Shoe Zone analyst Zeus on their bounce back into profitability

Shoe Zone plc (LON:SHOE) H1 results confirm a strong recovery in store sales and a bounce back in profitability, benefitting from 26 weeks of uninterrupted trading. The Group is now debt free and has reinstated its dividend, with an interim distribution of 2.5p declared and scope for further special dividends and share buybacks.

¨ H1 Results: Group revenue of £69.9m is +72.8% YOY (H1 FY21A: £40.4m) driven by a strong rebound in store revenue +154.4% to £58.1m (H1 FY21: £22.8m) with stores trading for the full 26-week period versus just 10 weeks during H1 FY21. Digital revenue of £11.8m declined 33.0% YOY (H1 FY21: £17.6m) as customers returned to stores but is up strongly on a two-year basis, +114.5% versus H1 FY20, contributing 16.9% of Group revenue in the period. Adj. PBT of £2.8m (excluding £0.3m profit on disposal of freehold properties) compares to a pre-tax loss of £2.6m in the prior year, with Ad. EPS of 5.1p versus a loss per share of £4.2p in H1 FY21. Net cash of £13.9m is +£9.8m YOY (H1 FY21: £4.1m), with the CLBILS loan repaid in full, and dividends reinstated.

¨ Strategy: Shoe Zone continues to transition its store portfolio towards Hybrid and Big Box formats. Eight new Hybrid stores were opened in the period, with a further five original format stores converted to Hybrids and thirty poor performing original format stores closed. The Group’s disciplined approach to property management delivered a further £0.4m in annualised lease renewal savings, equating to an average reduction of 37%. With an average lease length of just 1.8 years (FY21: 1.9 years) Shoe Zone has flexibility to respond to changes in any retail location at short notice. Retail property supply continues to outstrip demand, with the Group able to significantly improve its property portfolio not only in terms of cost but also quality of both sites and locations over the medium term.

¨ Dividend: The Group repaid the outstanding £4.4m balance of the CLBILS loan during the period, giving it the ability to recommence dividend payments. An interim dividend of 2.5p per share has been proposed, representing a pay-out ratio of ~50% on Adj. EPS of 5.1p. This is a relatively modest pay-out ratio versus the Group’s typical dividend distributions of >70% of earnings and reflects a prudent approach as a precaution against the risks of continued inflation and current global instability. We believe the Group’s pay-out ratio should trend back towards levels seen prior to the pandemic over the medium term. In addition to the proposed interim dividend, management have indicated they will continue to review available cash resources with potential scope for a special dividend and/or share buyback programme, details of which will be announced in due course.

¨ Forecasts: Our headline forecasts are unchanged today, reflecting a prudent outlook in the face of ongoing cost inflation and declining consumer sentiment. Our net cash forecasts fall to reflect the reinstatement of the Group’s dividend, with a modest 50% pay-out of EPS equating to a full year dividend of 5.5p, and a prospective yield of 3.6%.

¨ Valuation: At current levels Shoe Zone trades on an FY22 PE of 14.2x falling to 13.4x. We believe that the Group operates in a defensive subsector of the consumer market, with its core product offer representing a staple like rather than a discretionary purchase. In addition its ongoing store transformation offers scope for meaningful earnings growth.

Summary financials

Price149.5p
Market Cap£74.8m
Shares in issue50.0m
12m Trading Range61.5p– 160.0p
Free float23.10%

Financial forecasts

Yr end Oct (£’m)2020A2021A2022E2023E
Revenue122.6119.1155.9162.8
y.o.y growth (%)-24.4-2.830.84.5
Adj. EBITDA14.828.929.629.7
Adj. EBIT.-12.79.98.18.3
Adj. PBT-14.68.46.57.1
EPS (p) ful dil. adj-23.813.510.411
DPS (p)5.55.5
Net (debt)/cash†6.314.613.815.1
P/E (x)n/a1114.313.6
EV/EBITDA (x)^8.53.63.12.9
Div Yield (%)3.63.7

† Excludes IFRS 16 lease liabilities ^Including IFRS 16

Source: Audited Accounts and Zeus estimates

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