WH Smith: investor confidence sorely lacking

It has been something of an “annus horribilis” for WH Smith (LSE:SMWH), with an overstated profit forecast leading to a sharp decline in the share price and with the CEO unfortunately falling on his sword as a result.

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The North American division accounting error related to the early recognition of supplier discounts, as opposed to being recognised in later years which would be the normal practice. As a consequence, the unit showed a profit of £22 million for the year, as compared to the forecasted £55 million. This update seeks to clarify the current position, but comes with complications. Previous periods have been restated to correct the accelerated supplier income recognition, which clouds comparisons.

However, two figures are perfectly clear. The adjusted pre-tax profit of £108 million for the group compares to previous City expectations of around £157 million. In addition, the final dividend of 6p compares with 22.6p last year, halving the projected dividend yield to just 2.5% at a stroke. The share price performance of late anticipated these declines and confidence will take some considerable time to rebuild as a result while the group strengthens its controls and where an FCA investigation will add further delays in resolving the situation.

That the error should have occurred in the North American unit came with some irony, as the group had previously highlighted the substantial potential, where passenger numbers were forecasted to grow in air travel 2.5 times before 2050, and where the group was observing more opportunities for airport retailing. At 27% of group revenues the error is material and to some extent transformational, as WH Smith has put the scope of the InMotion business under review, although it remains fully committed to Travel Essentials.

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The financial oversight also undoes much of the group’s progress this year, both financially and in terms of investor confidence. WH Smith had previously announced the sale of the high street business, a strategically sound move which established a clear direction of travel for the remaining units, leaving the group as a “pure play travel retailer”.

In turn, what was a burgeoning business could then benefit from what the company describes as “structurally advantaged growth 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, 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.

Unfortunately, the group has inevitably been impacted by the wider economic uncertainty, especially in its key UK and North American markets. 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 railway stations and airports.

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Even on a restated basis, the numbers do not make for easy reading, with the exception of revenues which rose by 5% to £1.553 billion. Adjusted pre-tax profit fell by 5%, actual pre-tax profit fell by 78% to £16 million and trading profit was 6.5% lower at £159 million. Current trading has seen growth of around 3% in like-for-like revenues, leading to guidance for next year of growth in a range of 4% to 6% and for adjusted pre-tax profit of between £100 million and £115 million.

The lack of a bounce to the update, when perhaps the bad news should already have been factored in, is proof if it were needed that investor confidence is sorely lacking. The decline follows a precipitous drop when the North American issue was announced, with the shares 37% down since the announcement and 42% lighter over the last year, as compared to a gain of 9.4% for the wider FTSE 250.

The slump has also prevented the group from recapturing its pre-pandemic glories, instead of which the share price is 74% lower than the levels of December 2019. With so much investor confidence damage to repair, a market consensus which has reduced from a previous buy to stand at a hold for the time being is of little surprise.