WH Smith ahead despite flat sales

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WH Smith on Thursday announced it had grown profits by a third in a year of flat sales, as Kate Swann, chief executive, pressed on with her cost-cutting drive as part of a wider three-year turnaround plan.

Unveiling her first set of results since demerging WH Smith’s retail and news distribution arms in August, Ms Swann said pre-tax profits before exceptionals rose 31 per cent to £51m in the year to August 31, despite total sales falling a touch from £1.42bn to £1.34bn over the year.

However, the gross margin improved by 270 basis points year-on-year. Ms Swann said she had delivered faster-than-planned cost savings over the period. She has delivered cost savings of £42m over the last two years and has identified an additional £15m over the next three years, on top of the £7m already flagged.

Underlying sales in the high street business, which accounts for the bulk of profits, fell 7 per cent over the year. However, outlets in airports and railway stations had a better run, with like-for-like sales growing 3 per cent over the year – with airport sales up 6 per cent. Underlying sales were down 3 per cent in the five weeks to October 7,

Ms Swann, who is two years into her three-year programme, said the retail business remained on track as she delivered a 14 per cent rise in profits at the high street arm, to £42m.

She is changing the in-store mix – cutting back on lower-margin sales in entertainment in favour of core products such as books and stationery – and experimenting with new book and stationery-only stores in an attempt to find new avenues for growth.

Ms Swann reiterated that medium-term improvement in the business depended on sales growth. “We will not see top-line growth for the next two years,” she said.

However, she also stressed that underlying sales in the core categories were better than the headline number of the high street, with books down 4 per cent and stationery down 3 per cent.

“As we continue to build our core categories we should benefit as consumer spending returns,” she said. “We are where we expected to be. We are still only two years into a three-to-five year plan. Perhaps we are a hair’s breadth ahead of it.”

Basic earnings per share rose 50 per cent to 18.6p, with a final dividend of 6.2p proposed, taking the combined dividend to 15.3p.

Looking forward, Ms Swann said she expected Christmas to be competitive and had “planned accordingly”. Last Christmas, underlying sales slipped by 6 per cent.

Meanwhile, Smiths News, the newspaper and magazine distribution group, presented its debut preliminary results, with pre-tax profit flat at £32m, against 31.7m last year.

However, it was upbeat on the back of new contracts from Northcliffe Newspapers and Johnston Press to distribute titles in the Plymouth and Peterborough areas. It also won a £50m distribution contract with Frontline.

Smiths News also said it had renegotiated big contracts, with 81 per cent of revenues covered by contracts averaging four years in length. Basic earnings per share rose 6.3 per cent to 15.1p, with a dividend proposed of 4p.

WH Smith split the two business in August. The decision was aimed in part at defusing tensions with the distribution arm’s supermarket customers – including Asda, Wm Morrison, J Sainsbury and Tesco – which increasingly compete with music and books retailers.

WH Smith had feared this rivalry might lead some supermarkets to cancel wholesale contracts. In particular, Tesco, which recently cancelled a big wholesale DVD supply contract with Woolworths, was understood to be unhappy about a rival retailer acting as a supplier

In early trading, WH Smith shares were 1.7 per cent higher at 381½p. Smiths News shares were flat at 125p

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