CHRISTMAS should hardly have been a season for merriment at WHSmith, judging by the latest trading update, with like-for-like sales down five per cent for the 20 weeks to 20 January, and total sales down four per cent. Yet the stationery, books and impulse goods seller was chipper, pointing to good profits thanks to careful margin control – especially impressive in a season given to heavy discounting.
Investors seemed to share the cheer: shares fell, but remain well above both their January lows and the price they have commanded for most of the last five years. That’s thanks to the remarkable strategic turnaround worked by Kate Swann, the outgoing chief executive, which helped WHSmith evolve from a loss-making dinosaur burdened with selling the sort of low margin CDs and DVDs that laid HMV low into an agile, margin-conscious business, returning ever-increasing profits.
However, it might be time for a little anxiety about how long this new vision can remain airborne.
It isn’t as if Swann can claim that there is a problem in one particular division. High street sales were down five per cent like-for-like and five per cent in total – perhaps hardly surprising, given the performances other high street chains have been reporting over the same period. But travel – stores in travel hubs like train stations and airports, the focus of the new WHSmith strategy – was down as well. Total sales for the division were flat, despite the chain’s continued expansion – visible once again this month with the announcement that eight new stores will be part of the new Doha airport when it opens later this year. And like-for-like sales in travel, stripping out sales in new stores, were down by four per cent.
The new WHSmith is much less dependent on Christmas season sales than it used to be, but these figures are no one-off. WHSmith total like-for-like sales were down four per cent in 2010, five per cent in 2011 and five per cent in 2012.
Investors haven’t minded that fall, since group pre-tax profits rose at the same time, and in healthy increments: group pre-tax profit was up nine per cent in 2010, four per cent in 2011 and 10 per cent in 2012.
Yet there must come a point where one effect starts to cancel out the other. Despite the expansion in travel and overseas outlets, overall revenues have continued to decline: down two per cent in 2010, three per cent in 2011 and two per cent in 2012. Revenues have fallen only on the high street side of the business, but like-for-like sales have fallen every year for travel as well: two per cent in 2010, three per cent in 2011 and three per cent in 2012.
With profits continuing to march upwards, it would be foolish to lose faith in WHSmith just yet. No doubt its interims on 11 April will continue to reflect the remarkable success of Swann’s way. But the book and magazine market faces a continuing onslaught from the digital revolution, the high street is on the critical list and economic gloom is keeping travel numbers soft. Without growing revenues, or at least arresting their decline, how long can profits keep soaring?