The core Travel business is doing the heavy lifting as WH Smith (LON:SMWH) continues to reap the rewards of captive customers in key locations.
Earlier this week, the shares reacted positively after confirming that it was giving consideration to hiving off its High Street business. The unit has been something of a drag on the group more recently, with store closures, margin pressures and faltering progress being in contrast to the Travel business which is currently responsible for 85% of trading profit. The announcement seems to have been vindicated by this statement, which revealed a disappointing 6% drop 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 £11 million. Even so, given the general pressure on the high street, let alone the question marks over the UK consumer’s propensity to spend this year, the potential exit of the high street business could come just at the right time and would allow fuller focus on the main travel unit.
Indeed, at the last count at the full-year results, the Travel business accounted for around 75% of group revenues and 85% of group trading profit, within which Travel UK was the largest unit with 55% of overall profit. North America is still growing strongly and accounted for 24% of group profit, with the Rest of the World contributing some 6%, although improving strongly.
In this period, overall group revenues rose by 4%. The contribution of 8% growth from Travel comprised 7% from the UK, 6% from North America and 16% from the Rest of the World. Within the Travel UK unit, there was revenue growth of 9% in air, 8% in hospitals and 5% in rail. In addition, Travel more broadly 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 around 60 stores due to open in the region, 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 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 47% 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.
A fall of 15% over the last three months has hindered a share price which was down by 3% over the last year as compared to a gain of 6.6% for the wider FTSE 250, prior to the positive reaction to this update in opening trade. Indeed, the potential streamlining of the business and growth aspirations for the core Travel unit are sufficient temptations for investors, where the market consensus remains at a buy.