WH Smith revives dividend as recovery continues amid travel boom

Life on the high street is tough, but business is booming at busy travel hubs. Our head of markets analyses latest results from WH Smith.

WH Smith (LSE:SMWH) has swung back strongly into annual profit, propelled by its Travel business which is growing globally and has become the driving force of the business.

At the same time, the group has signalled its confidence in prospects by reintroducing the dividend. This is a symbolic gesture given that the projected yield is under 1%, but nonetheless draws a line under a period of pandemic uncertainty.

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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, while further store wins means that in addition to the 98 new stores opened in the year, there are a further 150 in the pipeline, 70 of which are in the burgeoning North American business.

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. Combined with the tailwind of a recovering travel environment, revenues stood at 131% of pre-pandemic numbers over the period.

Perhaps of equal importance is that in the new financial year this figure has continued to grow and now stands at 148%. Trading profit, which accounts for two-thirds of the group total, swung to £89 million for the year ended 31 August from a previous loss of £39 million, with the UK accounting for 56% of this number, North America 31% and the rest of the world 13%.

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In the High Street business, where competition does exist more openly, the business is also recovering, although growth may be more limited compared to the extent of the Travel unit. Even so, trading profit increased to £33 million from a previous £19 million, an increase of 74%, although revenues slipped by 2% over the period. Costs are currently being attacked, particular with regard to rental savings, where renegotiations have on average yielded savings of 53% at lease renewal, showing the benefit of the flexible rent model.

Aside from the likely challenges which the High Street business is likely to face in the coming period, the cyber security incident at Funkypigeon.com resulted in revenues which decreased from £54 million to £35 million, with any prolonged dent in customer confidence yet to be proven. In the meantime, the general online offering offers further scope to the group in revenue terms, and capital expenditure of £150 million at group level will ensure further investment in the potentially higher growth areas.

Overall, the numbers represent a shift in fortunes as the group edges more towards becoming a global travel retailer. The new store opening programme and the reintroduction of the dividend are positive statements, driven by a performance which saw WH Smith delivering revenues of £1.4 billion, a jump of 58%, and  pre-tax profit of £61 million, as compared to a loss of £104 million in the previous year.

As with the sector generally, sentiment remains sour on prospects for retail, particularly in light of potentially recessionary times, which could have a specific impact for the group in terms of air travel as discretionary consumer spend is crimped.

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WH Smiths shares have fallen by 21% over the last year, during which time the wider FTSE250 has dropped 20%, although over the last six months the general direction of travel has improved. Indeed, unmoved by the tougher economic backdrop to come, the market consensus of the shares as a 'strong buy' is reflective of both the group’s performance as well as its aspirations.