Recently listed value-shoe retailer Shoe Zone (SHOE) may not offer the alluring growth story boasted by some of this year's other IPOs. However while the top-line growth isn't headline grabbing, a forecast yield of over 6 per cent, significant scope to boost profitability and a bargain-basement rating that would rival the price tag on any of its shoes means its shares should be snapped up.
- Big yield on offer
- Hugly cash generative
- Low rating versus sector peers
- Scale offers competitive advantages
- Scope for significant cost savings
- Minimal sales growth
Shoe Zone's strategy is more concerned with profit growth, than sales growth, along the same lines as WH Smith (SMWH), whose former chief executive Kate Swann trumpeted the adage "sales are vanity, profits are sanity". And, like WH Smith, Shoe Zone is a very cash-generative business, with no debt, a healthy cash pile and cost-cutting opportunities.
Unlike many IPOs earlier in the year, Shoe Zone came to market not to raise money for private equity, or to pay off debt, but to allow the Smith family owners to realise part of their investment and provide a public market for the shares. The Smiths still own 55 per cent of the stock, so have a vested interest in the company's success - always a good sign.
The average selling price of Shoe Zone's shoes is £9.77 - half the national average - with just over a fifth of sales in the growing children's shoes market. Prices are kept so low and competitive because of Shoe Zone's scale, direct sourcing and cheap operating costs. It sells three times as many shoes as Tesco (TSCO) and twice as many as Asda through a network of 551 stores across the UK, with a 3.2 per cent slice of the UK footwear market.
Since 2011, Shoe Zone has worked hard to increase the amount of higher-margin directly sourced shoes it sells. This has risen from 16 per cent of total orders to 59 per cent today. Management believes this can reach the 65 per cent mark. Head office costs are low, too, at just over 10 per cent of last year's total sales, which also includes distribution, as all of Shoe Zone's logistics are handled in-house.
| SHOE ZONE (SHOE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 196p | MARKET VALUE: | £98m | |
| TOUCH: | 194-198p | 12-MONTH HIGH: | 196p | LOW: 160p |
| FORWARD DIVIDEND YIELD: | 6.3% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 65p | NET CASH: | £5.9m | |
| Year to Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012* | 189 | 5.3 | na | na |
| 2013* | 194 | 6.5 | na | na |
| 2014** | 176 | 11.4 | 17.8 | 3.6 |
| 2015** | 176 | 13.0 | 20.6 | 12.3 |
| % change | - | +14 | +16 | +242 |
Normal market size: 1,500 Market makers: 4 Beta: 0.59 *Pre-IPO figures and adjusted for liquidation of Stead & Simpson business **Numis Securities forecasts and pro-forma EPS figures | ||||
However, the really big savings look set to come from the low-cost and flexible store base. Leases are short, averaging three years, and as rents are falling across the UK, Shoe Zone is reaping the benefits by negotiating considerable reductions - more than 100 leases are up for renewal each year on average. Typically, management also relocates 10 to 15 stores annually and refits 35, constantly adjusting the portfolio to squeeze out every penny of profit.
The massive store network is also good for online sales. These account for just 2.5 per cent of total revenue, but grew by more than a quarter last year. They're also twice as profitable as in-store sales because the return rate is just 12 per cent, compared with an industry average of roughly 50 per cent. Furthermore, 90 per cent of returns are made in-store, thanks to the sheer number of shops in conveniently located outlets around the county, which means Shoe Zone doesn't have to foot the bill for pricey returns. And, unlike some retailers, promotions actually drive the cash profit margin, because they are well-planned and supported by higher volumes.
