Shoe Zone (SHOE) is a value stock that’s surging!

Shoe Zone (SHOE) has had a difficult time through the pandemic. Dan Appleby looks into the business to see if it’s turning a corner.

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The pandemic was tough for most businesses, although I think the retail sector suffered more than most. When the government shut down the economy to contain the virus, the high street was deserted, and footwear wasn’t even a popular category online for stuck-at-home consumers. Shoe Zone (LSE: SHOE) is a company that had to bear the brunt of this.

Unfortunately for my portfolio, I held the stock heading into the pandemic. The returns weren’t pretty. The share price crashed over 80% from its peak, and the dividend was stopped too.

But I held the shares throughout, and still do today. Recently, the price has been recovering, and rallied again this week.

Let’s see if I should carry on holding the stock.  

The business

Shoe Zone is a footwear retailer, selling shoes for all ages from over 400 stores nationwide. It sells over 16m pairs of shoes each year with an average retail price of £10. It’s a budget place to pick up footwear, depending on high sales volumes to generate profit.s

What went wrong

It’s easy to see why the business suffered because of the pandemic. When shops were closed, Shoe Zone was not able to sell its footwear in anywhere near the volumes it needed to turn a profit. Across the 12-month period ending in October 2020, sales declined 24% to £122.6m, but profit plunged from £6.7m to a loss of £14.6m.

The business also didn’t have a good online presence, relying heavily on its network of stores. Digital revenue did increase by 82% over the lockdown period, but still only came in at £19.3m.

What’s going right

The share price is up a huge 200% since the pandemic low, so things must be looking brighter. At the time of writing the share price is 110p, but this remains under 180p which is where the price was before the March 2020 drop.

Recently, trading has been looking much better. The company issued two full-year updates in October and November, with the first saying profit before tax will be at least £6.5m. Considering the profit before tax in the fiscal year to 2019 was £6.7m, this is a good result. What’s even better is that digital revenue has grown again by 58.5%, and now represents almost 26% of total sales. This diversifies the business if another lockdown happens simply in the ‘new normal’ where shoppers are going online more often.

In the November update, Shoe Zone said profit before tax is now expected to be in the range of £9m to £10m (but with some favourable currency movements and lower pension contributions helping). That’s a great result, and shows that the business is really picking up again.

The shares are on a price-to-earnings ratio of 9, which I consider value territory.

Looking ahead

Holding shares of Shoe Zone has been difficult over the pandemic, but things appear to be turning around. I also like the fact that the CEO and chairman own over 24% of the company, so their interests are aligned with shareholders.

I’m still cautious about the recovery though. Any further lockdown or disruption will severely impact the business, but the increase in digital sales does mitigate this to some degree. I’m going to keep holding the shares for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Dan Appleby owns shares of Shoe Zone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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