Shoe Zone has warned it may be forced to close up to 20% of its store estate in the next 18-24 months should the “antiquated” UK business rates system return in April next year.
In a trading update today (28 October), CEO Anthony Smith said the suspension of business rates in April this year was a significant benefit for the company, but noted government plans to reintroduce the system in 2021 could lead to store closures.
“The consequence to Shoe Zone will be the closure of up to 45 stores prior to April 2021 and the potential closure of a further 45 stores in the 12 months following the reintroduction. In total this would represent the closure of up to 20% of our store estate in the next 18 to 24 months.”
He added a delay to the rates revaluation in 2015 has cost the business GBP2.5m in total, while the latest revaluation delay will be even more costly as “rents during the period have fallen significantly further and consequently, rateable values should have fallen broadly in line with rents.”
“Never has the rating system been more unfair. Our rates as a proportion of rent have increased from 26.4% in 2009 to 54.3% in 2019 and forecast to be close to 60% in 2021. This is unsustainable for most high street retailers and closures will continue unabated until the government makes substantial changes.”
Smith’s comments come as Shoe Zone expects to report a loss before tax for the 52 weeks to 5 October in the range of GBP10-GBP12m (US$13m-$15.5m).
In a statement this morning (28 October), prior to entering its close period, the retailer said as anticipated trading conditions in the second half of the financial year were challenging.
Store trading since reopening in June has been broadly 20% down year-on-year with digital trading broadly 100% up year-on-year. While the latter is encouraging, Shoe Zone said it has not filled the deficit from store sales.
Full-year revenues are expected to amount to about GBP122.6m, compared to GBP161.9m last year.
It added no dividend will be paid in relation to FY20 as debt repayment is now being prioritised by the board which does not anticipate Shoe Zone will be in a position to restart a dividend policy until at least the 2024/25 financial year.
The retailer ended the year with 460 stores, having opened ten Big Box stores and closed 40 stores during the period. At the year-end, 50 Big Box stores were trading. All future new openings are on hold until trading conditions improve whilst a small number of essential relocations will happen as needed.
Sports footwear focus
Pippa Stephens, retail analyst at data and analytics company GlobalData, notes Shoe Zone’s footwear specialism has significantly hindered its performance during the pandemic, with its revenue during the second-half falling by about 40%, causing its share price to tumble by 20% in early morning trading.
“Shoe Zone has announced that it now plans to shutter up to 90 of its 460 stores over the next two years, and while it has blamed the government’s delayed revaluation of business rates, a lack of footwear demand during Covid-19 will have accelerated its response. Having already carried out 30 net store closures throughout FY19/20, this slump in store numbers will be a massive blow to the business but will enable it to adapt more successfully to consumers’ rapidly changing shopping habits, with online penetration across the clothing and footwear sector continuing to rise significantly.
“Moreover, a smaller high street presence will allow the retailer to focus on its Big Box locations, which will remain more desirable among shoppers, as their positioning within retail parks allows for easier accessibility and plentiful parking, while their larger floorspaces enable simpler social distancing.”
While the retailer’s decline was mainly driven by its physical locations, which were forced to close across the UK during lockdown, Stephens says it has also been severely hindered by the fact that its shoppers were not previously accustomed to shopping through its website, with online only accounting for 6.5% of its sales in FY2018/19. Though digital revenue was up about 100% versus last year throughout the pandemic, this was not significant enough to outweigh the lost revenue from stores, and retailers with more established online platforms have had greater top of mind appeal due their superior fulfilment capabilities and more engaging websites, she says.
“Shoe Zone must encourage more frequent purchases among its current customers by offering more perks via its loyalty scheme, reducing the cost of its delivery saver option to GBP9.99 (currently priced at GBP12.99) and introducing free postal returns. Providing free delivery over a minimum spend threshold would also help to increase basket sizes, while more inspiring social media pages would boost impulse purchases.”
Shoe Zone’s value proposition will have helped it retain some appeal during Covid-19, Stephens notes, as increasing unemployment rates have caused some shoppers to trade down from competitors like Office and Dune.
“However, some of its branded ranges extend into midmarket price points, so it should reduce these options and prioritise those which offer better value while economic uncertainty remains rife. Its strong presence of children’s footwear will have been beneficial throughout the crisis, as this subsector has proven more resilient due to shorter replacement cycles. However, to maximise potential within its adult ranges, Shoe Zone must decrease its mix of formal styles and focus more on sports footwear, which has been one of the strongest categories during the pandemic. It should try to onboard more desirable sports brands, like Fila and Puma, to boost relevance, and should ensure trainers have a key presence across its social media posts and website homepage to raise awareness of its offer.”
Shoe Zone will announce its final results for the period on 13 January 2021.