WHSmith’s travel business should soar even higher following a landmark US deal.

Alongside full-year results – showing a 9% rise in group trading profit to £177m, driven by an 11% uplift in group revenue to £1.4bn – the famous British brand revealed the $400m acquisition of US travel retailer Marshall Retail Group (MRG).

As chief executive Stephen Clarke exits the company after 15 years, including six at the helm, it was a farewell souvenir that typified his time in charge. He will be succeeded by former WHSmith travel managing director Carl Cowling, who led the MRG deal.

WHSmith has been expanding its travel retail business for some time. It now accounts for two-thirds of group profit, so it is clear why the retailer seeks to further build the division.

Into the big league

The acquisition of MRG will nearly double WHSmith’s US presence. The 65-year-old speciality retailer has 170 stores – 59 of which are in airports – selling a mix of news, gifts and convenience products.

MRG storefront

District Market is one of the MRG fascias

But unlike WHSmith’s acquisition of US travel business InMotion in October 2018 – it offers technology products and accessories under one fascia – MRG boasts several banners to offer “distinctive retail experiences tailored to local customers and landlords”. Its portfolio includes District Market, Flight Stop and Ciao, selling snacks, souvenirs and sundries.

Cowling says: “It completes the jigsaw for us. We’ve got the WHSmith brand, InMotion to do tech accessories and Marshalls Retail Group for speciality retail, and that gives us access to the entirety of the $3.2bn market available in the US.”

And, he adds: “It’s an acquisition that has strong financial returns.”

MRG is expected to deliver $204m of sales and EBITDA of $31.5m for the financial year ending 2019. With plans in place this year to open another 24 MRG stores across the US, WHSmith’s travel division will account for 70% of group operating profit.

Broker Peel Hunt says: “This is a completely transformative deal for WHSmith and propels it into the big league of global travel businesses.”

WHSmith’s rising profits at the travel arm are in contrast to flat profits of £60m at the high street division.

As high street footfall continues to decline and online sales rise, expanding into train stations, airports and hospitals has been a sweet spot for WHSmith – a market where Amazon cannot touch it.

It’s no secret that many high street retailers are struggling at present. WHSmith is faring better than some. Although in line with expectations, total high street revenue and like for likes were down 2%.

With the added uncertainty of Brexit hanging over everyone’s heads, looking across the pond to expand makes even more sense.

GlobalData analyst Patrick O’Brien says: “When you look at the sorts of markets they’re moving into there is so much more potential, especially airport retailing, and airport retailing is going to put them up among some of the real big players in international markets.“

He thinks both recent acquisitions could be a sign of new strategic direction for WHSmith and the first in a buying spree of travel businesses.

But he warns that the retailer will need “deep pockets” to continue at pace.

“They’ve already increased their debt and equity so there might be a point where they look to monetise the value of the UK operation and sell that to a private equity player or the like,” he adds.

High street stalwart

While travel is growing in importance and the high street faces challenges, the latter is still important. With 567 high street stores across the country and 14,000 group employees – 10% of which have been employed for over 20 years – WHSmith has become a staple in most towns.

Although travel is the driving force of the business, the high street arm still provides profit that can contribute to wider growth.

O’Brien observes: ”£60m is money that can continue to fuel that international expansion and they might view that if they can maintain – I don’t think they will think they can grow those profits – but if they can maintain the £60m-a-year business that’s good fuel to push in.” 

WHSmith continues to invest in its high street stores – mainly its stationery offer rather than refurbishment and expansion – and has developed several partnerships to drive footfall; the Post Office can now be found in 205 locations.

“We consider retail space as a strategic asset and we utilise our space to maximise profitability in the current year in ways that are sustainable for future years,” WHSmith says.

As a high street stalwart, WHSmith can negotiate hard with landlords to keep costs down and justify town centre operations.

With an average lease length of four years, a number of stores with zero rent and others that pay rent in arrears, it makes sense to carry on with business as usual even if high streets are overshadowed by travel.

As Cowling steps out of Clarke’s shadow and into the pilot’s seat, his priority is finalising the MRG acquisition details.

Once the transitional period is over and the new acquisition is firmly in place, Cowling looks well placed to take WHSmith travel to new heights even if the high street stays on the ground.

Analysis: WHSmith takes off with transformational travel deal