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Try on Shoe Zone's Big Box

The footwear retailer's property estate is in good nick, while its safe-ish dividend generates a fat yield
August 16, 2018

Footwear retailer Shoe Zone (SHOE) continues to shift its business model towards its ‘Big Box’ format – cleaner, modern stores in out-of-town, or “destination” retail parks. We remain quietly confident in management's ability to realign the group's property portfolio, bring down rent and rate costs, and make the organisation more efficient. 

170p
Tip style
Income
Risk rating
High
Timescale
Medium Term
Bull points

Prospects for Big Box strategy
Tight cost control
Debt-free
Fat dividend yield

Bear points

Competitive market
Low consumer confidence

Half-year profits neared the £1m mark – representing a tripling in growth year on year – thanks to continued efforts to cut costs and keep profit margins as stable as possible. Rent renewals fell by a fifth on average, equivalent to annual savings of £100,000; in addition, last year's foreign exchange losses prompted by the Brexit vote dropped out of the reckoning. The average length of a Shoe Zone property lease also fell from 2.3 years to 2.2. And City analysts picked up on what they called the “cautiously confident” tone from management; bosses said trading patterns had continued, so far, into the second half in line with expectations.

By offloading five freehold properties via sale-and-leaseback arrangements, the cash coffers were also boosted by £1.2m. A comfortable debt-free, net cash position of £5.9m should also help underpin shareholder returns in the near term. A 3 per cent rise in the half-year dividend to 3.5p generated a trailing dividend yield in excess of 6 per cent. Based on forecasts from broker FinnCap, which is also the company's adviser, this is where the dividend – and thus the yield – will remain, all things being well. The company still owns 14 other freeholds with a net book value of £7.8m, although finance director Jonathan Fearn told us at the time of the half-year results in May that there were no plans for imminent disposals.

Shoe Zone’s defensive position in a fiercely competitive market should not be overlooked, either. Having been through various trading highs and lows, management now has a clearer understanding of its hard-pressed customers, as well as tight control of the product offering, the shopping experience and pricing strategy. This means revenues should, over time, become more predictable and sustainable, especially as initiatives such as email marketing provide more visibility over customers' behaviour.

Management is also putting more effort into online growth. The stores themselves are receiving more digital enhancements, while online marketplace tie-ups with Amazon (US:AMZ) have demonstrated a sensible approach to penetrating the online market – not to mention a capital-light way to reach digital shoppers. The proof is in the pudding: multi-channel sales increased by more than a fifth to £4.9m during the first half, with mobile visits now accounting for 79 per cent of total online visits.

SHOE ZONE (SHOE)   
ORD PRICE:170pMARKET VALUE:£85m
TOUCH:165-170p12-MONTH HIGH:194pLOW: 146p
DIVIDEND YIELD:6.2%PE RATIO:10
NET ASSET VALUE:59pNET CASH:£5.9m
Year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201516710.116.29.7
201616010.316.910.1
20171589.515.810.2
2018*15910.116.210.4
2019*16110.216.410.5
% change+1+1+1+1
Normal market size:2,000   
Beta:0.02   
*finnCap forecasts, (adjusted PTP and EPS)