In a fast-changing world, one thing you can always rely upon is WHSmith to deliver the goods and the business strategy remains exactly the same.

In a fast-changing world, one thing you can always rely upon is WHSmith to deliver the goods and the business strategy remains exactly the same.

When she was chief executive of WHSmith, Kate Swann’s mantra was always “under-promise and over-deliver” and the record of the group delivering the goods is very impressive, particularly from a cash generation and a shareholder point of view. Since 2007 WHSmith has returned as much as £536m in cash to shareholders, through a combination of dividends and share buybacks, and yet it still has a healthy amount of cash on the balance sheet.

Profits and earnings per share continue to grind remorselessly forward as well, despite the unhelpful economic environment, but some people still grumble that the business has been squeezed dry by relentless cost-cutting and that a new approach will be needed in the future.

Well, the City wasn’t expecting WHSmith’s new chief executive, Steve Clarke, to announce any big change in the strategy of the business today, with the final results, and indeed, he made clear to the analysts at the results presentation that the strategy of “sales down, costs down and gross margins up” has served the business well in tough times and is arguably more relevant than ever, while the economic environment remains uncertain. As the man who executed that strategy when running the high street division he was hardly likely to say today that it was all a big mistake.

The fact is that the high street division of WHSmith is not a particularly pretty sight for retail purists, but its profit performance continues to defy the sceptics. Who would have thought that the high street chain would be making a 7.7% operating margin before central costs in the year just finished?

Interestingly, the performance of the two divisions was remarkably similar in the year to August, with the travel division trading profits up only 5% to £66m and high street trading profits up as much as 4% to £56m, despite the new space openings in travel and a big hit to book sales.

In the year to August, like-for-like sales in the high street were 6% down, with an 8% drop in the second half, as WHSmith ran up against the bonanza with the “Fifty Shades of Grey” book in the summer of 2012. And if ever the business was going to see profits come under pressure you’d have thought that scale of top-line sales weakness would do some damage. And yet another huge rise in gross margin, through sales mix and promotional management, combined with hefty cost savings to protect the bottom line.

With three million sq ft of selling space and 615 shops, the high street division has a total operating cost base of about £350m a year and quite a lot of that is fixed, but management continue to find ways to make big savings, through a myriad of different measures and operational efficiencies. The current focus is on cutting costs in the distribution and warehouse system, as well as the introduction of more self-service checkouts in the stores, and WHSmith insist that most of this work is “non-customer facing”, although the new energy efficient lighting does seem to make the stores look a bit dark.

Customers still able to see their way around the WHSmith high street stores will not find many back-list fiction books these days, as more and more space is give to higher margin kids books and stationery, as well as the Kobo e-reader shop-in-shops, but they will find more and more Post Office branches with another 16 to come, on top of the current 82 branches. Credit must be given to management for the way they constantly re-work the space and evolve the high street business, even if some of the carpets look a bit worn out.

In the travel division, WHSmith benefits from the flexibility of turnover rents, but with like-for-like sales down 4% in the year to August, it wasn’t easy to make progress on the bottom line, despite more gross margin growth. Airport like-for-like sales fell 3% and railway like-or-like sales fell 5%, as consumers are still doing their best to cut back on discretionary spending. But WHSmith expects normal service to be resumed as and when UK passenger numbers return to growth.

In the meantime, with 20 new international travel units announced today - including two in Russia - WHSmith now has 141 units open or won overseas-excluding the kiosks in Shanghai - which is starting to be a meaningful presence and a potentially lucrative new profit stream in the long term.

The sceptics still don’t believe that WHSmith’s success is sustainable, but the more things change the more they stay the same and management still think that they can grind out another 150-200 bps increase in the overall gross margin of the business in the new financial year, taking it to around the 57% level, a far cry from the circa 40% gross margin that Kate Swann inherited. And you can be sure that Kate Swann is still keeping a close eye on things from her new berth at the travel food group SSP, to make sure her WHSmith legacy is protected.


Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.