Today, we’re going to take a look at Shoe Zone plc [LSE: SHOE]. It has been two years since I last did a ‘FTSE Show’ episode. I wasn’t sure I would ever be doing a season 2 or coming back to the show again, but recently I hit 40 years old, and I felt genuine regret for not doing the show anymore. So here I am back in it.
Shoe Zone plc are a company I’ve not looked at before on the show. Shoe Zone is a discount footwear retailer in the UK high street. They have 500 stores across the UK and Ireland and sell about 20 million shoes a year. They employ 3400 staff, and they notably acquired the shoe store chain Stead & Simpson back in 2009. Shoe Zone plc floated on the London Stock Exchange in May 2014 at £1.67 per share. Today, you can buy them for £1.47 a share and that’s eight years later, so that’s your first clue as to what’s going on with Shoe zone.
We will dive in and look at why that might be the case and decide what we think of this company as an investment opportunity.
I’ve analysed 1000+ FTSE companies over the years. I’ve looked at over ten years of financial data per company. So that’s 10,000 years of financials analysed essentially. It’s what I do every day. I mean, it’s taken over my life. For the last three years, my life has involved studying company financials. It’s not for everybody. Most investors don’t want to do it and would never be able to put in that kind of time. However, personally, it’s just something I love doing, and it’s my passion.
Having completed so much analysis of hundreds of companies, I tend to see a lot of patterns. One of those patterns I see is stagnant share prices due to companies not making any or enough profit to reinvest into growth. I see companies moving in the wrong direction and not making much progress. Companies that have reached their pinnacle and have nowhere to go. It would require a big shakeup or a new CEO coming in with fresh new ideas to shake up the business or expand it. And these events are pretty rare. I tend to find that companies will grow until they reach a plateau where they aren’t making enough profit to do anything special in terms of the growth of the business. You tend to see the share price sitting in correlation with this. A share price that stays flat, refusing to go anywhere exciting.
I don’t invest in these kinds of companies. I’m looking for growth stocks. Companies that are going to grow.
Looking at Shoe Zone plc [LSE: SHOE], the first thing that stands out for me is the revenue has been falling, and it’s been consistently falling over the last eight years. That’s a red flag for me straight away. Back in 2013, they were making £194m a year. In 2014 it went down to £172m then down to £166m then £159m. It’s been falling consistently year after year to the point that 2021 turned out to be their worst year since they floated. Down to £119m in revenue. From £193m to £119m over nine years. That’s a bad sign. I don’t want to be investing in companies that are shrinking and falling and making fewer sales every year. I want to be investing in companies growing and expanding. So this is a bad sign straight away. It doesn’t mean it’s the end of the world, but it’s a bad start.
Cost of sales is the cost of getting the shoes into their stores. These costs have been falling in correlation with the drop in revenues. That might suggest that as sales are going down, the company is buying fewer shoes, or they have a system controlling their stock purchases relative to sales numbers. Whatever the reason, it’s good in that it allows them to maintain their gross profit levels despite the fact revenues are falling. Don’t get me wrong. Falling revenue is not sustainable long term, but at least they are managing to keep gross profit levels around the same each year despite the apparent decline. Gross profit has stayed at around £27-32m a year consistently for eight years. Like most retailers, they had a bad year in 2020 due to the various nationwide lockdowns. Many high street stores suffered because of that.
Shoe Zone plc [LSE: SHOE] only makes 15% a year in gross profit on average despite the consistency. That’s not going to leave much for expansion or re-investment into the growth of the business. Expenses are pretty high; they’re not what I would consider “end of the world high”, but we are consistently looking at between 63-70% of the gross profit being consumed by expenses. The expenses came in at 256% in 2020, which was a bit of a killer for them, and that’s why they lost quite a bit of money that year. I have been tending to put less emphasis on 2020 results, however, as it was an abnormal year for everyone, and there were matters outside of their control that influenced those results.
Show Zone plc tend to be making about £10m in pre-tax profit a year, and that’s been consistent from 2014 onwards since they floated. Now consistency does count for something, but the question is whether these numbers will be sustainable if revenues keep falling.
Interest paid on debt is another expenditure we have to take out of that pre-tax profit. Interest paid on debt increased in 2020 because the company took out some debt. They did that to try and protect the business during lockdowns. Therefore, after taxes are deducted, the actual net profit of the company sits at about £8m a year, ignoring the £12m loss they incurred in 2020. £8m profit a year from £119m revenue is a 6-7% net profit. Unfortunately, that’s not enough for me as a potential investor. Historically, we have witnessed a more accurate 5% net profit per year. It’s just too low for me.
These results do not mean that they’re a terrible business. 5% profit is more favourable than a company breaking even or making a loss. So they are definitely on the right side of the line. However, I set my bar incredibly high, and I know there are far better opportunities out there right now as an investor. So for me, I wouldn’t be investing in Shoe Zone plc [LSE: SHOE] purely because I know there are stocks out there that provide me with a better opportunity to experience share price growth. If Shoe Zone plc are only making 5% a year, that’s not going to give them much to play with to grow that business. If they can’t grow their business, the share price is unlikely to grow also.
Debt Levels & Equity
Show Zone plc currently have £4.4m in short-term borrowings outstanding. Yet the debt to earnings ratio here is acceptable. They’re making profits of £7m a year as of 2021, meaning they’re borrowing at a level that makes sense relative to the power of their earnings. So we’re okay with that, and there are no concerns here.
The value of the company assets has been flat from 2013 to 2019. They haven’t gone anywhere. In 2021 they started to jump up a bit, but the value of the company liabilities did precisely the same thing. They’ve been flat from 2013 to 2019, and in 2020, they jumped up. Therefore it’s best to look at its net worth to see the overall true picture. So here, we take the company asset value and deduct the liability value to give us the company net worth. The net worth comes in at £30m in value from 2013 to 2019.
That’s not great to see a company’s value remain stagnant for six years. I like to see company growth, and this isn’t a company that’s going anywhere fast. In 2020, that net worth dropped to £12m but had recovered somewhat to £23m by 2021. Shoe Zone plc is a company that’s not growing in value and, if anything, is falling backwards. That’s almost certainly going to impact the share price as fewer investors become interested in buying stocks in this company.
These guys floated at £1.67 back in 2014, and the price has been relatively flat since. Looking at the historical price chart, we can see the share price falling during the lockdown when most stocks around the FTSE suffered. So that’s to be expected. But to be fair, the price had been declining before lockdown arrived. But, when it did, it knocked it flat, and we saw the price fall to a low of about 34p per share at one point.
The share price has done pretty well in 2021 and 2022 so far. We’ve actually seen some significant growth here in the share price, but it’s still at £1.47, and it is still flat considering where it was back in 2014. If you’d invested in this company in 2015 and fast-forwarded seven years to find the share price lower than what you bought it for, you’d be somewhat frustrated, I’m sure.
The bottom line is this is probably a bad investment. It’s not an outstanding growth stock, and from what I can see in the numbers for Shoe Zone plc, I wouldn’t expect to see much growth unless something drastic happens. It would require a new CEO to come in with great new ideas to expand the business, perhaps, or they would need to rustle up enough money to acquire an exciting new company to bolt on. Something along these lines would need to happen for me to reconsider this stock in any way because all I can see right now is a stagnant business with falling revenues and no growth or direction.
I would expect that in 5-years, if they’re still around, their share price probably won’t be much higher than £1.50 to £2.00 a share because there’s no growth there. Shoe Zone plc is a company that’s reached its pinnacle; a plateau. It can’t expand from where it is by only making a 5% profit a year. It has no capital to reinvest.
The falling revenue is a big concern for me. I’m not particularly eager to invest in companies making fewer sales. That’s a bad sign. The company have been cancelling all dividends since 2018 also, which is bad news for dividend investors. The share price right now is not overvalued. I think the share price right now is cheap relative to the value of the business. However, what’s the benefit of buying a business on the cheap that’s not providing you with any growth or strong profit return? Yes, you can purchase the shares cheap today at £1.47, but I wouldn’t expect them to go above £2.00 over the next five years. In my experience, a company with no profit for re-investment, no strong growth strategy in place and no ample cash reserves to make acquisitions is likely to see no big moves in its share price.
The FTSE Show is a programme created by Chris Chillingworth, founder of the Sussex Investment Club. The show is dedicated to the financial analysis of UK FTSE stocks. We go through the FTSE 100, 250, Small Cap, Fledgling and the AIM indexes and identify companies we feel are worth more time and attention. With the view of potentially identifying an investment opportunity. This show is all about looking at the good and the bad including some companies that are atrocious investments. This show looks at why they are terrible or great investments.