July 8, 2011 4:09 am

WH Smith upbeat amid uncertainty

The royal wedding boosted newspaper and magazine sales at WH Smith, which issued an upbeat trading statement on Thursday, saying it “remained confident” in spite of the uncertain economic environment.

Kate Swann, chief executive, has shown herself to be a master of managing decline at the retailer, maintaining the delicate balancing act of cutting costs and improving margins to offset falling sales.

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Although the group’s like-for-like sales were down 4 per cent for the 18 weeks to July 2, both its divisions experienced a lower rate of decline than in the same period a year ago.

The performance of the travel business, which typically generates more than half of annual profits, was boosted thanks to weak comparatives a year ago from the Icelandic ash cloud disruption.

Like-for-like sales of the division, which operates stores in airports and train stations, dipped 2 per cent, with management reporting “a further period of gross margin expansion”.

Seven international stores were added in the period, bringing the total up to 47, including stores in Australia and Kuwait.

“Our view is that the pace of store openings will only accelerate from here,” said Jonathan Pritchard, retail analyst at Oriel.

Noting that the 23 WH Smith stores opened in the first half of the financial year are split evenly between airports, railway stations, hospitals and shopping centres, he added: “This increases our confidence that the 250-300 store target on a three- to five-year view is achievable and that international [operations] could offer a 20 per cent boost to earnings from the travel business on that timescale.”

Like-for-like sales at WH Smith’s high street business fell by 4 per cent in the period, against the 7 per cent decline reported a year ago, thanks to the royal wedding effect.

Management said gross margins “continued to grow”, and cost savings had been delivered “in line with plan”. Mr Pritchard believes the rise of e-readers could wipe up to 10 per cent off group earnings in time as book sales fall.

The company’s share buy-back scheme continues, with 9.4m of shares purchased and cancelled in the period, meaning 90 per cent of the planned £50m ($80m) buy-back has been completed. Shares fell 5½p to 516½p.

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● FT Comment

Despite all the bad news on the high street, WH Smith has proved a resilient performer, and margins continue to move in the right direction. Despite the encouraging pace of international expansion, the more bearish analysts fear the high street business will deteriorate further. Trading on a forward price/earnings ratio of 8.5 times, this is below the retail sector average of 12 times, and a 5 per cent dividend yield adds to the stock’s attractions.

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