Much to the surprise of many, high street stalwart WH Smith (SMWH.L) had a good Christmas.
A surprise because traditional retailers have been suffering from the shift in consumer spending to the online market, a process that the Covid-19 pandemic has accelerated. But perhaps Group Chief Executive Carl Cowling wasn’t so surprised. The previous month, he had talked up his company as a ‘resilient and agile business’ enjoying ‘a steady recovery’, and well positioned to benefit from a return to growth in the market.
Better than expected sales
So it proved. Sales in December at WH Smith’s high street business were better than expected, at 92% of 2019 levels. For the 20 weeks to 16 January 2021, total group revenue was 59% of 2019 revenue for the period, reflecting a poor start to the year and the battering that WH Smith’s travel business had taken from travel bans, leaving revenues at 37% of 2019 revenues for the period.
Cowling attributed this better-than-expected performance to a focus on cost control, growing the average transaction value and developing the product range. As a result, cash generation for November and December 2020 was ahead of plan, leaving the group with £340m in available cash. The group had access to £300m in government Covid funding, but did not touch it. Backing up his positive outlook, and his expectation of a return to normality, Cowling also talked about expansion plans, including three new stores and a new bookshop at Heathrow Terminal 2.
News agent or travel business?
If WH Smith’s travel retail business is particularly vulnerable to lockdowns, it is also its best prospect for future growth. In fact, the company now styles itself on its website as “a global travel retailer with a smaller business located on the UK high street”.
In 2018, WH Smith ramped up its international strategy by opening 33 stores in airports around the world, with a particular focus on North America, which thanks to the higher volume of domestic travel via airports has recovered more quickly than the rest of the world. In October of that year, WH Smith paid $198m for US digital accessories retailer InMotion Entertainment Group to gain a share of the $3.2bn US airport travel retail market.
The deal doubled WH Smith’s international travel business. In October 2019, WH Smith announced an all-cash deal to buy fast-growing US retailer Marshall Retail Group for about $400 million. The profits and revenues for this transformed business tell their own story: for the period 2018-19, WH Smith’s travel business revenues were £817m, with a trading profit of £117m, outpacing its high street business revenues of £580m with trading profits of £60m.
What of the share price? The stock closed the week (22/1/21) at 1725p, well below the 52-week pre-Covid high of 2468p, but up 146% on the March low of 700.5p. Year to date, the stock has lost -30.8%, as against the FTSE 100’s -9.4%.
Without a doubt, the company’s heavy debts (its debt to equity ratio stands at 176%) represent a significant investment risk but, looking past Covid-19 to a future where the travel retail market returns to normal, analysts are bullish, forecasting an annual earnings growth of more than 100%, well ahead of the broader market (25.4%), and a return on equity of almost 40%. And this would not be a surprise.