Small Cap Value Report (11 Jan 2017 - Part 1) - SHOE, JOUL

Wednesday, Jan 11 2017 by

Good morning,

There are two reports today, this one from me, and an additional report from Graham - here - he's running a bit late today, due to a late flight last night. So his report won't be finished until later this afternoon.

Today I shall be reporting on;

  • Joules - Xmas trading update
  • ShoeZone - preliminary results

Graham will be reporting on;

  • McBride
  • Sigma Capital
  • Foxtons

Yesterday's report - I had a late surge, and added loads more companies to it, in the evening. So I reported on a total of 11 companies. Here is the link to review that report.

Thanks for all the reader comments - these are an increasingly valuable part of the whole thing. I very much welcome intelligent, interesting reader comments. Feel free to disagree with me too - well-argued bear points are particularly welcome.

"Market expectations" clarity in RNSs

Before I get started on the companies, a quick hat tip (see Tweets below) to Reg Hoare of MHP Communications. Reg is one of my favourite PR people, as he's very responsive to private investors, and recognises our importance in creating liquidity & setting share prices.

Why do I talk to PR people at all, you may ask? Well, despite being much maligned, they're actually very helpful, I find. They give me access to companies that I wish to speak to & meet. They often email me broker notes on results day, and presentation slides which the Instis are given. Also they are sometimes receptive to grumbles I have about the wording of RNSs, etc. So my aim is to improve things for everyone, where possible, by giving useful feedback to the PR companies. Lots of them read my reports too!

For these reasons I'm happy to have a co-operative relationship with quite a few PR firms. I resist their charms when they try to change my views on companies, unless they present reliable facts & figures to support their argument. In those cases, I try to keep an open-mind & am willing to change my mind if the facts suggest that is the correct thing to do.

Also they all now know that it's a waste of time to try to get me interested in blue sky, or jam tomorrow shares!

Going back to Reg, he responded positively to my suggestion yesterday that all companies should clearly state in their trading updates the specific figure for market expectations.

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Shoe Zone plc is a footwear retailer in the United Kingdom and the Republic of Ireland. The Company offers women's shoes, men's shoes, boy's shoes and girl's shoes. The Company's online offering combined with its store network enables customers to shop through multiple channels. The Company operates from a portfolio of approximately 550 stores. Its customers purchase all of the products available in stores, as well as an additional approximately 400 product styles. The Company sells over 20 million pairs of shoes per annum. The Company has operations in various countries, including Germany, Italy, Spain and France. The Company's distribution center is located in Leicester, England. The Company's subsidiaries include Castle Acres Development Limited, Shoe Zone Retail Limited, Zone Property Limited, Zone Group Limited, Shoe Zone (Ireland) Limited, Shoe Zone Pension Trustees Limited, Stead & Simpson Limited, Zone Footwear Limited, Zone Retail and Walkright Limited. more »

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Joules Group PLC is engaged in the design and sale of lifestyle clothing, related accessories and a homeware range, through the multi-channel business structure embracing retail stores, e-commerce, county shows and events and wholesale. The Company has three segments: Retail, Wholesale and Other. The Retail segment includes sales and costs relevant to Stores, E-commerce, Shows and Franchises. The Wholesale segment includes sales and costs relevant to the sale of products to other retail businesses or distributors for onward sale to their customer. The Other segment includes income from licensing. The Company's products include womenswear, menswear, Little Joule, Baby Joule, Wellies and homeware. The Company operates 97 the United Kingdom and Republic of Ireland stores (including five concessions) and three franchise stores. Joules branded products are sold through selected wholesale partners, primarily in the United Kingdom, North America and Germany. more »

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  Is LON:SHOE fundamentally strong or weak? Find out More »

38 Comments on this Article show/hide all

Howard Marx 11th Jan '17 19 of 38

In reply to post #166176

"Surely these should be available on the investor section of a company's web site at the same time they are sent to institutions. It seams wrong that there is one rule for PI's and one for institutions"

Rest assured Purpleski, all information handed out at institutional investor results meetings has (to avoid inside information infringement) already been made public either via the company website or broader internet disclosure.

The one advantage that the institutions do have is in corporate access i.e. meeting companies 'one-on-one' in the periods in between results presentations.

Companies at these meetings clearly cannot (by law) disclose inside information. However, given that 'body language' supposedly represents 90% of communication, access to such meetings is clearly an advantage.

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jonesj 11th Jan '17 20 of 38

Shoezone have a VERY low quality product offering. As far as I can see, there are plenty of other supermarkets and discount retailers with marginally more attractive product at a similar price. No moat at all.

My nearest store has a prime location in central Milton Keynes. The rent cannot be cheap. Although I suppose a small empty town centre shop might cost less to run than a large empty Brantano shed on a retail park.

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Aislabie 11th Jan '17 21 of 38

In reply to post #166266

I am surprised at the assumption that food will not be bought online - when it already is, and in substantial and fast growing amounts. I use Ocado for probably 80% of all food purchases and with Amazon joining the offerings by all the main supermarkets it will only increase.
I am happy to buy basic shoes online - as long as the return process is slick. SHOE concentrates on basic rather than fashion offerings so I would expect its sales to go online even faster than, say, Russell and Bromley

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Velo 11th Jan '17 22 of 38

In reply to post #166347

Yes, but be fair Herbie, Are you surprised they didn't last? You probably bought the ultra cheapest footwear in Britain. It's their USP. Cheaper than Aldi et al.

It's why I visited them with serious intent.

I wanted cheap, cheap, footwear - but my feet aren't having any of that.

Rule No:1 for shopping at Shoe Zone (LON:SHOE) - is that you have to have the right feet. I've got the wrong feet.

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herbie47 11th Jan '17 23 of 38

In reply to post #166362

To be fair they were similar prices, so comparing like with like. They fit ok it just the wear is not. They were not that cheap either. I only have one right foot.

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topvest 11th Jan '17 24 of 38

Lots of adverse comment, but they are a highly profitable and extremely well outfit. The average share buyer obviously would not go anywhere near such a bottom-end store as this and is probably walking past at the wrong time of day!

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Jardine 11th Jan '17 25 of 38

Given the experiences of readers of this blog it seems the Directors of Shoe Zone (LON:SHOE) need a standing ovation for having generated £160m of sales from an estate of just over 500 shops that appear to be devoid of any customers!

I am reminded though of a quote from the most successful British shoe retailer ever, Sir Charles Clore, who established the British Shoe Corporation after the Second World War. He once said the easiest way to make money was selling shoes and the best place for a shoe shop was right next door to another one.

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Velo 12th Jan '17 26 of 38

"...Given the experiences of readers of this blog it seems the Directors of Shoe Zone (LON:SHOE) need a standing ovation for having generated £160m of sales from an estate of just over 500 shops that appear to be devoid of any customers!.."

- LOL! Hee hee! That's what I'm thinking.


"...The average share buyer obviously would not go anywhere near such a bottom-end store as this and is probably walking past at the wrong time of day! .."

- Yep! I certainly am walking past AFTER paying customers have left.. Have calculated that they must be packed out to the rafters with customers between 9:00am and 11:30am. It's the only explanation left!

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Aislabie 12th Jan '17 27 of 38

In reply to post #166401

Sir Charles Clare was not only quoted as saying this but carried it through by standing outside his Lilley and Skinner shops and counting the customers into it as well as the customers going into the rival Saxone stores which were often next door.
He later bought Saxone and seemed to get satisfaction from firing all their headquarters staff in Kilmarnock.

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Aislabie 12th Jan '17 28 of 38

In reply to post #166431

Apologies, I should have said Dolcis stores not Lilley and Skinner ( which was part of Saxone).

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Howard Marx 12th Jan '17 29 of 38

If Shoe Zone (LON:SHOE) generates annual revenue of £160million from 500 shops then the average revenue per shop is £320,000.

Assuming each shop was open 9 hours/day and 6 days/week then each shop would be selling just EIGHT pairs of shoes per hour (assuming average retail price £15).

A shop selling eight pairs of shoes per hour will rarely look busy!

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herbie47 12th Jan '17 30 of 38

In reply to post #166440

I think the problem is they have many smaller stores in small towns or even in cities they are not always in the main shopping areas. So yes a lot of these stores will look quiet, you say 8 pairs an hour but in the smaller ones that is probably 2-3. They said last year they were closing some smaller stores and opening larger ones, so that should help with growth. For me they have too many stores, many probably are not that profitable, with wages rising that will also affect costs, if you have 2 staff and only selling 4 pairs an hour you can see that's not going to be profitable. Looking at their stores in East Anglia, they have 1 in each major town but then there will have 1 in most towns within 15 miles of them, why not just concentrate on bigger stores in the main shopping centres, people will travel into their nearest large town for shopping, shoes are not something you buy every week, people do make the trip to buy clothes and shoes.

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simoan 12th Jan '17 31 of 38

In reply to post #166338

According to Bloomberg, Miton's holding is 19.37% split across various funds and the Diverse Income Trust. In December, the Miton Multi-cap Income Fund sold down 250,000 shares, leaving the asset management arm with a 14.13% holding. The Diverse Income Trust, when it last declared its holding in July, had also been selling.

I'm never sure how reliable and how frequently updated news sources like this are and so was only referring to the latest holding RNS from April 1st - probably quite an apt date for anyone long of Shoe Zone (LON:SHOE) it would seem :-):

There has been nothing since and so do not see how this qualifies as Miton selling down their holding recently though clearly they have at some point to get from 19 to 14% as of last April. Anyway, it's nice to know I am in good company! However, it does beggar the question why a respected small cap investor has such a large holding in a very illiquid company that sells crappy shoes from empty shops? 

I must say I am greatly encouraged by the negativity towards the company here, it confirms the contrarian nature of my very small holding which is part of a small pot I have for out of favour high QV rank shares paying good dividends which also currently includes Braemar Shipping Services (LON:BMS) and Gattaca (LON:GATC).

All the best, Si

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hayashi22 12th Jan '17 32 of 38

I walk past a Churches shoe shop (top end) every morning and at various times of the day. Yet to see anyone in there!. Think the prices are so high that buyers wait for the sales.

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Flackwell 12th Jan '17 33 of 38

In reply to post #166359

I am talking about the percentage share of the whole market of course - not that NO food is bought online.

Ditto the other markets quoted.

Ultimately the majority shop for these items in physical shops - and will imo continue to do so - hence the growth in the local Tesco's/Sainsbury's/Marks etc

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Flackwell 12th Jan '17 34 of 38

In reply to post #166332

The point is - where is the vast, vast majority bought?

Of course you aim to sell through all available channels but ultimately these items are bought in person not by mice

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Velo 12th Jan '17 35 of 38

In reply to post #166440

Howard, seeing as you've gone to so much effort to break the sales down into daily sales per individual shop (although traditionally weekend retail shop days are stronger than general week days) let's agree that your ballpark figures are close to accurate as is possible.

I have one question based on the assumption that Shoe Zone (LON:SHOE) shops only sell 8 pairs of footwear per day on average.

And it's this:
- How can 8 pairs of footwear sold per day, cover that day's staffing costs (baring in mind the minimum wage and that the shop manager will be paid above minimum wage) let alone after that, contribute towards regional and head office managerial staffing costs - and then some left over to cover the remaining running costs, not to mention expensdive shop leases etc., AND after all that still leave enough over to call it a decent profit? All from just 8 pairs of footwear sold per day?

- I've seen market stall traders admit to selling more than that per day. And they're still struggling to get by.

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Howard Marx 12th Jan '17 36 of 38

In reply to post #166635

I'll let a shareholder of Shoe Zone (LON:SHOE) answer that question Velo.. they are likely more qualified than me in this company.

I suspect the answer lies in the 62% gross margin i.e. each pair of shoes sold at £15 generates nearly £10 of gross profit.

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Jardine 12th Jan '17 37 of 38

In reply to post #166635

Velo, I think you've had a senior moment. The estimated store turnover for Shoe Zone (LON:SHOE) above arrived at 8 pairs per store per HOUR and not per DAY, so that's an average of 72 pairs per store per DAY.

As regards the costs of running each store, bear in mind that landlords now pay rates on empty shops so it is better to have a tenant paying no rent at all than have the shop empty. I expect the management of Shoe Zone (LON:SHOE) take advantage of this and take short term deals at no or low rents. On staffing you don't need to be well qualified to sell a pair of shoes in their sector. Those over 25 would get at least the National Living Wage, currently £7.20 per hour. But those aged 21 to 24 could get paid less, those aged 18 to 20 even less, those aged under 18 even less and an apprentice even less again (£3.40 per hour). So that opens lots of opportunities for cost savings!

Also, I expect many of the shops, such as those in small towns probably only cover their operating costs and a 1/500th share of central costs and make no surplus. That's not a problem as (1) they help build brand recognition which helps the chain nationally (2) it spreads central costs over a larger number of stores so, for example, one international buyer can just as well buy for 500 stores as he can for 250 stores so his/her pro rata cost per store is only half what it would be and (3) the larger volumes from a bigger estate generate bigger volume buying discounts which benefit every store.

It is probably only the sites in busy city locations that really make the profits but that's partly due to the lower overheads they bear individually from having a large estate of stores and from the buying economies that flow from this also.

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Velo 12th Jan '17 38 of 38

See? Knew 8 pairs a day wouldn't do it - But 8 pairs an hour . . . .  :)

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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