Are FTSE 250 shares, which have fallen 14% in a week, the bargain of the century?

Shares in Dr. Martens (LSE:DOCS) FTSE250 The footwear company fell 19% on September 20 after it was reported that a group of investors had sold a combined 7.3% of the company’s shares at a discount of 9.8% (57.85p) to the prevailing market price.

Until the listing was announced, the share price never fell below 63p. So if these shareholders did not invest before the listing, I suspect most of them suffered large losses.

Although the share price has since recovered somewhat, the upheaval means that the British legend now (on 25 September) has a market capitalisation of just £515m.

If you look at the company’s balance sheet as of March 31, 2024, this could be quite a bargain.

Lots of supplies

This is because on that date the company had shares worth £254.6m that could be converted into cash.

Accounting standards require that inventories be recorded in financial statements at the lower of cost and net realizable value.

The accounts for the financial year ended 31 March 2024 (FY24) show that Dr Martens achieved a gross profit margin of 65.6%. If this trend had continued, the £254.6m shares would have generated £485.5m in gross profit.

Measure	Expected
Revenue (£m)	740.1
Inventories at cost (£m)	254.6
Gross Profit (£m)	485.5
Gross Profit Percentage (%)	65.6

In other words, the company is currently valued only 6% higher than the profits (before overheads) that its shares are expected to generate.

In reality, the situation is probably even better. I suspect that most of the costs incurred in producing this product have already been invoiced to suppliers and paid. In cash terms, it is therefore worth £740.1m.

Other considerations

Of course, this is a bit simplified. A company is not valued based on one asset. There are liabilities that need to be taken into account.

Earnings are also important.

In April, it warned that pre-tax profits in fiscal 2025 could be a third of fiscal 2024 levels. That means earnings per share could be as low as 2.3 pence. Even at the current share price, the stock is trading on a forward multiple of 23.6. On that basis, it’s not cheap.

All this shows how much investors have lost sympathy for this company.

And inventory levels point to a broader problem.

Due to lower-than-expected sales, especially in the U.S., the company’s inventories turned out to be higher than anticipated.

As of March 31, 2024, the company had the equivalent of 44 weeks of product sales in stock. For comparison, as of April 28, 2024. Frasers Group had 22 weeks of supplies on its balance sheet.

In addition to the cash tie-up, there are warehousing costs associated with storing too many goods for resale.

My view

Given the strength of the brand and its global reach, I am optimistic that the quality of Dr Martens footwear will begin to improve.

And the company is doing everything I would expect in a turnaround. Actions include changing leadership, solving the stock problem and reviving marketing. The dividend has also been cut.

But even though the stock is near an all-time low, I don’t want to include it in my portfolio. Stocks are too risky for me.

I would have to see the first signs of economic recovery before I spent money.