WH Smith faces turnaround test to deter shortsellers
New WH Smith boss Leo Quinn is preparing to face shareholders. Felix Armstrong unpicks the many troubles facing the travel retailer
Announcing the sale of its high street business in March last year, Carl Cowling, then WH Smith’s chief executive, hailed a “pivotal moment” for the retailer, promising “substantial growth and value for all stakeholders”.
WH Smith claimed the sale of its 480 high street stores to private equity firm Modella Capital would simplify the business that remained, positioning it as a travel-only retailer well placed to cash in on the fast-growing demand for quick food and convenient accessories at train stations and airports.
But in the period since, the retailer has been troubled by a stream of profit warnings, a steady decline in its share price and the unwelcome attention of City shortsellers.
WH Smith, which delivers its full-year results on Thursday, is currently London’s 10th most-shorted listed firm, as traders bet that its woes are set to continue. The group has shed 63 per cent of its value since competing its deal with Modella, and is 35 per cent down in the year to date.
More than 18 months on from WH Smith’s high street demerger, Cowling’s decision hail it as “pivotal” have proven premature. Even the transaction itself proved to be far more complicated than hoped. The retailer slashed its initial £76m asking price to about £40m to account for “a more cautious outlook” and “softer trading”, and eventually made just £10m from the sale.
Though WH Smith was hoping to escape the myriad issues facing British high streets, this decline ended up marring its exit. And just as So too have WH Smith’s travel outposts have struggled, so too has the high street business – now renamed TG Jones under its new ownership.
Travel chaos hits profit
The retailer has cut its profit outlook twice in recent months and is now forecasting a pre-tax return of about £75m, in what would be a 40 per cent year-on-year decline. The firm has repeatedly blamed the dip in airline passengers caused by the Iran war, which sparked chaos across crucial travel routes at the start of this year.
Travellers that have passed through WH Smith’s shops have been more parsimonious than usual, the retailer has told shareholders, because airlines have passed on rising jet fuel costs in the form of higher prices.
Though WH Smith could usually hope to make a tidy profit from high-margin items like headphones and pillows, lower store footfall and softer spend per passenger is bad news for its takings.
These pressures are unlikely to ease in the near term, even as oil prices dip as President Trump signals he is keen to bring an end to the Iran war. Energy costs are staying high despite renewed shipping levels and multiple top airlines have warned that their fuel woes are unlikely to disappear any time soon.
Michael O’Leary, chief executive of budget carrier Ryanair, has warned that air fares could rise by as much as a fifth next year, while British Airways owner IAG said last week that its protection against higher fuel prices will lessen significantly next year. These factors will put more pressure on tourists’ holiday purses.
Aside from the impact of the Middle East conflict on its trading, WH Smith has been dealing with an entirely self-inflicted worry: the accounting error which had flattered the profit figures of its North American division for years.
The scandal, which attracted an ongoing probe from the Financial Conduct Authority, wiped £600m off WH Smith’s valuation in its biggest ever single-day stock decline and forced Cowling’s exit.
His successor Leo Quinn, who has led successful turnarounds at construction firm Balfour Beatty and defence group Qinetiq, will hope to convince investors that WH Smith is finally delivering on Cowling’s promise.