Is Shoe Zone at the value end of the stock market?

15th Aug '20 by Tortoise investor

8 comments 561 reads

I’m on the look-out for some bargains at the moment, and have noticed Shoe Zone (LON:SHOE) is sitting on my watchlist at c.52p – an all-time low. In April it fell to around 60p before climbing to around 100p, and falling back to its present level. Basic EPS for 2019 was 11.4p and underlying EPS was 18.4p. As well as being at the value end of the highstreet, is Shoe Zone (LON:SHOE) at the (good) value end of the stock market?

This is an easy business to understand. It sells cheap shoes which may potentially position it well during the recession. It has a large number of high street stores but its currently strategy is to move more towards ‘big box’ sites, which may work better for COVID given it is easier to implement social distance measures in these locations. This might also be important for the rush to buy back-to-school shoes given kids usually need to try on multiple pairs (see commentary below). However, at end of December the company had 45 stores out of a total store base of around 550. Digital sales are relatively low but rose during lockdown (see below).

In the past the company paid a reasonable dividend but it recently indicated it will be unlikely to pay dividends for some time to repay debt.

66% of shares are not in public hands, so the senior leadership should be highly motivated here.

Note I am an amateur part-time investor with no real expertise on balance sheets so definitely DYOR!

Recent performance

In the six months to 4 April (H1) the company made revenue of £68.9m – compared to £73m in H1 18/19. In the year to February – so ignoring March 2020 – the company noted revenue growth was 2.6%. Not a fantastic rate of growth but not a disaster either. One bright spot is that digital growth had been 31% in the half, albeit from a low base and still only representing less than 10% of revenue.

Statutory profit before tax in the half was -£2.5m compared to £1m a year earlier (the full year net profit for 2019 was £5.7m). Note there is a seasonal bias so historically H1 results don’t contribute as much to profits. I assume – but I am guessing – this is partly related to parents buying new shoes for school so it might…

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DWit199

15th Aug '20

In the latest interims, under the liabilities section, trade and other payables has increased from £1.9m to £46.5m. What do you think is the explanation for this large change?

aflash

Have you listened to Stephen English a 'plague on all our houses' this spring, on P.I.World? It does not show up on the Discussion tab, only his 2019 comments. He said it was certain that the owners would get increased bank facilities and that turned out to the case.

I then bought at 78. In 2019 I sold at 147 for a profit but had to endure a few months under water. In 2016 I sold for a small loss. My position size is always small but your interest increases mine. I can easily bring my price down to 64 where the share was at the end of July. There was huge volume on 5 August but the price did not move. Then on 13 & 14 it dropped on greater volume than average.

It is the owners who keep me. As Stephen, you and Paul point out they are (High) Street Wise.

Snowbum

16th Aug '20

Though i'm still learning the craft, from a TA perspective the chart looks quite grim to me. Would be interested on others interpretation?

My analysis suggests there is a descending channel on the weekly chart starting back at 04 Feb 2019 with bounce off lower support line around 07 Oct 2019. If this channel is valid, recent price action has broken through the lower support on high volume. I'd be looking to see if there is any reaction at the all time low on 30 March 2020 at around 35p before taking a punt on this.

Gromley

IFRS16

You'll notice that the latest interims a new asset "Right of use assets" amounting to £53.5m.

This is the value they have by being able to use their stores for the duration of the lease term.

This is balanced, by the liabilities that they have to pay the rents in future during the course of the lease terms.

Opinions differ as to whether IFRS16 is helpful or not, but the key fact is that it is very different.

Based on the above numbers, I would say that most if not more than all of the increase in trade and other payables came about from this reclassification. So not really a story IMHO.

Fegger

Have been a long term holder but sold out as retail sector profits shown to be very poor. And now the UK stock market trend for the whole sector very poor. And dividends suspended which was always a great strength of this stock. I do think they are a well run outfit and interesting that they have brought back a Finance Director so they must think that he is a quality operator. Also have the strengths of a family oriented company. I aim to buy back in when indicators improve though of course timing is tricky. I would especially hope that they can grown their online presence in the meantime. I am glad that they are now stocking a very wide range of brands including some US ones so that they can market some of these brands as well as their own.

Thanks. I had overlooked the impact of IFRS16 when accounting for leases.

This would also explain the fall of the Altman Z score after publication of the interim results.

Yes IFRS 16 is a minefield.

I think you are right about the Z score.

Shoe Zone (LON:SHOE) fails on two counts :

"Are liquid assets a significant proportion of the assets?" - the RIght of use asset (not liquid) make up about half of the total asset base.

"Does firm value compare favourably to its liabilities?" - liabilities are significantly inflated by the future lease payments.

Also these lease liabilities should (technically but not helpfully imho) be treated as debt, which distorts a number of other key ratios (including the F score).

In most cases the stocko tables do pick this up as debt - for some reason (& it will be Thompson Reuters rather than Stocko I think) in the case of SHOE the leases have not been shown as debt.

So not only complex, but also inconsistent!

Still if this stuff were easy .......

dustyie

Looking at shoe zone solely from a chart point of view . ........ it a share that going south . it would need to bottom out for a least 6 weeks , before you should considering a purchase,
One point i personally didn't like was the suddenness that last CEO left. This is a red flag for me and why i sold out last year.
DYOR

Is Shoe Zone at the value end of the stock market?

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Tortoise Investor

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