Sales drop but higher margins help to lift profits at WH Smith

The group, which trades from over 600 town centre stores and over 600 outlets at airports, train stations, hospitals, motorway service stations and workplaces, said store like-for-like sales fell five per cent in the 20 weeks to January 20.

This was down from the four per cent decline recorded in the 10 weeks to November 10.

Like-for-like sales fell five per cent at its high street stores and were down four per cent in the travel division, although gross margins improved strongly in both divisions.

The group said it is confident of making further progress in the year.

Under outgoing boss Kate Swann, the firm has underpinned profits by offsetting the impact of a tough consumer environment and falling sales with margin improvements and cost cutting.

It has expanded at home and abroad into more lucrative airport and railway station locations, moved towards more profitable products and fewer markdowns.

It also got out of the struggling entertainment market before the industry changed so much that HMV and Blockbuster went into administration last week.

Steve Clarke, managing director of the firm’s high street division, will succeed Ms Swann as chief executive on July 1.

The company said it delivered a “good” profits performance for the period thanks to a close management of margins and costs.

It is a formula that has worked well for the company, which operates 618 stores on the high street and another 619 at travel sites.

In October, WH Smith’s profits rose 10 per cent to £102m, compared with the £135m loss it made in 2004 prior to Ms Swann’s appointment.

The figure is expected to rise to £106m in this financial year.

Ms Swann has shifted the company’s focus away from lower-margin CDs and DVDs towards books and stationery, as well as reduced its dependence on the Christmas season and the need for heavy discounting.

She disappointed investors in October by announcing plans to leave the group.

The group said it expects trading conditions to remain challenging.

But Ms Swann said that the company’s resilience and profits record means she is confident of further growth.

Seymour Pierce analyst Kate Calvert said: “We believe there is still plenty of growth to go for, particularly in travel and internationally, and the high street business market position is probably strengthening given recent administrations as there become fewer places to shop on the high street.”

Analysts at Espirito Santo said: “We currently forecast £106m pre-tax profits for 2013, which is broadly in line with consensus at around £105m.

“While the market’s longer term concerns on the structural pressures that WH Smith faces are likely to remain, management continues to demonstrate its ability to drive profit growth and strong cash generation.”

Ms Swann said: “During the period we saw a good profit performance across the group. Margin was well managed and costs were tightly controlled throughout the business.

“Looking ahead, we expect the trading environment to remain challenging, however we are a resilient business with a consistent record of both profit growth and cash generation, and are confident in making further progress in the year.”

In the light of the demise of HMV and Blockbuster, Ms Swann said it is “unlikely” that the group will return to the entertainment sector.

High street entertainment stores are finding it increasingly hard to compete with discounted online sites such as Amazon.

Neil Shah, analyst at Edison Investment Research, said: “Solid margin improvement is pleasing after years of cost-cutting and repositioning and given the general malaise on the high street and a torrid Christmas, for WH Smith and its markets a five per cent fall in like-for-likes decline is another sign of stabilisation.

“The shares are trading at near five-year highs – up more than a fifth in the past year alone – so signs of sales improvement are needed for another sustained run on the share price.”

A tale of two businesses

WH Smith is one of the UK’s leading retailers and is made up of two core businesses – travel and high street.

Travel stores sell a tailored range of products, to cater for people on the move or in need of a convenience offer. The travel business’s typical customer has less time to browse than the high street customer and is more interested in reading materials for a journey as well as purchasing food, drink and confectionery.

The high street business has a presence on nearly every significant UK high street.

The shops sell a wide range of products, from stationery, greetings cards, books, newspapers, sweets, and a small selection of entertainment products in some stores.