm faces a large amount of uncertainty given the ongoing war there. Any further escalation might run the company out of business as its mining operations are located just east of Kyiv, where it’s more susceptible to Russian attacks. Additionally, China’s city-wide lockdowns have driven iron ore prices down. This will inevitably impact Ferrexpo’s top line in the near to medium term. Most importantly, the firm decided to defer its dividend payments. The board said that it will continue to assess the situation in Ukraine and make a decision on dividends when appropriate. With many investors initially buying the stock for its dividend, this is a stock I’m avoiding.

Getting the boot

Aside from sky-high inflation, Dr Martens (LSE: DOCS) will also have to worry about the recent retail sales figures. Although positive for the month of April itself, retail sales for the three months to April fell 0.3% as high inflation hurt purchasing power. That’s one reason why its stock is down 50% this year.

The majority of the firm’s revenue stems from the Americas and EMEA region. With inflation continuing to spiral out of control, this doesn’t bode well for Dr Martens’ near-term outlook. As central banks in these regions rush to raise interest rates, its debt levels start to become even more alarming. The firm has a debt-to-equity ratio of 140%, a declining free cash flow, and higher operating expenditure. These aren’t factors that are favourable when I invest in UK stocks, especially in a high interest rate environment. As such, I’ll be looking to purchase other shares with much more favourable fundamentals.

The post 3 UK stocks to avoid this summer appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended boohoo group. 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.

Why investors are walking away 

As one might expect, this isn’t just some random capitulation. Today’s trading update contained what I believe to be pretty worrying news for investors. 

Not that this was immediately apparent. After all, revenue rose 11% to £307m in Q3 — up from £275.6m over the same period in 2020. Direct-to-consumer sales came in 33% higher — a record for the company. Retail sales were particularly buoyant and benefited from more people striding into the stores in October and November.

“So, what’s the problem?“, you might ask. Well, that 11% mentioned above is actually down on the 16% growth achieved in the first half of its financial year. The reason for this probably won’t come as a surprise.

Like many other listed businesses, ongoing supply chain issues are starting to kick Dr Martens where it hurts. A move to prioritise the higher-margin DTC trading led to a 14% reduction at its wholesale arm. So, the company has essentially taken one step forward and one step back.

To make matters worse, revenue in the Asia Pacific region fell by 28% due to Covid-19 restrictions in countries such as China and Australia.

Has the Dr Martens share price fallen too far?

The Dr Marten share price hit a record low of 266p earlier today. Is this simply a case of the market over-reacting? Could the bootmaker turn out to be a canny contrarian buy in time? 

Well, no one knows where share prices will go in the near term. However, my gut tells me that things might get worse before they get better, especially as the company said today that February and March are regarded as “quieter trading months“. Regardless of how confident it is in being able to meet current expectations for its full year, that’s hardly bullish talk. Oh, and the latter is only the case if there is “no significant Covid impact in Q4“. Now, I’m as hopeful as the next person that we’ve reached the pandemic’s endgame. I wouldn’t like to bet on it though. 

For balance, I do recognise this is a brand loved by millions of people around the world. And it’s clear that the company is holding its own online. Sales here made up 39% of the total mix in Q3; that’s far higher than it used to be just a couple of years ago. Year-on-year e-commerce revenue also climbed 16% in the quarter, despite a “tough comparative“. 

Is this enough though? I don’t think it is. Just knowing that I don’t replace my own pair of boots very often is sufficient to make me question the investment case here. And the £2.9bn cap valuation.

Falling knife

I questioned the valuation of Dr Martens not long after it came to market almost exactly one year ago. Today’s update only serves to make me even more bearish. The shares may be down 36% from where they were one year ago but I think they could get even cheaper, especially with the company’s peak trading period now behind it.

Regardless of how highly I rate its products, Dr Martens looks to me like a falling knife. I won’t be attempting to catch it.

The post What’s going on with the Dr Martens share price? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers 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.