A picture of the front of a Shoezone store

- H1 profits slightly ahead of expectations

- Earnings pegged back by margin pressures

- Solid growth in stores and online

Shares in Shoe Zone (SHOE:AIM) fell 12% to 212.5p after the value footwear retailer reported a 17.4% plunge in first-half profits as inflationary pressures crimped margins.

Reflecting current consumer uncertainty ahead of the important summer and back to school selling periods, Shoe Zone’s management also left full-year guidance unchanged, which proved the catalyst for investor profit-taking after a stellar share price run from the cut-price shoes, boots and slippers purveyor.

MARGIN PRESSURE

Shoe Zone delivered adjusted pre-tax profits of £2.5 million for the half-year period, ahead of management expectations but down from £3.1 million a year earlier due to wage increases and margin pressure from higher container prices and a weak sterling to dollar exchange rate.

However, Shoe Zone stressed that container prices have since dropped to below pre-pandemic levels, the benefit of which will ‘start to flow through in the second half of this year’.

GROWTH IN-STORE AND ONLINE

Encouragingly, Shoe Zone’s store refit and relocation programme continues to progress and first-half revenue rose 7.9% to £75.4 million despite the fact the retailer traded out of 52 fewer stores compared to 12 months earlier.

This revenue growth reflected the appeal of the retailer’s competitively priced product range and the success of its pivot to larger hybrid and big box store formats.

Brick and mortar store sales were up 6.8% to £61.1 million and digital sales skipped 12.7% higher to £14.3 million in the half-year period.

Zeus Capital pointed out that Shoe Zone’s digital return rates ‘remain extremely low at 11.9% (FY22: 11.8%), with most returns transacted in stores, demonstrating the strength of the group’s omnichannel model’.

Shoe Zone has the balance sheet strength to ride out the consumer downturn, having ended the half with net cash of £12.9 million, down from £13.9 million a year earlier due to dividends paid, its ongoing share buyback programme as well as additional capital spend.

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Zeus Capital commented: ‘We leave our forecasts unchanged for now, reflecting current consumer uncertainty ahead trading through summer and back to school peaks.’

The broker continued: ‘We gain comfort from H1 FY23 being ahead of management expectations and see tailwinds in the form of lower freight costs and moderating input cost inflation.’

Zeus also pointed out that Shoe Zone ‘operates in a defensive sub-sector of the consumer market, with its core product offer representing a staple-like, rather than a discretionary, purchase.

‘In addition its ongoing store transformation offers scope for meaningful earnings growth, supplemented by a growing digital offer that allows it to capture further market share.’

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Issue Date: 16 May 2023