Dr Martens is heavily focused on its recovery, but that turnaround may not happen under its current ownership structure with a report saying it’s being eyed for a takeover by a number of major non-UK firms.

The heritage UK business is listed on the London Stock Exchange but its valuation today is ‘only’ £684 million, down from £3.7 billion when its shares were first floated just three years ago.

Analysts have called that IPO valuation “overinflated” and its current lower value makes it a potential target for deep-pocketed fashion groups and private equity firms. Thisismoney has just published a news report citing an unnamed hedge fund investor who said: “We met with management and there’s something in the offing”.

Who’s lurking?

The company hasn’t commented on the report that said potential suitors could include LVMH as well as VF Corporation. It would certainly be an interesting — and some would say unlikely — move for LVMH, which is heavily focused on the luxury and ultra-luxury market via brands such as Dior and Louis Vuitton. A company selling shoes for £140 wouldn’t seem like an obvious fit.

It would mesh much better with VF Corp’s existing portfolio, however. That includes Vans, The North Face, Timberland, Kipling and more.

Its price tag would seem to put it out of reach for the basket of ‘usual suspects’ such as Frasers Group, Next, Authentic Brands Group and more that could probably afford it but tend to prefer buying distressed brands at bargain basement prices.

So what makes Dr Martens a brand that big global names might want to snap up and what exactly is the problem with it in its current form?

Dr Martens history

Dr Klaus Märtens and his friend Herbert Funck developed the famous air-cushioned soles (later improved and known as AirWair) in order to make army boots more comfortable in the late 1940s and found early success actually selling their products to women.

R Giggs Group bought the rights to manufacture in the UK in the 1950s, tweaked the sole design and added the famous yellow stitching. In 1960 and 1961, it launched the famous 1460 and 161 multi-eyelet boost/shoes that are still made today.

DMs were a workwear staple but in the late 60s and 70s became associated with youth culture tribes such as skinheads and punks. Comedian Alexei Sayle even wrote a song about them.

So far, so cool

As sales grew, international expansion was on the cards, as well as a move into other styles. Sales hit the hundreds of millions in the late 90s but plummeted in the next decade and R Giggs came close to bankruptcy.

In response, production was largely moved abroad, although some of its £200+ styles are still made at its original Northamptonshire factory.

The company clawed its way back under CEO David Suddens and by the late 2000s and early 2010s was one of the UK’s fastest-growing companies.

It was clearly a company on the rise and that attracted plenty of buyer attention.

What went right… and wrong

Private equity giant Permira bought R Giggs for £300 million in 2013 and growth continued with revenues of £454 million in the year before the pandemic after it brought in former Deckers exec Steve Murray as CEO.

But an early sign of the issue that would dog the firm (poor decision-making around production and logistics) came as concerns over declining quality linked to its outsourced production mounted.

And in 2017 its bottom line was hit as Dr Martens Airwair USA recalled over 30,000 vegan boots in the US and Canada after it discovered wearing them exposed people to the toxic dye chemical benzidine.

Such issues seemed like mere blips at the time and the brand went from strength to strength, and even increased its UK manufacturing.

It poached Cath Kidston boss Kenny Wilson in 2018 to be its new CEO and that seemed to be a good decision.

Careful cultivation of celebrity wearers — from the Pope and Dalai Llama to Madonna and the Spice Girls — came alongside high-end collaborations and direct-to-consumer expansion.

It opened new concept stores, reduced wholesale, boosted DTC (something that many brands were doing at the time) and embraced special editions such as working with Yohji Yamamoto, Raf Simons, The Clash and Marc Jacobs, and launching special boots, apparel and accessories celebrating the Sex Pistols.

Overvalued?

It all made the brand seem unstoppable and led to that premium valuation when its shares were listed. There had been rumours that American private equity giant Carlyle might buy it for over £1 billion, but the pandemic appeared to dent its enthusiasm.

While the eventual valuation was thought by some to be just too much, Permira’s £3.7 billion share float of 35% of its equity was heavily oversubscribed and the share price rose to £4.9 billion within a month, leading to speculation it might join the elite FTSE 100.

Its revenue in the year to March 2021 was up 15% at £773 million and a 22% jump saw EBITDA of £224.2 million. And in the first quarter of the next year, it continued to shine with America seeing triple-digit growth.

But by early 2022, while sales were still rising, it also predicted slower growth and its share price began to fall as a sign that lofty expectations being disappointed would see it punished by investors. Yet sales actually continued to rise, reaching record levels.

Still, the share price continued to trend downwards, suggesting investors had also reached the conclusion that they’d been over-enthusiastic. As is often he way, a share price dip becomes a bigger fall, pushing the firm closer to a price level as which it would become vulnerable to takeover approaches.

The logistics issue

On 19 January last year, while reporting another record year, it said that it saw “a combination of significant operational issues creating a bottleneck at our new LA distribution centre (LA DC) and weaker than anticipated US DTC trading, in part due to unseasonably warm weather”.

It shares had been priced at £2.10 on 13 January but were just £1.39 by 20 January.

The company continued its focus on initiatives such as increasing its sustainability credentials, while sales were still rising. Yet while it said its issues at the LA DC were largely sorted, putting things right had cost a lot more than it expected and this dented profits. And it looked like it may have dented the confidence of its customers (both consumers and wholesale buyers) too.

While its results in mid-2023 showed sales still rising, in the US, it referenced weak consumer sentiment and weaker wholesale shipments.

In July it said that addressing its performance in the region “remains our number one priority for FY24. In Americas DTC, the actions we’re taking are progressing to plan, and we continue to expect that it will take until the second half to see a meaningful improvement here”.

The launch of a new ‘brand vision’, more sustainability moves, and the announcement of Apple’s Senior Director for Retail Ije Nwokorie as incoming Chief Brand Officer were key developments to try to arrest the decline.

But H1 results delivered in November saw sales going into reverse, primarily because of weakness in US wholesale. As DTC, retail and e-commerce continued to rise, the company insisted better times were coming.

However, in January this year, its Q3 release showed revenue down 21% at £267.1 million. Again, American weakness was blamed, but combined with a wider softness in the market due to the cost-of-living crisis, the results weren’t well received.

Calls for action

With the share price falling further, earlier this month investment firm Marathon Partners Equity Management called for it to kick off a strategic review and said a sale of the business was the way forward.

Marathon isn’t in the top 10 of shareholders (who are led by Permira with over a 38% stake) so it can’t force change through. But is its sentiment shared by others higher up the list?

The FT has reported that Artemis Income Fund, its third-largest shareholder, identified Dr Martens as “the biggest detractor” in its portfolio in the quarter to December. It talked of “an almost distressed valuation multiple” and said that while “fundamentally [it] remains a unique brand with a global resonance… the obvious catalyst for improved share-price performance would be better guidance and improved execution”.

That didn’t even come close to calling for a review that might lead to a sale and seemed more suggestive of it hoping that different leadership might be on the cards.

Wilson has already said he’s preparing to step down as CEO with the aforementioned Nwokorie to step up.

His experience leading such a business is very thin, but he’s widely respected as a brand visionary. His first priority will be to fix the US business.

US issues haven’t gone away

Only last week in a full-year trading update, the company said it saw “a flat outcome in the USA”, despite stronger business in EMEA and APAC. And remember, America is its largest market.

For the current year, FY25, US wholesale revenue is anticipated to be down in double-digits. And the final AW24 order book, which makes up the majority of the second half of US wholesale, “is significantly down”.

That will all have a “significant impact on profitability”.

Lessons to learn

Dr Martens is a great brand with hugely popular products that — like another footwear brand Birkenstock — just carry on standing the test of time, and plenty of interesting developments in areas such as sustainability and creativity. But it’s also an object lesson in the importance of maintaining the quality levels that customers expect and in not expanding too fast in markets where a slick logistics operation isn’t in place.

Only this month, White Company’s CEO was forced to apologise over logistics delays. And luxury retailer END. had big problems linked to a new automated fulfilment system. Its new stock system implemented to improve inventory management didn’t work out as planned and led to a multimillion pound stock write-off.

Wilson had been an undeniably successful CEO and the firm’s sales are above what they were when its share price was higher. But for investors, it’s profits and future profit growth that count and on that front, the picture isn’t quite so good.

For Wilson, being in the top job during the calamitous LA DC launch wasn’t a good look so his decision to move on comes as little surprise.

But will Dr Martens fall to an overseas buyer? It’s a possibility and it all depends on Permira. It owns almost 40% of the company so its view is paramount.

Its earlier expectations when speaking to Carlyle were lofty and appeared to be justified by the IPO success. What might it want to do now with the market value at only £685 million, as I write? And what about the other shareholders in its top 10 list? They include a variety of UK-based investment and asset management firms, plus one American giant and one from Singapore. Their holdings add up to roughly 30% of the business.

For now, nobody is saying anything so it looks like we’ll just have to watch this space.