Shoe Zone (SHOE) - a good fit for a portfolio?
Today I've taken a look at Shoe Zone (SHOE). Is it a good fit for my portfolio?
My opinion:
A trading update for the year end is due on 27 Oct. I am going to wait until that’s published to see if there are signs of the company growing. My preference is always to buy cheaply rated companies that look like they will have earnings upgrades in the next 12-24 months (like Fairpoint PLC).
To me this company looks like its revenue is slowing year-on-year. Its H1 results have fallen two years in a row which looks dodgy to me. See Stockopedia data for financial performance over the last few years. The brand looks outdated and dull, and the shoe selection is hardly exciting. Will they just get knocked out the market by other upcoming retailers such as Boohoo?
The management has also lost the confidence of the investor community after a profit warning earlier in the year. There are some parallels with ENTU there. Maybe it listed recently because they are worried the company is moribund so perhaps the owners are trying to make money while they can (hence the dividend target of 60% of profits?).
Based on broker estimates the company is trading on a P/E of about 11 in the current year which does not look like a bargain given uncertainty about future earnings. I will watch this one for now. I might consider buying some in the short-term if the share fell to around 145p (i.e. P/E of 9 on current year estimates which would allow for further reductions in revenue).
About the company:
Shoe Zone (SHOE) basically sells cheap shoes. It has 553 stores in the UK and Ireland. Shoe Zone sells over 20 million pairs of shoes per annum and, in 2013, the average retail price per pair of shoes was £9.77. According to its website, it is able to maintain low retail prices due to high volumes ordered, direct sourcing from factories and a low product line count. 95% of products are made in China.
Online:
Free delivery is available on all orders. It also sells products through Amazon (which represents 17% of online revenue). Online availability seems good from the random shoes I picked on (no sizes were out of stock).
Growth strategy:
The company seeks to achieve profit growth through targeted online sales growth and through the opening of larger stores in place of smaller stores which currently sell a reduced product range compared to larger stores due to space constraints. It is also planning to open new stores in Poland and Spain according to Paul Scott, although recent RNS' seemed to have had few details about this.
Pros
• This is essentially a family business. The Smiths own 55% of the business. John Lee has previously written about the benefits of family-owned businesses and as a general rule of thumb I like that. It’s in their interests to maintain a good yield and sometimes these businesses are sold at a good price during a takeover.
• Free 2-4 day delivery. Although at what cost to the business? Online is driving revenue growth (30% growth in H1 2015 results). Apparently this is more profitable for the company than store-based sales.
• Rent renewals have fallen by 28% recently! This is steep but I am not completely surprised because in my experience they seem to target towns and shopping centres that are struggling for business so they are probably able to secure cheaper sites.
• The group aims for a dividend of 60% profits which is good although it does make me question how serious they are about overseas expansion.
• Reasonable balance sheet. Paul Scott is better at analysing this than me.
• An easy business to understand. I like that.
Risks
• Sales fell in H1 2015 ‘reflecting the planned closure of 9 loss making stores and trading conditions towards the end of the period’. This was a fall for the second year in a row. The company blamed warmer weather. Presumably this means people don’t buy cold weather shoes so quickly? I am a bit suspicious about this as a response. Little explanation was provided about why warmer weather was an issue in the RNS. There was a profit warning ahead of the H1 results in an April RNS.
• Further to the above, the company had recognised the warm weather issue back in early 2015 and suggested this wouldn’t be a problem. The share price has been hit badly this year because of the profit warning (which said little about expected profit growth) so it is going to take time for confidence in management to increase.
• One broker has suggested the fall in H1 profits was because the selling price for shoes has reduced.
• Low volume so I imagine there’s a bit of a bid-offer spread.
• The investor relations section of its website has information which is out-of-date. Not very helpful!
• I wonder what the impact of the minimum wage will be on their costs and revenue.
• Their shoes seem a little uninspiring and their brand seems old-fashioned. A lot of black shoes! Can they compete properly with the likes of Primark? Or Boohoo?
About the Board and management
• The Chair is the CEO of DFS furniture. He was at Boots. Clearly has a lot of experience but it doesn’t sound like he has much time to be Chair.
• The CEO, Anthony Smith, has been with Shoe Zone since 1993 and has been CEO since 1997. His uncle and father acquired the company in 1980.
• Similarly the COO has been with the company since 1998.
To look out for in results / risks
• Any signs of growth?? Plus consumer sentiment.
• Changes to the minimum wage. This might drive up operating costs but also revenue.
• How their growth strategy is playing out.
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10 comments
I notice 2 directors in October sold over £2m worth each @ 190p, does not bode well?
Shares falling before an announcement, could be a leak or insider dealing.
When are the results due? Can't see any date, last year was 14 Jan.
I don't think people look to buy when the weather is rainy as it might spoil their new shoes.
The SP fell by almost 10% today with not a shred of information to explain it. What's most odd is that results come out in a couple of days time. I emailed the CFO who replied that they had no idea why this happened and that he would ask the brokers for clarification. I'll report all I hear, but meantime, I still think this company has legs.
I bought a modest holding in SHOE a few weeks ago after doing a bit of chatting up shoe salesmen, mostly while killing time while my wife looked for hours at shoes. It seemed that the entire shoe selling business had come under the cosh, partly because of a mild winter, resulting in far lower sales in the run up to Christmas 2014 but, in one city, several high fashion, expensive shops had closed. One household named shop we went to had a most indiscrete young salesman who told me how many changes of ownership there had been in a short while and how they had been obliged to start their "sales" period a month earlier than usual. Lessons had been learned and it is widely believed that we may well see snow in November. I hear on the news today that the first snow in Europe has already fallen.
I believe much of the stock SHOE sells comes from China. I'd be surprised, given the turndown in the Chinese economy, if Mr Smith was unable to strike some very advantageous deals now. He lives quite near to me and, by a coincidence, we shared an employee for some years. I got to hear enough about Mr Smith to be very sure that he is an extremely shrewd cookie indeed. As the major beneficiary of dividends, I feel certain he'll keep these growing.
I gather that some pundits felt that the previous declaration relating to profits last year was a bit naive of SHOE management, suggesting that their job was to be able to spin bad news better to attempt to keep the share price up. I can't say that concerns me too much.I'd be much more unhappy about evidence of smoke and mirrors. I just want a slice of their ongoing profits and am delighted if I can get this sort of return for a few years. From what I heard in the shoeshops, it could be that in the tough world of shoe selling, SHOE zone is the equivalent of Lidl. With over four more years of a benefits cutting government, I believe there is a reasonable future for good cheap shoes. A blizzard before Christmas is a bonus.
Stepdaughter goes to Primark and buys a new outfit on what feels like a weekly basis but is actually about every 6-8 weeks.
That new outfit includes matching shoes from Primark about half the time.
She also has some Vans (upmarket in her view) . I don't see her in a shoeshop of any sort.
Best of luck to Shoezone as I think they will need it.
"There are a lot of stand-alone shoe shops such as Clarks and more middle market or upmarket ones like Dune, Kurt Geiger, etc etc."
Not at all the same, though. The average retail price of a pair of shoes at Shoe Zone is less than ten pounds. They are definitely competing head-on with people such as Primark and with the supermarkets.
So while a dull range and dull image do certainly come into it, the issue for Shoe Zone goes much beyond that, imo. I'd question whether there is a worthwhile niche for them in the long term without a new strategy.
Ah yes, I should have checked that! Same pun too. However, I don't think enough intention is being paid to its falling year-on-year revenues.
This was discussed a few weeks ago here: http://www.stockopedia.com/content/stock-in-focus-is-shoe-zone-a-good-fit-105800/
It does not look very attractive to me. I don't see Boohoo.Com (LON:BOO) as a problem but Primark as they expand is more of a concern.
Quite apart from the growth of online shopping, most chains of women's clothing stores now stock shoes (I don't only mean trainers), including Primark, New Look, Next and M&S, of course. Perhaps the supermarkets in UK do the same, they certainly do in France and Spain. The whole concept of the stand-alone shoe shop might well be dying and Shoe Zone's business model might well be becoming redundant, perhaps? Is anyone else even trying to do what Shoe Zone are doing? Perhaps that tells us quite a lot? An analogy could be in the neighbourhood clothes shops, once ubiquitous but which now seem to have almost disappeared. Even boutiques for younger women seem now to be few and far between. Perhaps Shoe Zone need to rethink seriously their whole business concept so as to avoid being increasingly pushed out on to the margins of the market, serving a gradually diminishing market sector of people unable, for whatever reason, to access greater choice. I don't know, a "Shoe Zone" within Morrisons supermarkets, perhaps, with a smaller but fast-moving range? Certainly, I really fail to see a prosperous long-term future for this company as it is now.
There are a lot of stand-alone shoe shops such as Clarks and more middle market or upmarket ones like Dune, Kurt Geiger, etc etc. The issue for Shoe Zone I think is more that its shoes and its brand look dull. Will be interesting to see any signs of a change in that in the results at the end of the month.