Investors’ Chronicle: Shoe Zone, Games Workshop, Taylor Wimpey

BUY: Shoe Zone (SHOE)

The group is shifting focus from the less-profitable high street to out-of-town retail parks, writes Jennifer Johnson.

Budget footwear group Shoe Zone has managed to increase sales while closing stores — an unlikely combination in the retail sector. It ended full-year 2023 trading out of 37 fewer locations, yet bricks-and-mortar revenue was nonetheless up 4 per cent to nearly £135mn.

An oversupply of commercial property is proving advantageous for the company, with management hoping to “significantly improve” its portfolio in the medium term. The company managed to negotiate annualised rent reductions of £700,000 on 53 store renewals — amounting to an average rent cut of 31 per cent.

These conditions in the property market come as the group is carrying out a mass scale reformatting of its shops. By the end of 2026 it aims to have shuttered all of its original Shoe Zone locations. In their place will be either “big box” or “hybrid” alternatives. The former are designed to be based in larger, out-of-town premises, as opposed to high street locations.

Hybrid stores will sell a mixture of Shoe Zone’s cheaper, own-brand footwear and more expensive branded alternatives. Management said it ultimately anticipates trading from a similar level of square footage, albeit from a smaller number of locations.

The group is also building its digital offering, with online revenues increasing 17 per cent to £31mn (due largely to strong sales on Amazon). In the next 12 months it also plans to introduce Apple and Google payment options and a new returns portal, as well as launching a mobile app. 

Shareholders have been rewarded with a total annual dividend of 11.4p, as well as a special dividend of 6p. The effective yield for full-year 2023 is therefore 7.6 per cent. With next year’s forward price/earnings multiple sitting at just 9.3 times, we think Shoe Zone looks like an increasingly attractive prospect, particularly given the increased consumer focus on value pricing.

BUY: Games Workshop (GAW)

While the retailer’s valuation remains pricey, this has fallen from fantasy levels of recent years, writes Christopher Akers.

Games Workshop delivered record half-year results, with no big surprises in the figures after the guidance provided in last month’s trading update, but the war game miniature maker’s shares were marked down as investors reacted to the resignation of chief financial officer Rachel Tongue.

Double-digit growth was posted at the key trade and retail channels against last year, with revenues up by 12.6 per cent and 12.3 per cent, respectively. Online sales climbed by 4.9 per cent, despite “some teething issues” with the October launch of a new £10.8mn online store. 

The licensing revenue stream was the only channel to go backwards, down 15 per cent, given the more volatile nature of the company’s royalty income. There is material intellectual property revenue potential here, after the company gave a much-anticipated confirmation last month that it inked a deal with Amazon for the prospective development of films and TV series based on the world of Warhammer 40,000. 

Profitability improvement in the half was seen in the margin performance as well as the surge in pre-tax income. Core gross margin came in at 69.4 per cent, helped by lower logistics costs and inventory provisions, an increase of over five percentage points.

Strong brand equity continues to attract more interest in the company’s universe. Active users of the My Warhammer online portal were up two-thirds to 576,000 year on year, while Warhammer+ subscriber numbers were up from 115,000 to 169,000.

Tongue will officially step down at the AGM this year and will leave the company next January. Investors rarely respond well to a CFO resignation, so it was no surprise that the shares nudged downwards despite there being no apparent negative reason for the move. 

A share price lower than recent highs — the shares tumbled by 14 per cent in early December after the company revealed trading had slowed since late summer — offers investors an excellent opportunity to buy a quality company with high margins, an attractive dividend trajectory, a solid balance sheet, and further expansion potential in international markets. 

The shares trade at 21 times forward earnings, according to consensus forecasts on FactSet, which is a nice discount to the five-year average of 25 times.

BUY: Taylor Wimpey (TW.)

The FTSE 100 housebuilder is a shrewd operator even when the market is sluggish, writes Mitchell Labiak.

Taylor Wimpey’s trading update ahead of its results for the last calendar year provided another reminder that housebuilders do not build according to political whims but to market demand. 

The FTSE 100 housebuilder cut completions by 23.4 per cent to 10,848 homes, from 14,154 in 2022. Meanwhile, its average selling price rose 3.5 per cent to £324,000, from £313,000, despite Halifax recording a 1.8 per cent drop in house prices generally over 2023. Scarcity in the market is having an impact, propping up new-build prices to a degree. The government wants housebuilders to build more housing, but they will only do so if they can sell at a price they like.

Taylor Wimpey is not alone in adopting this strategy. Rival Persimmon also reduced production while increasing prices last year, and trading updates from other players may reveal more of the same thing.

But does the strategy work? On one hand, Taylor Wimpey has forecast an operating profit of around £470mn for 2023, at the top end of its guidance. It’s a steep drop from the £923mn posted in 2022, but other housebuilders have had a similarly sluggish 2023. This month, shares in small-cap MJ Gleeson sank after it told the market its 2023 performance had not hit expectations, so the fact that Taylor Wimpey is outperforming — albeit from a forecast that still anticipates a much worse performance than in 2022 — could be seen as a victory.

Analyst Jefferies said it was “too early to read too much into post-Christmas trading” but still rates the stock a buy. We agree. Its full-year results are due out on February 28, when shareholders will be able to make a better assessment. Until then, we maintain our rating.