Dr Martens stands for “rebellious self-expression”, according to the blurb, so the company is in no position to complain if an independently minded stock market decides to stick the boot in.
Investors’ reaction to Thursday’s half-year numbers was blunt. While the chief executive, Kenny Wilson, warbled about “another strong set of results” and the board raised the dividend to shareholders by 28%, the share price crashed by almost a fifth. It is now 40% below last year’s float price.
To be fair to Dr Martens, in other circumstances one might call the plunge an overreaction. The numbers were strongish in the sense that revenues rose 13%; even a 6% fall in pre-tax profits to £57.9m could be explained in part by a combination of currency movements and a decision to keep investing in new stores, new IT and so on.
The issue, though, is that it is now obvious that Dr Martens was overpriced when it came to market with a £3.7bn valuation. A tale of years of easy growth – thanks to store openings and expansion in the US and Japan – looks more of a struggle in a colder inflationary climate.
The classic 1460 boot already retails at £159, so there is surely a limit to how many price increases can be pushed through to match rising input costs. Operating profit margins are now expected to fall this year, even if the company is sticking to its medium-term target of 30%.
The backdrop is also key to the rapid rethink on value. Dr Martens was brought to market by the private equity firm Permira, which purchased the business for a mere £300m in 2014. Permira cashed out £1bn at float at 370p, trimmed again in January at 395p to the tune of £257m but is still sitting on a 36% stake. So what does it do with that large rump?
It is presumed to be a long-term seller but, with the shares now at 221p, sales at the new level would further sap other investors’ confidence. This is a classic share overhang situation. The only short-term cure would be a storming set of trading numbers from Dr Martens at Christmas, which is probably not the way to bet.
Common sense scuppers government veto
It won’t make the top-10 list of this year’s political U-turns, but let’s not overlook Rishi Sunak’s volte-face on Wednesday evening. In the world of financial regulation, it is a very big deal that the government has dropped its plan to allow ministers to override City regulators.
The so-called “intervention power” looked a dead cert to be added to the financial services and markets bill because Sunak himself, when chancellor, proposed the idea. It was part of how the UK would pursue those elusive “Brexit opportunities”: if pedants at the Bank of England or the Financial Conduct Authority were getting in the way of UK competitiveness, the government would be able to prod them towards the preferred path.
But no, Andrew Griffith, the economic secretary to the Treasury, was wheeled out to say the plan has been dropped: “The government has decided not to proceed with the intervention power at this time.”
Give thanks for the belated outbreak of common sense. The original plan was always wrong-headed and self-defeating. A right of veto for government on specific decisions would have created a charter for aggrieved and well-connected chief executives to trot round to Downing Street to grumble.
The two key arguments were made by Sam Woods, the head of prudential regulation at the Bank, in a speech last month. First, the link between operational independence for regulators and financial stability is well-established. Second, a power of intervention wouldn’t actually boost competitiveness.
“My view is that through time it would do precisely the opposite, by undermining our international credibility and creating a system in which financial regulation blew much more with the political wind – weaker regulation under some governments, harsher regulation under others,” said Woods. Absolutely right.
The Bank and the FCA may screw up from time to time, but there’s nothing wrong with the overall design of the current setup: parliament sets objectives and regulators have day-to-day operational independence. The possibility of political meddling in individual decisions would have injected uncertainty and confusion in the system.
The government’s U-turn will inevitably provoke the usual cries from Tory backbenchers about “overmighty” regulators. Ignore them. It was important that the Bank and the FCA won this power struggle. A system of independent regulation has to be seen to be independent.