Member Info for LorenzoLynch

The billionaire could be wading in again? Or there could be a leaked takeover over bid?

Pure speculation of course, but I can’t see any relevant news story to this.

RetiredBanker,

I agree with you in regards to the demand for cheap shoes, but I don’t see what sets Shoe Zone apart from the competition in the long-term, and I think that’s evidenced by the margin deterioration witnessed recently I.e. why couldn’t they simply increase prices to maintain margin?

I like the business, and I don’t think it’s going bust anytime soon, but I think it’s fairly valued (or thereabouts) and I think it lacks a level of certainty, in terms of forecasting future performance.

In regards to moat, I think you raise a valid point. There is a space for such a business in the market, but I don’t think it’s a space where a business can truly thrive, due to the level of competition. Primark, George and others will always provide a sufficient level of completion to ensure that margins remain low. Any significant increase in margin, I would expect to be short-lived (as it has been). I think the business outperformed over the past few years, but I expect it to now see a reversion to the mean.

I could be wrong, of course. This is one of the few times I’ve seen a stock that really divides my opinion. Personally, I prefer a ‘sure bet’. SHOE doesn’t meet that standard for me, but equally, I wouldn’t be surprised if it ticks along at an ok pace, once it’s turned things around.

For me, it’s a coin toss where there probably isn’t much to be made, but equally, there isn’t much to lose. If I was a retired man with a diversified portfolio, it would probably make the cut for me (for a small position, albeit)

I’d expect c.60%-65% above the current SP, so you’re talking approximately £2 per share. I certainly don’t think a bid below £1.80 would be entertained at all.

If you look at the growth strategy, all things considered, net income should be c.£62m (from memory) by FY27 year end (only 3 years from now!).

Imo, that’s worth £3+ a share, assuming that the outlook is equally positive. That’s a nice return for a buyer, so I think they’d be perfectly happy paying c.£2 today, but that depends on a variety of factors… can they add some synergistic benefits? Can they accelerate the growth strategy? Are the growth estimates too conservative?

There are many swings and roundabouts, so as always, it’s simply worth whatever the highest bidder is willing to pay.

I don’t see many companies worth taking over these days, which works greatly in our favour. There’s a big appetite for acquiring UK companies atm, so all the stars appear to align nicely…. How it wasn’t bought out at 30p per share, I will never know. I’d love to know what these institutional investors are taught (or not taught!) during their education… it can’t be a lot, thankfully!

Uallmakeitup,

Each to their own.

It’s very easy to point to one situation and retrospectively say that it was a smart move. I first bought in at 30p… many investors sold shares on the climb to 50p, but look at where we are now. I can safely say that my returns from CARD would be much, much lower if I sold shares on every small climb, so it’s not for me, personally.

I prefer to top up on dips and I only start selling shares when a SP approaches fair value (when there’s 50% upside or less, I start trimming, usually, and I’m usually all out then there’s only 20% upside left on the table). It’s served me well, so far.

If I was retired or playing with big money, I’d probably act differently, however.

Jed,

What’s an RSN? I assumed that you meant an RNS?

LWHL,

I agree that profit taking is a necessary part of investing. I don’t agree with Jed’s narrative, however.

The fact that a billionaire is wading in and has just bought over 8% of the company and 2 directors have just triggered their options has got me on the edge of my seat. The cat might finally be out of the bag

Jed,

Obviously we all have to undertake some level of portfolio management at all times (personally, I haven’t trimmed any shares on this rally), but I fail to understand your point regarding a trading update. The last report told me everything I needed to know.

In recent times, we’ve had the pandemic, the cost of living crisis, rising interest rates, cost inflation (paper and energy hitting CF, in particular) and many other significant headwinds. At present, there are no major headwinds to my knowledge, so I think it’s reasonable to assume that CF are on an upward trajectory. That’s just my view of course.

I do find it odd though how we’re all invested in CARD, because we think it’s significantly undervalued, but as soon as it starts rising, some investors head for the exit. If I was satisfied with mediocre returns, I’d just invest in index funds and bonds etc.

Bhaveen,

I wouldn’t worry too much about the reasons for institutions buying and selling… they often make foolish decisions, from what I’ve witnessed down the years, and many of them perform badly. Teli appear to have done this before by investing in CARD while it was being managed terribly, so I’m not at all concerned by them exiting their position. If Berkshire Hathaway (or the like) were selling shares in a stock I owned, I’d pay close attention, however.

Jed,

That’s an interesting way of saying ‘I missed the ride up from 90p, so please start selling shares so I can buy back in on the cheap’… even though it’s still very cheap based on earnings (in my opinion, at least).

You’re making yourself look a right clown to anybody with an IQ over 40.

Do any of you have a full understanding of the put and call options which are listed as a liability on the balance sheet?

It’s the first time I’ve encountered this with a business

Lemonade,

If you think SCS was/is a mediocre business, then with all due respect, you didn’t understand the economics of the business. The low fixed costs were just a piece of the puzzle (albeit, the most important part for me, due to it being in a cyclical industry).

There are several reasons why SCS kept growing and gaining market share while their competitors continually went bust.

That said, I sold as soon as the offer came in, as it wasn’t too far below my valuation, and I wasn’t prepared to wait 2-3 years for that valuation to be realised if the purchase collapsed.

I must say, I’m quite that CRL wasn’t acquired recently. I think it would have been a great purchase for the right bidder.

Lemonade,

Over 70% of SCS’ costs were variable according to their investor presentations. I’d say that’s a pretty high %…. Did you also hold shares in SCS?

Threeputt,

Yes it is, but it’s more important for companies with higher fixed costs. On the positive side of this, when they can produce goods for pennies (like CRL), much of that additional revenue above the break-even point goes to the bottom line, leading to a surge in profit margin.

Other companies, like SCS (a former holding of mine until the buyout), were able to ride out recessions with ease due to having low fixed costs, but their growth was stunted.

There was a lot of like about the RNS today. I think Pippa has performed exceptionally well and it looks like the turnaround if fully underway.

Shandy,

I didn’t realise that it was accounted for like that. Thank you for the info

All,

Congratulations on the rise today

Lemonade / Apox,

When reducing inventory, they were able to sell those goods (c. £2m of goods) without any production costs. If they hadn’t done this, they’d have made a loss over the period.

Whether inventory was already too high is debatable, but the key thing is that they cannot continue to do this, so if things don’t improve for the underlying business, it will make a loss, and it will continue to do so until things improve.

I first invested in CRL in 2021, so I’m all for investing in the company, but there is a lot more risk here now than there was previously.

Those high fixed costs and a weak balance sheet force the company into a situation where increasing revenue is absolutely imperative. If they fail to do this, they will fail to turn a profit, and the company will eventually go bankrupt. Other companies, with more robust balance sheets and/or higher variable costs, have much more resilience, so the market is pricing in this additional risk, and rightly so.

There’s a huge opportunity here to make some serious returns, but revenue has to increase, and quickly, imo.

If you look back at Bernard’s last few presentations, he was expecting a turnaround long before now (by March 2023, from memory). There were no warnings back then of a rapidly declining contract sales business. If Bernard couldn’t foresee where CRL was/is going, I highly doubt that any of us can.

It’s simply too risky for me at the moment. I’d rather wait for the start of the turnaround (and make lower returns, admittedly) than roll the dice. In my opinion, this is too speculative atm to be considered a true investment, and that’s before factoring in that it’s under new management.

Also, something worth considering is that CRL clearly has no pricing power; the company was not, and is not, able to pass on cost inflation to consumers (and that includes B2B).

My dad remains a shareholder here, so I’m often in discussion about CRL with him. He shares my views, but it is happy to roll the dice, whereas I am not, at present.

All in my honest opinion. Do your own research.

Lemonade,

I don’t have any issues with the inventory levels. My issue is that the company would have reported a significant loss, as opposed to a profit, had they not reduced their inventory to such a degree.

In other words, the company is loss-making, and I think it’s prudent to wait until that changes, as the balance sheet is weak and it’s under new management. Compound this with the collapse of the contract sales side of the business, and there are plenty of red flags.

What is your current fair valuation of the business? I personally couldn’t give one

Retired banker,

The key issues for SHOE imo are as follows:

• Low profit margins. We’ve recently seen how quickly profit can dry up with just a touch of cost inflation.

• Cheap shoes (and even branded shoes from other supplies) offer no moat, and therefore no profit margin stability.

• A sweat shop scandal could come out at any time. Boohoo’s share price never recovered after their scandal.

• 2 huge profit warnings in 6 weeks indicates very poor momentum, and poor visibility for the company moving forward in the short-term, let alone the long-term.

Creighton’s experienced a huge rally while things were great, but some cost inflation and poor momentum absolutely destroyed the earnings and share price. In 2 years or so the share price has fallen from £1.35 to 18p… it was even lower than 18p a few days ago, albeit only briefly.

I’m not a trader, but I do think such companies are much better for trading than investing. I’ll consider trading this when we see signs of a turnaround, but things appear to be getting worse for SHOE atm, not better.

Lemonade,

From the last half year report:

“We have achieved stock reductions of £2.4m to the end of September 2023, achieving a closing stock balance of £10.4m when compared to the same period in the previous year (2022: £12.8m) without any reduction in effective service levels to customers”

Compare that to the dismal earnings of c.£300,000 BEFORE TAX for the 6 month period.

Imo, this is the main reason the share price has tanked in recent times.

I must admit that I also have no idea why the share price tanked so heavily first thing this morning, but I imagine stop losses had something to do with it. I think the current share price (give or take a few p) accurately reflects the risk vs reward relationship here.

While the impairment might have tax benefits, I imagine that there will be costs associated winding down Emma Hardie.

The major concern for me remains that prior results have been artificially inflated by the huge reductions in inventory levels (something which is evidently unsustainable).

If you strip this out of the prior results, CRL actually made a significant underlying loss. If this kind of smoke and mirrors continues, then the company might still be losing money.

After reading some Ben Graham after my last post (reminding myself of his investing values, and tbh, my own), I parted ways with my Creighton’s shares, crystallising my largest ever loss as an investor (my first 4-figure loss). Reason: it was too speculative, and I already held 2 other stocks which have a speculative element to them (one being Plus 500, which i still hold). It was very much a keep one and sell one situation for me. SP movements since then tell me that I made the right move, but a turnaround in CRL’s fortunes could really see the SP rally.

Today, I was tempted to buy back in here on the promise of improved results, but as mentioned above, the inventory situation makes me weary.

I’d love to get involved again, but I think I’ll be waiting for the results this time around, even if it means lower returns.

It’ll be interesting establishing which direction the company is moving in and the growth strategy moving forward.

I’ve given a lot of consideration to those shares in the treasury. I think they’ll either simply cancel them at some stage in the future to create some additional upside when PLUS is somewhere close to fair value or I they’ll float them when they IPO on the NYSE or following the NYSE IPO. Nobody has a better understanding of clueless trust fund retail traders than Plus 500… I have absolutely no doubt that they’ll make the right call on this front

Londoner,

Excellent post, and I’m in full agreement with you.

I noticed in the annual results this year that the underlying business performed very poorly, and that revenue and net income were artificially propped up by the earnings of the acquisitions. That’s a huge red flag in my opinion.

I don’t have the time to go back through the results to drop the numbers on here, but it’s something worth considering.

I no longer hold any shares in National World.

Panda,

As you’ve said, a help to buy scheme would likely be required if Labour actually hope to achieve this target (or get close to it).

The govt-backed mortgage scheme and planning reforms should stimulate supply, but I’m not overly excited.

Stevebt, sorry to sound pedantic, but house prices don’t always rise, cash just always falls in value. A war (or a similar crisis) isn’t required for house prices to fall. Without economic stimulus, housing would be much, much cheaper today than it is. The housing market is propped up with an obscene amount of debt, the bank of mom & dad, and blind optimism, and homeowners are typically highly leveraged in other areas of their life (every man and their dog has a car on finance/lease). A fall in employment is all that is required for a serious correction, in my opinion.

The U.K’s economic performance of late and outlook over the next decade does not inspire me with confidence. Most of the skilled and knowledgeable people I know (I’m 30) are looking for a way out, permanently. There’s money to be made with HB stocks, but I don’t think it’s the free lunch it used to be.

As I said previously, I expect housebuilders to recover, eventually, but I think it could be a slow recovery, and I’m not convinced that we’ve seen the worst of it yet.