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Small Cap Value Report (25 Oct 2016) – SHOE

Tuesday, October 25, 2016 8:01
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Headline: Bitcoin & Blockchain Searches Exceed Trump! Blockchain Stocks Are Next!

Good morning!

In case you missed it,here is my interview yesterday with Exec Chairman, Ric Traynor, of insolvency practitioner Begbies Traynor (LON:BEG)  (in which I hold a long position). I thoroughly enjoyed chatting to him, and reliving a few moments from my own experience of working in the sector, 25 years ago.

The next interview planned is with the CEO of Staffline (LON:STAF) (in which I also hold a long position) – so I invite you to submit any questions you’d like me to ask on your behalf using this link.

Shoe Zone (LON:SHOE)

Share price: 169p (up 18.6% today)
No. shares: 50.0m
Market cap: £84.5m

Trading update – this covers the 52 weeks to 1 Oct 2016.

The key paragraph is more positive than I was expecting, saying;

The Board expects pre-tax profit for the period to be broadly in line with expectations and marginally ahead of the prior year.

The business continues to have strong cash conversion and closed the year with an approximate net cash balance of £15.0m (2015: £14.2m).

Valuation – broker consensus EPS forecast is 17.5p, so assuming they achieve about 17.2p (based on “broadly in line” actually meaning slightly below), then after today’s big rise in share price, the PER is 9.8.

Given that nearly 18% of the market cap is the company’s own net cash balance, then the ex-cash PER is about 8.1 by my calculations.

Dividends – the yield is generous, with a payout of 10.5p forecast for this year, yielding 6.2%

Outlook – the company has not really said anything about the future in today’s update, and has therefore completely ignored the elephant in the room – the devaluation of sterling. Since ShoeZone imports product from China, cheap plastic shoes, then its future deliveries are bound to be more expensive.

Competitors will also have to put up prices, to protect margins, and we simply don’t know yet how consumers are going to respond. Clearly higher prices will reduce volumes sold, but we don’t yet know by how much.

I think it was a big omission for the company not to say anything about this issue at all in today’s update.

My opinion – this is the calm before the storm for retailers. Hence I reckon today’s pop in the share price may prove short-lived perhaps?

I’m avoiding apparently cheap retailers for now, because when business turns down next year, on more expensive product feeding through, and overheads rising, who knows what profits will be? Today’s surge in the share price looks to me more like a selling opportunity, than a buying opportunity.

I’m taking a break now, but will be back later this afternoon to report on;

Carpetright (LON:CPR)

On The Beach (LON:OTB)

Also, brief comments on;

Braemar Shipping Services (LON:BMS)

Pendragon (LON:PDG)



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