After a summer of poor PR, does WHSmith’s comment today about “evolving our customer proposition” imply a change of stance?
If you were a hard-working spin doctor for WHSmith, then the summer was a trying time, with the airport VAT row and the hospital shop over-charging row combining to produce some unhelpful headlines (on top of the persistent criticism of the state of the carpets and the lighting in its high street stores), which took a toll on the share price.
It was interesting therefore to see WHSmith say today, in its final results statement, “our future focus will remain on profitable growth, cash generation, investing in new opportunities and evolving our customer proposition”. Normally WHSmith just says it is focused on profit growth and cash generation…
Well, leopards never change their spots, as they say, and if you thought that “evolving our customer proposition” meant investing more back into store refurbishment then you would, rightly or wrongly, be mistaken.
“Nearly 60% of WHSmith’s trading profits comes from its lucrative travel division”
To be fair, WHSmith has invested money in improving the look, the fabric and the flooring of its UK airport stores, to capitalise on the improvement in passenger traffic numbers. And, further afield, if you travel regularly through Sydney International Airport, then you may have noticed a shiny new upmarket WHSmith “landside” store open there a couple of days ago.
And the redoubtable chief executive of WHSmith, Stephen Clarke, was at pains to point out that the airport VAT issue was very over-blown, as it only applies to passengers travelling outside the EU and VAT is only chargeable on about half WHSmith’s sales in airports and that with an average ticket price of £1.60 the sums involved were minimal.
Of course, nearly 60% of WHSmith’s trading profits comes from its lucrative travel division and although only 11% of the division’s sales in the year ending August came from international, that segment of the business is growing rapidly. International will soon have 200 units operating, spread across 20 countries and 28 airports.
High street criticism
Much of the criticism of WHSmith as a business, however, is focused on its high street stores, but management has never made any pretence that they are not just focused on pumping up gross margins and cutting costs to bolster profits, despite persistent negative like-for-like sales.
But, to the chagrin of WHSmith’s critics, the high street business model remains remarkably successful and the trading profits of £59m in the last financial year represented a robust 9% margin on sales – a rate of profitability that many retailers would be pleased with.
So the ruthlessly pragmatic approach to reallocating high street space to high margin product categories and cutting costs isn’t going to change and with the high street operating cost base still well over £300m WHSmith see plenty to go at, in terms of making savings, notwithstanding some pressure from the living wage.
There was, alas, absolutely no mention today of investing generally in high street store refurbishment, but category by category WHSmith does invest in growth opportunities, whether that is in stationery or in food to go and the new stationery Brights format has been successfully introduced into 88 of the largest stores, while the discount card shop chain trial Cardmarket is being extended from 20 to 30 stores.
And, although WHSmith did not get where it is today by being big in online, the online stationery business Funkypigeon.com is growing nicely, with a new offshoot Funkyparty.com launched in time for Halloween.
In summary, shareholders might grumble as consumers about the general state of the high street stores, but nobody can have any complaint about the quality of WHSmith’s management and their disciplined approach to growing earnings and dividends per share and generating cash.
- 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.