As far as businesses go, Shoe Zone (LSE: SHOE) was impacted more than most due to the pandemic. The high street was deserted, and lockdowns meant consumers weren’t exactly rushing to buy new shoes. But it seems the worst is over now. The UK economy has rebounded back to almost where it was before the crisis unfolded, and retail sales are higher than they were. The recovery at Shoe Zone has been impressive too. And the business is in a better shape than pre-pandemic. That’s why I think it’s one of my best stocks to buy today. Let’s take a closer look.
The investment case
In the recent full-year results to 2 October (FY21), revenue actually declined to £119.1m (from £122.6m in FY20). However, the company was still heavily disrupted due to lockdowns and only traded through its stores for 36 weeks, or five weeks less than the previous year. But it was digital revenue that was most impressive. This increased by over 50%, from £19.3m, to £30.5m in FY21.
Shoe Zone has been improving this sales channel over the pandemic, and sees it as a key growth area. Indeed, it said: “Our decision to invest in infrastructure and people pre-pandemic enabled us to take advantage of the change in buying habits and to cope with the increase in volumes through our digital shoehub platform.”
Digital returns rates are also very impressive at only 8.4%. This is a good sign because high returns rates have significantly impacted Boohoo’s sales recently.
Another thing that stood out to me in the recent results is that Shoe Zone has been able to reduce the rents it pays by renegotiating leases on its stores. Rent payments will now be 58% lower, which equates to £1.8m in annual cost savings. Not only this, but it’s closed 50 unprofitable stores. Therefore, Shoe Zone is coming out of the pandemic a much leaner business, with a growing digital offering.
Finally, the dividend should be reinstated soon. It was stopped during the pandemic as the company was loss-making, and made use of a government loan. But Shoe Zone is now debt-free and expects to recommence the dividend this year.
There are still risks though
One of the main risks to Shoe Zone is competition. There’s little to differentiate it against rival businesses. It competes heavily on price, but others can do the same. So it could lose market share. Inflation and UK economic issues would likely impact spending by its price-conscious customers, and hence its profits (although it could also benefit from shoppers trading down). And of course, another strain of Covid could lead to further restrictions.
However, a key strength of the business is the leadership team. The current CEO and chairman have been at the company since the 1990s and both own a significant number of shares themselves. This gives me confidence that their interests are fully aligned with those of shareholders.
Taking everything into account, I view Shoe Zone as one of my best stocks to buy on AIM. It’s a more streamlined business today, with a much better digital offering. The dividend is also an added benefit. I’d add to my position in my portfolio.
