Is Shoe Zone PLC a supermarket alternative?

Disclosure: I own shares in Shoe Zone.

After disappointing investors with an early profit warning in April, less than a year after its listing, Shoe Zone PLC (LON:SHOE) appears to be back on track.

At sub-200p, the shares look more attractive than they did before April’s slide, too.

At least that’s the conclusion I came to after reading the firm’s recent interim results. Shoe Zone appears to be cheap, profitable and cash generative. Its balance sheet looks strong and the shares have an attractively high dividend yield.

These are attributes we used to associate with supermarkets, but no longer do.

Low prices, high margins

There’s no doubt that Shoe Zone’s shoes are cheap. This makes the firm’s gross margin of 60.5% all the more impressive. This suggests a firm grasp on manufacturing costs and an efficient supply chain.

Unlike some retailers, such as AO World, Shoe Zone’s profits are not eviscerated by administration and distribution costs. The firm’s trailing operating margin of 5.9% is pretty pleasing too — remember, this is a ‘pile them high, sell them cheap’ retailer.

Shoe Zone’s strong balance sheet helps ensure that this operating profitability is converted to post-tax profits and dividends. According to the firm’s latest accounts, net cash is £5.9m and debt is zero, although there is an employee benefit liability (pension, I assume) of £6.5m.

A current ratio of 2 is also impressive for a retailer, many of which maintain lower current ratios as they receive payment in cash for goods sold before they have to pay their suppliers. Negative working capital (current assets minus current liabilities) is quite common with big retailers such as supermarkets.

All of this leads to a forecast dividend of 9.45p per share for the current year. This gives a prospective yield of 5.0% and should be covered almost twice by earnings.

Stores vs. online

Shoe Zone’s store portfolio is constantly being refined to improve performance and Shoe Zone seems to have a firm grip on costs.

The company says that rents fell by an average of 28% after renewal over the last six months. Store fit-out costs seem likely to be low (take a look at a Shoe Zone store next time you pass one) and a shift towards larger format stores is helping to control wage costs.

As supermarkets and corner shop owners know all too well, larger store formats require fewer employees per unit of space/merchandise than small stores.

Things are going well online, too. Internet sales rose by 30% during the first half, through a combination of eBay, Amazon and own website sales. Customer returns are just 10.5% of sales, which is well below the average for online fashion retail.

Outlook

Shoe Zone shares trade on a trailing P/E of 12.1 and a 2015 forecast P/E of 10.4. That doesn’t look expensive, given that the latest consensus forecasts suggest earnings per share should rise by around 12% in 2015 and 2016.

Shoe Zone’s modest valuation, cash-backed high yield and healthy profit margins are the key to its appeal, for me. Given current growth forecasts, I can see the potential for a double-digit total return over the next year or two.

As a result, I recently added some Shoe Zone stock to my value portfolio.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.