Stock in Focus: Is Shoe Zone a good fit?

Thursday, Sep 03 2015 by
8
Stock in Focus Is Shoe Zone a good fit

Disclosure: Roland owns shares in Shoe Zone.

When investing in retailers, it’s important not to confuse product quality with investment quality. Take Shoe Zone, which floated on AIM in 2014. Although the firm’s business model is of the ‘pile them high, sell them cheap’ variety, Shoe Zone’s stock scores far more highly on the quality front.

As it happens, Shoe Zone is one of the most recent additions to my personal portfolio. I purchased the stock after the June interims revealed no new problems and quite decent results.

Nothing much has happened to the share price since then, despite the recent market volatility. This makes sense to me. Although Shoe Zone’s products are made in China, its customers are all in the UK, where the economy appears relatively stable.

Like Poundland, Aldi and other cheap retailers, Shoe Zone appears to have found a successful formula for high street growth. In this article I’ll ask whether this seems likely to translate into shareholder returns.

What about investment appeal?

Shoe Zone’s frugal appeal certainly stretches beyond its footwear.

Stockopedia gives the firm a StockRank of 87, with value and quality ranks in the mid-80s. This gives the firm a QV Rank of 95. As a value and income investor, I often use the QV Rank as an initial filter to highlight companies in which I might be interested, as they tend to fit my investing criteria.

Interestingly, Shoe Zone’s profit warning earlier this year has left the shares trading at almost exactly their IPO price. Thus investors can buy Shoe Zone shares at the initial offering price, but with the benefit of more information.

Good value

Shoe Zone’s ValueRank of 84 reflects an undemanding valuation, an attractive dividend yield and a respectable level of profitability:

55e80fa050cd1SZ2.png

In my view, the dividend yield, earnings yield and P/FCF are the key figures here. Shoe Zone’s modest P/E ratio and attractive dividend yield is backed up by solid free cash flow generation.

The earnings yield is one of my favourite ratios. It’s calculated as EBIT/EV, or operating profit divided by enterprise value. In my view, this is an excellent way of assessing a company’s underlying profitability, as it excludes interest and tax costs but includes the impact of debt on a firm’s valuation.

I tend to look for an earnings yield of more than 10%, so…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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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 »

LSE Price
184p
Change
 
Mkt Cap (£m)
91.9
P/E (fwd)
11.2
Yield (fwd)
5.7



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


10 Comments on this Article show/hide all

Timmytrump 4th Sep '15 1 of 10

Hi

I like the proposition, seems like a John Lee sort of share.

SCS is similar.

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Roland Head 4th Sep '15 2 of 10
1

In reply to post #105890

Hi Timmytrump,

Thanks for your comment. I see your point about SCS (LON:SCS), although in my view Shoe Zone (LON:SHOE) has the edge, thanks to its superior profitability (operating margin of 6% vs 2.5% for SCS) and a more affordable dividend.

As Paul Scott pointed out recently though, current market conditions could be good for SCS for a while longer.

http://www.stockopedia.com/content/small-cap-value-report-12-aug-2015-utw-hrn-cap-trb-trcs-scs-104485/

Cheers, Roland

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VegPatch 8th Sep '15 3 of 10
5

My first port of call in thinking about Shoe Zone was Peter Lynch's advice to invest in companies that you see around you every day. From the outset it appears that Shore Zone (SHOE) has what people desire: a product at a low price point. Average prices are under £10 for a pair of shoes! But when I interrogated the numbers In the P&L felt less comfortable with this assumption. Sales have been going backwards for a number of years. management has just had to close 9 loss making stores and is moving a number of others, whilst opening larger stores. 


SHOE operates from 541 stores nationally. It has realised that a number of its 140ish smaller, Grade 3 stores, which stock c300 shoe styles, are not cutting the mustard and it is having to close some. It however is focusing on opening more, larger Grade 1 stores that stock 450 shoe styles. The problem is that Group sales are going backwards, -6% in H1, and although gross margins rose , it doesn't offset the decline in sales. It has also pushed some sales online with Amazon and eBay, but this doesn't offset the decline. Sales have fallen from £239m in 2010 to £173m in FY14, and it is very likely 2015 will be below 2014.

In the H1 results SHOE said that average rents have been renegotiated DOWN 28%. That helps the profitability of struggling stores but I think it tells me more about where SHOEs stores are located. I seriously doubt that Shoe Zone stores are destination stores that attract shppoer from miles around. The fact that rent reviews were down so much probably means the portfolio is located on desolate, sub optimal high street locations which have been negatively impacted by online sales and the financial crisis. Have consumer habits in these areas changed for good? Unfortunately quite possibly.   I would want to ask management if it built Shoe Zone from fresh today, how would it look? How many of its stores are non profitable, how many are only just profitable? How has the profitability of its current marginal stores changed in the last 3 years? I am concerned that while it is closing 9 loss making stores (just 2% of the total store base) it will be doing the same next year and the year after.

Multichannel sales grew 30% in h1, but no figure is given as to the importance of multichannel sales. No LFL sales for the store were given either. This doesn't strike me as a management team willing to 'fess up to its issues.

So I feel this company will struggle in future as it continues to battle against sales moving online and its diseconomies of scale from its 143 smaller stores which are likely to be losing sales. Also I am concerned that its store portfolio is poorly located.

I may be completely wrong in my admittedly cursory analysis, but This one is not for me despite the relatively low valuation.

Happy investing

VegPatch






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Roland Head 9th Sep '15 4 of 10
2

In reply to post #106050

Hi VegPatch,

Thanks for such an extensive comment, you make some good points. In my article I say that the firm's H2 performance is critical to the investment case and this sort of marries up with what you say -- the company really does need to prove it can deliver with boring reliability. I won't hesitate to sell if I get the feeling that this isn't going to happen.

I don't have such a downbeat view on the rent reductions and store portfolio as you, though. I don't think Shoe Zone is aiming to be a destination store -- it simply wants to mop up all the (considerable) demand for cheap shoes in areas where the stores are located. Rather like Poundland, pricing power is limited to so cost cutting is essential. If Shoe Zone can use its relative clout to force rents down, then that's all to the good, in my view.

Similarly, closing underperforming stores quickly makes sense to me. The big supermarkets should probably have been doing a bit more of this...

As regards earlier years' performance, at first glance SHOE's sales, profits and margins appear to have been all over the shop in previous years. You only mention the apparent decline in sales but there are other questions: could sales really have fallen 35% in 2011, but then shot up by 41% in 2012? I'm not convinced.

Without further research I can't be sure that I'm right, but my interpretation of these figures is that because they are pro forma figures produced for the IPO, they present a rather distorted picture. I suspect much of this may be explained by a combination of corporate restructuring, refinancing and calendar changes. (I should add that this is guesswork -- I don't know the detail of Shoe Zone's history before it was listed.)

Thanks again for your comments, opposing views are alway invaluable when trying to justify an investment!

Cheers,

Roland

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janebolacha 9th Sep '15 5 of 10
3

In reply to post #106062

Roland,

Perhaps another point to take into account is that Shoe Zone ( with shops in reportedly run-down locations) may now be being undercut by High Street stores, notably Primark. The Primark (pronounced "Preemark") store in a shopping mall near to where I have a flat in Spain sells women's shoes good enough for daily use (and I am picky!) at very cheap prices. In their sale, a few weeks ago, I picked up three pairs for a grand total of 16 euros! I have no idea whether Primark in UK sell shoes. If they do, that could present quite a challenge to Shoe Zone.

Best wishes,
Jane.

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herbie47 9th Sep '15 6 of 10
3

In reply to post #106064

That is probably true but Primark in UK is only in the large towns/cities, ShoeZone have more outlets and are in smaller towns. In my area there are no Primarks within 30 miles. In fact there is only 1 in Suffolk and 1 in Norfolk. Whilst ShoeZone have 2 stores in Ipswich and are in most medium size towns, in Suffolk they have about 12 shops in Suffolk. So a slightly different set up.

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Randval 9th Sep '15 7 of 10
1

Hi Roland, VegPatch et al,

Thanks to all for their interesting comments.

Perhaps another point to consider is that since March the remimbi/£ exchange rate has changed by approx 6.5%. This should help SHOE presumably and it should drop straight through to the bottom line.

Regards,
Richard.

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janebolacha 9th Sep '15 8 of 10
2

In reply to post #106067

Herbie, good point, although I've just looked up their websites and Primark do seem to have the appreciable number of 198 shops across UK and Eire against the 553 units Shoe Zone has in those two countries. The point of Primark perhaps starting to eat Shoe Zone's lunch may still be valid if they start mopping up the business for cheap shoes with bright, modern stores in those larger population centres and in shopping centres where there is likely to be captive footfall, effectively pushing Shoe Zone out to the edges of the market. Primark are very market-savvy and Shoe Zone may well have quite a fight on their hands.

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BrianGeee 9th Sep '15 9 of 10
2

SHOE prices from China are fixed in US$. However, there is scope to renegotiate at certain times, so the RMB depreciation should bring cost deflation, just not immediately.

The company are cutting back on total outlets, and will continue doing so. They feel that with their quality criteria on returns from new shops that (organically) they're currently near saturation levels in the UK. They've a programme of closing Grade 3 stores (300 lines) and opening Grade 1 stores (400 lines).

Renegotiation of lease terms is yielding dramatic benefits in terms of cost reductions, but they're aware this in not a long term solution. They're open to growth, and will probably resume that path soon, I feel inorganically. After the burns they suffered from the Stead & Simpson acquisition, they're understandably cautious about the right sort of growth.

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herbie47 9th Sep '15 10 of 10

In reply to post #106071

Thanks for that info. I did not realise Primark had so many stores now. I think ShoeZone are already in those sort of locations. In my local town there is the only shoe shop I think, there is a Sports Direct if you want trainers/walking/sandals type footwear. I can't see Primark opening a store there but there is a small M&S so you never know.

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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have a lingering interest in commodity stocks. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  My investment focus is increasingly on developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. more »

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