Most retailers have sold off heavily in 2022 as investors discount the impact of the cost of living crisis and rampant inflation on earnings, yet one UK-listed name whose shares are actually up 50% year-to-date is value footwear seller Shoe Zone (SHOE:AIM).

Shares believes the rally has further to run since this seller of cheap footwear for all the family appears well-placed to deliver a step-up in profit as cash-strapped consumers trade down in the months ahead.

The £77.5 million cap’s unwavering focus on value should enable Shoe Zone to gain market share as hard-pressed families opt for summer staycations over expensive forays abroad and the chain benefits from a strong back to school season.

BACK ON THE FRONT FOOT

Guided by CEO Anthony Smith, his brother and chairman Charles Smith and aptly-named finance director Terry Boot, Leicester-based Shoe Zone sells cut-price shoes, boots, slippers and trainers from 388 stores at last count. It also has a website offering free delivery and free returns to store and sells its affordable product range on Amazon (AMZN:NASDAQ).

Shoe Zone is able to achieve low prices due to the high volumes it orders direct from factories and sells a wide range of well-known brands including Skechers, Kickers, Lilley & Skinner and Heavenly Feet.

The small cap retailer is emerging from the pandemic in decent shape, having returned to profitability and become debt free again in the last financial year, and is executing against a compelling strategy outlined in October 2021.

Results (17 May) for the half to 2 April 2022 showed a business firmly on the front foot, with Shoe Zone swinging from losses of £2.6 million to pre-tax profits of £3.1 million on sales up 73% to £69.9 million as its stores traded over a full 26-week period with less disruption to trade.

Digital growth fell back as expected, with sales easing from £17.6 million to £11.8 million year-on-year after the retailer re-opened all its physical stores. Impressively however, digital sales were still 114.5% ahead on a two-year view.

STEPPING UP THE PACE

While investing in its online capabilities, Shoe Zone is also stepping up the pace of store relocations and refits and seeing ‘very positive’ results from the conversion of more ‘Original’ Shoe Zone stores to either a larger ‘Big Box’ format, which sells a wider product range than smaller stores, or a ‘Hybrid’ format.

Part of the success of Shoe Zone’s digital business in a fiercely competitive market is a very efficient returns process which is complemented by its nationwide store network. As the retailer explained in its results update: ‘We have a returns rate of 10.9% and the vast majority of these are returned to store, hence why our physical store network is critical to our future success.’

Another advantage Shoe Zone has is its average lease length of just 1.8 years. This gives the retailer the flexibility to respond to changes in any retail location at short notice. Shoe Zone continues to generate lease renewal savings which drop through to the bottom line and is in a strong position to improve its store portfolio coming out of Covid as the supply of property continues to outstrip demand.

Like other retailers, Shoe Zone is having to absorb inflation in shipping and wage costs and product gross margins fell modestly from 61.5% to 60.8% year-on-year in the siz months to 2 April.

The good news is Shoe Zone’s energy prices are fixed until September 2023, which means the retailer is not exposed to the market price increases currently being experienced by rivals. ‘All of our electricity consumption is from 100% renewable sources, we have started to monitor energy consumption and we have a programme to insulate ceilings and to install more energy efficient lighting in a number of stores,’ explains the retailer.

SLIP ON FOR GROWTH AND INCOME

With £13.9 million net cash in the coffers and having paid off its government Covid loan in full, Shoe Zone has become eligible to restart dividend payments and duly declared a 2.5p interim payment. Management says the company might also return capital to shareholders through special dividends and/or share buybacks, with details to be announced ‘in due course’.

According to consensus estimates compiled by Stockopedia, Shoe Zone is forecast to generate net profit of £5.2 million for the year to 2 October 2022, which translates into earnings of 10.4p, ahead of profits of £5.5 million and 11p of earnings in the 2023 financial year.

Taking next year’s earnings estimate and the 5.5p dividends forecast for 2022 and 2023, Shoe Zone currently trades on a prospective price to earnings (PE) ratio of 14.5 times with a 3.4% yield.

Given that Shoe Zone is rebuilding profitability, that earnings multiple looks attractive, particularly for a cash generative business generating a high return on capital employed (ROCE) of 28.4% on a trailing twelve month basis, according   to Stockopedia.

Shares is also reassured by the fact Charles and Anthony Smith hold sway over more than half of the shares, meaning their interests are aligned with those of other shareholders.

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