Although latest trading details from Shoe Zone (LSE: SHOE) were pretty well received in Tuesday trade (the footwear retailer was last 5% higher on the day), the dangers of a rising cost base are encouraging me to give the share short shrift.
Shoe Zone declared that it had “traded well in the second half of the year,” meaning that revenues for the full year ending September should clock in at £158m, albeit down from £159.8m in the prior fiscal period.
The Leicester-based business said that this reverse reflected the continued closure of lossmaking stores. Shoe Zone closed 35 during the period but opened 21, six of which were of the much-vaunted ‘big box’ variety, meaning the company ended the period with 496 stores.
And the shoe specialist plans to open another 10 gigantic stores in the current year.
Costs remain a concern
On the surface, Shoe Zone’s position at the value end of the market, allied with the heavy investment it has made in its digital operations, should be reason for investors to be optimistic over its earnings picture.
But I am afraid the spectre of those rising costs is adversely colouring my take on the retail giant. Indeed, Shoe Zone noted again that “foreign exchange headwinds… continued through the second half,” and these troubles are unlikely to abate any time soon.
The City is expecting Shoe Zone to record a 6% earnings slide for fiscal 2017, and while a 4% rebound is predicted for the present year, I reckon hopes of a bottom-line bounce-back could recede in the months ahead, making a forward P/E ratio of 9.8 times somewhat redundant.
Dividend hunters may still be drawn in, however, attracted by a monster yield of 6.6% for this year (a payout of 10.6p is currently predicted by the number crunchers). But I reckon the possibility of earnings disappointment in the near term and beyond still makes it an unattractive selection.
While Associated British Foods (LSE: ABF) may not be packing the sort of dividends forecast at Shoe Zone — a reward of 46.2p per share for the current year yields a modest 1.4% — I am much more confident about its investment outlook for the present and future.
Sales at the Primark owner continue to go from strength to strength, with takings at its British shops rising 9% in the 40 weeks to July 24 as it grabbed market share, according to the most recent trading statement. And the expansion drive both at home and abroad offers up plenty of additional growth opportunities — indeed, trading at its new stores opened in Europe, the US and the UK in the year to date was described as “good.”
So it comes as little surprise that earnings at the FTSE 100 star are expected to keep on surging. A 10% rise is predicted for the 12 months ending September 2018 by analysts, and while this results in a conventionally-expensive forward P/E rating of 24.4 times, I reckon Associated British Foods’ exciting Primark expansion strategy — allied with the improving momentum at the company’s other divisions — makes it worthy of a princely premium.
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Royston Wild has no position in any of the shares mentioned. 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.