Sales suffer fall but WH Smith sees strategy reaping rewards

The newspapers, books and stationery retailer maintained its upbeat outlook yesterday despite tough high street conditions denting sales in both arms of its business.

The company said total group sales fell by one per cent in the 18 weeks to July 2, and fell by four per cent on a like-for-like basis.

The high street division saw total sales drop by three per cent and like-for-like sales by four per cent, although the group said gross margins continue to grow in both arms, helped by cost savings.

The travel business, which operates from more than 530 outlets at airports, train stations and motorway service areas, increased sales by two per cent, but once new openings are stripped out like-for like sales fell by two per cent.

WH Smith’s new strategy is to cut out products with low margins, such as CDs and DVDs, to focus on core areas of news, magazines, books and stationery, a move that has impacted sales but boosted profits.

The group said the economic environment remains uncertain and while it is cautious about consumer spending, it remains confident about the outcome for the full year.

Arden Partners analyst Nick Bubb said: “Given the strategic value of the airport shops, the decent dividend yield and the awesome cash generation, the shares still look very attractive, despite the pick-up yesterday.”

Chief executive Kate Swann has cut costs and improved gross margins by focusing on more profitable products, better sourcing and better control of markdowns.

With an average transaction value of £5.50 in its high street business and £3.50 at its travel outlets the group is less affected when shoppers tighten their belts.

Consumers are grappling with rising prices, subdued wages growth, a lack of credit, job insecurity, a stagnant housing market, Government austerity measures and fears of interest rate rises.

This has led to a recent spate of retail failures.

WH Smith is also expanding overseas. It said it would open a further seven units this year, taking the total to 47.

Analysts at Panmure Gordon said: “We think that WH Smith can sustain its high returns, despite the growth of eBooks and the challenge of the supermar- kets.

“We think that these returns and the long-term value of Travel are undervalued by the market in the current share price,” the broker added.

Panmure Gordon recently initiated coverage on WH Smith with a “buy” rating and target price of 584p.

The figures for the first 18 weeks of the second half were an improvement on the whole of the first half, when travel like-for-like sales were down three per cent and high street sales were down six per cent.

WH Smith said its financial position is in line with expectations and its balance sheet remains strong.

The group said: “The economic environment remains uncertain and while we continue to be cautious about consumer spending, we remain confident in the outcome for the full year.”

Kate Calvert, retail analyst at Seymour Pierce, said WH Smith is an attractive investment because of its “strong management, defensive qualities, good cashflow and the fact that the management is turning the business into a sustainable growth strategy through Travel”.

WH Smith declined to comment on its attitude to the stocking of, and advertising in, News International newspaper titles in the wake of the News of the World phone hacking scandal.