Bottom Line: No change is no cause for concern – for now

 
Elizabeth Fournier
FOR ALMOST the entire decade that Kate Swann ran WH Smith, Christmas sales at the stationery retailer fell. Yet over the same period, its share price has tripled – climbing from 2004 levels of around £3.50 to a close of £10.43 yesterday.

Its most recent update proved that investors – who’ve long cheered its ability to grow margins despite declining sales – have nothing to worry about; new boss Stephen Clarke is clearly toeing the party line.

The newsagent’s skill lies in slashing costs while shifting focus away from the high street and onto high-footfall travel sites like airports and stations.

The strategy works. Although its store are dated and tired-looking – a disaster on the high street – this is much less important to the captive audience grabbing a last-minute magazine before a 10-hour flight.

It’s how founder’s son William Henry Smith envisioned the firm when he opened its first bookstall at Euston in 1848, and one that Swann’s leadership – to be continued by Clarke – has been smart to return to.

The firm’s expected operating margin of over eight per cent is seriously impressive for a general retailer, and yet its shares still trade well below the sector, at just 13.5 times 2014 earnings. All this makes it easy to see why falling sales aren’t as bad as they might seem. But cost cuts can’t continue forever – and neither can the share price growth investors have become accustomed to.

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