The WH Smith (LON:SMWH) group has retained the brand but shaken off an underperforming unit, leaving a clear path for renewed focus.
The recently announced sale of the high street business is strategically sound and establishes a clear direction of travel for the remaining units. The unit had been something of a drag on the group more recently, with store closures, margin pressures and faltering progress in sharp contrast to the Travel business.
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 have come just at the right time.
Indeed, some vindication from the decision has come with these results, where trading profit of £15 million was 32% lower than the previous year, and where non-cash impairments relating to the unit were largely responsible for an overall group pre-tax loss of £25 million, compared to a profit of £32 million in the corresponding period.
In terms of what remains, the prospects are significantly brighter. Travel, already responsible for 85% of trading profit, reported a number of £56 million, an increase of 12% and boosted by a 6% rise in revenues. The UK unit currently comprises 54% of revenues, North America 27% and the Rest of the World 19% and the group is energised by the opportunities in North America in particular.
The potential in North America is substantial in the group’s view, where passenger numbers are forecast to grow in air travel 2.5 times before 2050, and where the group is observing more opportunities for airport retailing. The store opening programme continues apace, with around 70 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 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 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 offerings to include health and beauty, technology, food and pharmaceutical 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 this progress, any number of factors have weighed on the share price, which is down by 39% over the last two years. 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 a share of customer spending, especially at railway stations and airports.
Nonetheless, the business is in good shape, and the remaining Travel unit should sharpen the group’s focus on growth. A progressive shareholder returns policy is being pursued, with the previously announced £50 million share buyback programme ongoing and an increase to the dividend leading to a projected yield of 3.6%, which is a reasonable return.
In addition, profit is likely to be weighted to the second half as the peak summer trading period approaches, and the group is on track to deliver in line with market expectations.
A share price decline of 25% over the last year compares to a dip of 0.4% for the wider FTSE 250, and WH Smith will be hoping that the revitalised focus will lead to a re-rating of the stock as time progresses. Indeed, its growth aspirations are currently sufficient temptations for investors, where the market consensus remains at a buy.