A weak third quarter trading update has sent books-to-magazines retailer WH Smith (SMWH) down 3% to 709p. Yet analysts remain broadly upbeat about the story, believing the cash-generative high street stalwart can continue to eke out profitable growth through tight cost control and gross margin gains.
Over the opening 14 weeks to 8 June, like-for-like sales dropped 6%, continuing the falling revenue trend reported at the interim stage (11 Apr). Alarmingly, like-for-like sales were down 7% in the core high street division, showing a weakening from the 5% same-store decline seen for the first half year. While fragile consumer confidence is at play, the fall also reflects demanding comparatives in books, as WH Smith last year benefited from the bestselling, saucy 'Fifty Shades of Grey' saga.
The picture was brighter in the strongly-performing travel division, covering outlets in airports, railways stations, hospitals and motorway service stations. Overall sales were flat and a lesser 4% like-for-like revenue decline was revealed. WH Smith continues to open new outlets both at home and internationally in its travel arm, where profits rose 7% to £29 million in the six months to February.
WH Smith continues to demonstrate resilience in the face of structural challenges, namely migration to e-books and falling consumer footfall on the UK high street. Despite declining sales, the identification of costs savings and sticking to retail basics well has enabled the company to grow profits, up 5% to £69 million at the interim stage.
In today's statement, the £927 million cap flags gross margin improvement in both divisions with the aid of cost cutting. WH Smith also stresses the strength of its balance sheet – net cash amounted to £41 million at the half-year – and continues to return cash to shareholders through a £50 million buyback announced last summer.
Well-regarded chief executive officer Kate Swann steps down on 30 June after nigh-on a decade in charge of the robust-performer, in a move which has prompted bears to question whether she is getting out at the right time. Steve Clarke, managing director of the high street business, takes over the reins from 1 July and has big shoes to fill.
Espirito Santo's Sanjay Vidyarthi forecasts taxable profits of £107 million and earnings of 71p for the full year to August. The analyst has a 'buy' rating and 720p fair value estimate for the shares. 'There's not enough in this statement to provide a positive catalyst for the shares short term, but we maintain our view that estimates are cautiously set and that management continues to have levers to pull to offset structural pressures and drive earnings growth and cash generation – after 22% earnings per share growth in FY12, we look for 13% in FY13E, with a free cash flow yield of 8.8%.'
Over at Panmure Gordon, respected retail number crunchers Philip Dorgan and Jean Roche remain holders with a 700p price target. In a note this morning, the pair write: 'We think that sales can continue to fall and profits continue to rise for some time yet, with the potential kicker coming from an increase in air passenger numbers for Travel. We remain holders, because we think that immediate prospects are discounted. Also, the new man – Steve Clarke – will need time to persuade investors that Kate Swann's departure was not timely, rightly or wrongly.'