WH Smith continues to travel in right direction

Strong trading momentum has largely been maintained by WH Smith (LSE:SMWH) in the 20 weeks to 20 January, largely driven by the Travel business which is doing much of the heavy lifting.

At the last count at the full-year results, the Travel business accounted for 74% of group revenues and 85% of group profit, within which Travel UK was the largest unit with 40% of overall sales. North America is still growing strongly and accounted for 21% of group revenues, with the Rest of the World near doubling revenues for last year, although its share of sales overall is 13%.

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For the 20 weeks, overall group revenues rose by 8%. The contribution of 13% growth from Travel comprised 15% from the UK, 7% from North America and 19% from the Rest of the World. The High Street business reported a slightly disappointing drop of 4% in revenues compared to the previous year, although more positively the unit exited the Christmas season with a clean stock position and is on track to deliver annual cost savings of £10 million.

However, Travel is where the growth opportunities lie and the potential in North America is substantial in the group’s view. The store opening programme continues apace, with more than 50 stores due to open in the region among a figure of 110 stores for the group as a whole. In addition, there is a strong pipeline of tenders in place, which suggests that the group has every intention of bolstering its presence in this market.

In terms of Travel overall, the reasons behind this burgeoning business are largely due to what the company describes as “structurally advantaged markets”.

WH Smith benefits from “captive” customers in many of its key sites, such as railway stations, motorway services, hospitals and, in particular, airports, which sets it aside from much of the retail competition.

The return of near normality in air travel has been a particular boon to this segment of the group. In addition, research suggests that air passenger numbers will finally return to pre-pandemic levels during the course of this year. Indeed, revenues in these sites have shown strong growth compared to the corresponding period, with sales up by 14% in airports, 17% in hospitals and 18% in rail.

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In the meantime, and at each of its locations, the group is aiming for a one-stop shop approach by expanding its more traditional books and newspaper offering to include health and beauty, technology, food and pharmacy products.

Technology is a relatively new area of focus, with the group’s InMotion brand often in adjacent stores to the main space, and where the group is keen to expand its international presence. The overall offering is thus able to provide time-pressed customers with all their travel essentials under one roof with a fast and convenient shopping experience.

Despite all of this progress, any number of factors have weighed on the share price, which is some 54% shy of pre-pandemic levels. A deteriorating economic outlook, especially in the UK, has been a notable headwind while geopolitical concerns have also had a detrimental effect on the travel sector as a whole.

At the same time, part of its product suite such as books can be purchased online prior to travel, while an increasing international business adds the potential complication of currency headwinds. These factors are quite apart from the growing competition for share of customer spend, especially at rail stations and airports.

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There has been a marginal uptick in the last three months, but this is not enough to change the fact that over the last year the shares have fallen by 23%, as compared to a dip of 3.5% for the wider FTSE250 index.

Even so, the possibility for success as the business expands its US business and the growing return to normality for the travel sector as a whole are potentially positive catalysts. The market consensus of the shares as a 'buy' seems to mirror such optimism for the group in the medium term.