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WH Smith to focus on travel and survive

Toys R Us, High & Mighty, Jacamo, Simply Be, GAME, Staples, MFI, Athena, Unipart, Tie Rack, Blockbuster, Barratts (shoes), Jessops, JJB Sports, Shoe Express and many other famous names have all disappeared from the UK High Street or retail estates. WH Smith has clung on

Departure board
Stuck at the airport and hankering for an oversized chocolate bar and an overpriced sandwich?

WH Smith PLC (LON:SMWH) is not a well-loved retailer but it should be given credit for seeing, years ago, the writing on the wall.

In the last 10 years, a number of famous names have either disappeared from the UK High Street or gone into administration and reappeared in diminished form.

READ: WH Smith voted worst shop on the high street by Which? Readers

Those names include Woolies, HMV, BHS, Phones4U, Maplin, Bargain Booze, Comet, Toys R Us, Poundworld, Austin Reed, Clinton Cards, Zavvi (the successor to Virgin Records), MFI and Allied Carpets.

Some of those, strictly speaking, were denizens of the edge of town retail park rather than the High Street but that did not stop them going belly-up.

In 2008, WH Smith’s High Street business was still generating more profit than its Travel business.

In the year to August 31, 2008, the Travel division’s profit before tax was up 14% year-on-year (YOY) to £41mln whereas the High Street division’s profit rose 7% to £47mln.

The Travel division’s sales were up 1% on a like-for-like (LFL) basis, whereas WH Smith reported that High Street LFL sales were down 3%, “in line with our strategic plan”.

So, even while the rest of the world was worrying about the credit crunch, WH Smith’s management was preparing for the long, slow, decline of the High Street.

The game plan was – and remains – to use the High Street shops as a cash cow to finance the expansion of the Travel business and overseas expansion.

The cash generative nature of the business also enabled the group to pay out decent dividends and buy back shares.

In today’s full-year results announcement, which disappointed the market because of lower than expected profits, the company said it had earmarked another £50mln for its share buyback programme.

Some pundits have wondered whether the money set aside for repurchasing shares might have been better spent on sprucing up the shops.

READ: WH Smith’s move away from the high street is paying off

Given that there is a Twitter feed devoted entirely to the questionable state of the carpets in WH Smith’s shops, the pundits might have a point but rather than invest the money in revitalising its High Street business, the current management has abandoned recent initiatives to make a go of it on the High Street, such as Cardmarket and WHSmith Local, to focus on its core categories.

It also announced plans to close around six High Street shops – particularly those affected by onerous leases.

Even though shopping in a High Street outlet of WH Smith’s is often a wretched experience that involves the repeated rejection of chances to buy a monster-sized chocolate bar (when you only went in there to get a copy of Slimmer’s Weekly), it is hard to argue with management’s decision.

Today’s results showed that trading profit of the Travel division had risen 7% from last year to £103mln while the High Street trading profit fell 3% to £60mln.

The Travel estate’s revenue growth was 8%, or 3% on a LFL basis, whereas the High Street’s chain’s sales were down 3%, both on an actual and LFL basis.

Faced with that sort of contrast, it is small wonder that chief executive Stephen Clarke and his team are focusing on the Travel business, where, in the words of Richard Hunter, the head of markets at interactive investor, the retailer has an “almost monopolistic presence”, and what Clarke called the “fast-growing international business”.

Could sharpen up its act?

The international business has 286 units open across 27 countries and 50 airports; it won 42 new units this year including some significant tenders in South America and Europe.

David Madden of CMC Markets is one of those who thinks the retailer should sharpen up its act in the UK.

“Retailers across the board are having a tough time, and when you take into account the firm was voted the ‘worst high street retailer’ earlier this year, its sales aren’t too bad. Shoppers complained about rude staff, high prices and tired stores. The group should address these issues, and not sit back and rely on transport hub stores,” Madden said.

Fiona Cincotta at City Index, by contrast, noted that while the bottom-line profit fell unexpectedly, that was due to “some welcome changes at the high street business, including the closure of six weaker-performing stores”.

“At the underlying level, profits have met expectations. The dividend has been hiked by more than hoped, cementing WH Smith's reputation as a reliable supplier of higher pay-outs,” Cincotta said.

“A key growth driver going forward will be the company's international travel business. At the moment, shops outside the UK only account for about 10% of trading profit in the travel division.

“Investors could be a little disappointed that there's no clear guidance on how many new stores WH Smith would like to open overseas this year. There's plenty of room for it to move, especially in North America, where it has yet to open a store,” she added.

One thing’s for sure: customers in North America will not stand for “rude staff, high prices and tired stores”, although they might be suckered into buying monster-sized chocolate bars at the till.

Why isn't there more competition?

George Salmon at Hargreaves Lansdown said there are two reasons investors can be optimistic about WH Smith.

“Cost control has been impressive in those High Street outlets, and the Travel business continues to deliver impressive results. The group’s outlets in railways and train stations now account for around two-thirds of profit.

“The Travel business is attractive because it’s often one of only a handful of outlets available where consumers can grab a bite to eat or something to read. This has proven a winning formula for sales and profit growth, and with plenty of blank space on the map, Smith’s Travel business should remain an attractive roll-out story,” Salmon said.

All of which begs the question: if WH Smith’s Travel business is such a good money-spinner, why does it not have more competition?

It is not as if sourcing books, newspapers, magazines, travel accessories, giant chocolate bars, stationery and sarnies is particularly difficult; it may just be that WH Smith’s travel business is in that sweet spot of being profitable enough to be bothering with but not so profitable so as to attract serious competition.

Quick facts: WH Smith PLC

Price: 2296 GBX

Market: LSE
Market Cap: £2.64 billion

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