Quick notes – SHOE, DIS

I haven’t posted much recently due to a lack of news from the shares I follow, but this morning was a little more interesting. Here is a couple of announcements that caught my eye but where I missed the deadline for a 7:59 cut.

Shoe Zone – FY Update

As background, I previously held Bonmarche, perceiving it to be an undervalued retailer with a cash buffer. Despite plenty of evidence, it wasn’t until the day of their mid December 2018 profits warning that I realised Bonmarche was quite likely to fail and I sold out for a 50% loss. Wishing to learn from my mistake I checked over my portfolio for other companies at similar risk / with read-across and decided to sell my position in ShoeZone.

Within a month I suffered seller’s remorse as strong full-year results and outlook led a 20% share price to jump. Revisiting my decision to sell I identified a rising operating margin of 6-7% versus a falling operating margin of 3-4% for Bonmarche. This, I reasoned at the time, was evidence of a much better customer proposition and, most importantly, meant that Shoe Zone could experience a greater fall in sales / profitability without suffering losses. Writing now, I would add that Shoe Zone’s leases are generally shorter than Bonmarche’s were, their store designs make it much easier move around to minimise lease renewal costs, and a lesser proportion of their stock is dependent on correctly judging fashion trends. In summary, there was every indication that my sale had been a mistake.

And so it was with some bemusement that I read August’s profits warning. Primarily I was now delighted with myself for having sold out back in December for 20% above (adjusted for dividends) than the much reduced share price. But on the other hand I could not ignore the fact I had subsequently decided that this sell decision was mistaken.

A couple of weeks ago with reports that a Brexit deal was imminent I looked at Shoe Zone again as a potential beneficiary. At this point Shoe Zone’s share price had fallen even further, partly I believe due to the comparison with Bonmarche which had gone so quickly from cash-rich and profitable, to being virtually worthless. I came very close to buying but decided it remained too risky.

It now looks as if the decision Bonmarche’s new owner to abandon it to administration a few days later precisely marked the bottom of the pit of despair for Shoe Zone. Every day since then their share price has risen and today they issued a positive trading update:

  • Revenue very slightly ahead of post-warning forecasts at £161.9m
  • Adjusted EPS in line with forecasts of around 15.5p
  • YoY cash steady after adjusting for £4m special dividend, suggesting that the period’s 11.5p of normal dividends are sustainable and that forecasts for a cut may be pessimistic or at least very temporary.
  • Online growth described as “progressing strongly”, albeit not quantified.
  • Operating margin forecast confirmed at around 6.0%.

It would have hardly been a major surprise if Shoe Zone had announced a further profits warning and in this context today’s update is excellent news and fully justifies the 12% rise seen in the share price at the time of writing.

However, risks remain. Primarily I am very cautious about their “Big Box” strategy of larger stores carrying a greater range. This appears to go directly against the general trend where larger out-of-town stores are squeezed between internet shopping and the high street. Their proven competence is with small stores selling a constrained range and where they have a strong negotiating position with landlords due to ease of relocation. I can see potential nascent issues around slow-moving stock, fixture and fitting depreciation policies, and lease provisions / location choice.

The other risk is of course of a renewed downturn in trading and today’s statement only confirms that this hasn’t happened yet.

I remain very much on the fence as to whether to buy back into this company.

Distil – Interim Results

Distil describe themselves as:

…owner of premium drinks brands RedLeg Spiced Rum, Blackwoods Gin and Vodka, Blavod Black Vodka, Jago’s Cream Liqueur and Diva Vodka…

However the reality of the situation is that they have just one successful premium brand: RedLeg Spiced Rum. Having researched the situation in the past I would summarise their other brands as follows:

  • Blackwoods Gin – arrived too late to the party and never quite reached critical mass. Poor availability and likely to fade away further.
  • Blackwoods Vodka – stillborn, never got beyond a tiny niche.
  • Bladvod Black Vodka – tired brand, most definitely not premium.
  • Jago’s cream Liqueur and Diva Vodka – failed premium brands, now a very tiny niche.

As far as new products are concerned:

  • A “Caramelised Pineapple” rum sounds utterly disgusting and risks undermining the credibility of their only successful brand, regardless of its actual palatability. At best it seems more likely to be a short-term fad / moneyspinner rather than ever building up any brand value.
  • A future flavoured gin offering would arrive at an already crowded market just as their unflavoured offering did. Perhaps a launch two years ago would have been successful, but like the exotic rum product doesn’t seem likely to have a long lifespan.
  • I am very positive about the ready-to-drink collaboration with Franklin & Sons as this marries genuinely premium rum and cola products in an long-term expanding market.

I’ve concentrated on the product side because the financial figures speak for themselves. After the full-year results many were worried about all the future profits being eaten up by marketing costs, but there are no such worries this time as there aren’t any profits. While H1 is always going to be weaker than H2 in their market, the YoY comparables are also truly terrible. The reduction in H1 marketing spend (and lack of cash for a last-minute splurge) as well as worsening trends must bode very badly for Christmas sales.

In my opinion today’s price fall is fully justified and the punter who sold at 0.56p this morning got a fair price despite the bounce later in the day. The company is sub-scale and a market capitalisation of £4m is far below the level at which it is sensible or economic to hold a market listing. I would be surprised if it still exists in the current form this time next year – only their ready-to-drink product could save them.

[Edit: In today’s SCVP Graham Neary notes that RegLeg is growing inline with a growing rum market – while this means it is unlikely to be dropped by major supermarkets, this really isn’t good enough. However overall he is much more positive. I think the difference is that he is taking profit forecasts at face value and not considering the short-medium term effects of large implied reductions in marketing]

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