Shares in the UK’s biggest value footwear retailer Shoe Zone (SHOE:AIM) slumped on Friday following the shock resignation of chief executive officer (CEO) Nick Davis as the company issued a damaging profit warning.
Investors are particularly spooked because Shoe Zone has forged a reputation for resilience, even delivering upgrades against a broader backdrop of retail sector business failures and warnings.
But the bleak UK high street now appears to have caught up with the company, sending the share price plunging 33% to 128.5p.
DAVIS IS ON HIS TOES
Davis (pictured below) unexpectedly tendered his resignation in order to ‘pursue other business interests’ and is out the door ‘with immediate effect’, possibly carrying the can for today’s damaging downgrade and a major property portfolio write down.
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Reassuringly for shareholders reeling from the news, executive chairman Anthony Smith (pictured below), nicknamed ‘the slipper king’ by friends, will resume his role as CEO on a permanent basis.
He knows this business inside and out having been CEO from 1997 to 2016, during which he successfully led Shoe Zone’s organic and acquisitive growth.
His brother and chief operating officer (COO) Charles Smith will assume the role of interim executive chairman and there is continuity in terms of overseeing the numbers, since as Jonathan Fearn will stay in post as finance director.
LOSING ITS FOOTING
Compounding the pressure on the share price this morning is a warning full year profits are expected to be below management’s expectations. Shoe Zone explained that while Big Box, its larger out of town retail format, and the digital growth element of its strategy are ‘progressing strongly’, in the short term, ‘their performance has been offset by the tough high street trading environment’.
Shoe Zone’s high street business, consisting of around 460 stores, has recently struggled with the UK consumer pulling in its horns and high street footfall dropping in July as the structural shift to the internet continues apace.
Against this backdrop, Leicester-headquartered Shoe Zone will be writing down the value of its 17 freehold properties by £3.1m to £5.3m, triggering a non-cash exceptional charge in its results for the year ending 5 October. While this property write down won’t impact on the ordinary dividend, the board doesn’t expect to pay a special dividend this year.
‘As has been widely publicised, the UK High Street is currently facing a challenging environment in which to operate,’ bemoaned Anthony Smith. ‘The pressure on the retail property market has enabled Shoe Zone to achieve an average 23.5% fall in rents on renewal and average outstanding lease length of only two years. As a consequence of this and the tough freehold property market, our freehold assets had to be revalued to represent fair value and give us future flexibility.’
WHAT THE EXPERTS ARE SAYING
Finncap (FCAP:AIM) analyst Peter Smedley has cut his year-to-September 2019 pre-tax profit forecast by circa 14% to £9.5m following the news of difficult second half trading.
Yet he believes that ‘the strategy remains firmly on track, and the group has continued to deliver stable gross margins, tight cost control and strong focus on cash - some of Shoe Zone’s historical strengths. We reduce our target price to 220p (versus 240p) to reflect what we consider are short-term uncertain trading conditions.’
Russ Mould, investment director at AJ Bell, pointed out that Shoe Zone has been helped ‘by having some levers to pull such as securing rent reductions and closing its weaker stores. It also helped that the company sold affordable but essential products.
‘To now have a profit warning from the company would suggest the retail sector is a still a brutal place in which to operate. The high street is to blame for Shoe Zone’s woes with the company’s underperformance understood to be across all regions, product types, prices and brands.
‘A value retailer like Shoe Zone will have to rely on high volumes of sales to make money which is a problem when footfall is weak on the high street. With the economic outlook for the UK looking gloomy, life could get even harder for the company and so it will have to do everything it can to improve brand awareness, product marketing and keep a lid on costs.’
