The Christmas trading update from WHSmith was the first from new chief executive Stephen Clarke, but the more things change the more they stay the same.

The Christmas trading update from WHSmith was the first from new chief executive Stephen Clarke, but the more things change the more they stay the same.

Every year the sceptics expect WHSmith to collapse because of the perceived lack of investment in the high street, but today’s message on Christmas trading is uncannily similar to the one that we used to get regularly from the previous boss, Kate Swann.

As an example, Stephen Clarke says: “During the period we have delivered another good profit performance across the group with costs tightly controlled and further improvement in gross margin. Looking ahead, we continue to plan cautiously and manage the business tightly while investing in new opportunities for future growth. We are confident in making further progress in the year”.

Compare that statement today with the one from Kate Swann at the same stage last year: “During the period we saw a good profit performance across the group. Margin was well managed and costs were tightly controlled throughout the business. Looking ahead, we expect the trading environment to remain challenging however we are a resilient business with a consistent record of both profit growth and cash generation, and are confident in making further progress in the year”. WHSmith clearly believe in the virtues of recycling.

As ever with WHSmith, lower like-for-like sales are more than balanced by strong gross margins and lower costs, so that the bottom line continues to chug forward, with the City slightly upgrading full-year profit forecasts today for the group because of improving trends in the key travel division.

For the first 10 weeks of the current financial year, to November 9, WHSmith reported -2% like-for-like at the travel division, but that has improved to -1% over the 20 weeks to January 18, thanks to a recent improvement in airport passenger traffic.

The last 10 weeks have been no worse than flat like-for-like in the travel division overall and it won’t take much to tip like-for-like sales into positive territory soon, which would be the first time in ages (even if trading in the other channels like rail and motorway service stations is a bit soft).

The summer is the travel division’s Christmas, as it were, given the number of people going off on holiday, but at this stage of the year travel division operating profits look like hitting £71m i(compared to £66m last year, which represented a healthy margin of over 14%).

Rising sales from now on in UK airports will be penalised by a rise in turnover-related rents, but that is a nice problem for management to have and in the meantime gross margins continue their inexorable and astonishing rise (up 120bps in the first 20 weeks in travel).

Of course, the focus of WHSmith’s management and the City is on the expansion of the lucrative travel division, particularly as it spreads its wings internationally, but it is important that the much maligned high street arm doesn’t collapse and holds its profit contribution.

Now, the weak-looking -6% like-for-like in the high street reported today is unchanged from the position in the first 10 weeks of the financial year, so it is safe to say that the last 10 weeks were also down by 6% in the high street, but that was very much as expected.

The P&L model here is to constantly cut costs and constantly grow the gross margin and on both counts Christmas was another success. The high street gross margin was up by no less 200bps in the 20 week reporting period (thanks to more sales mix and promotional mix management), and operating costs were some 3% down (thanks to savings in marketing, distribution and variable staff costs).

Despite the sorry state of the carpets in some stores, WHSmith’s high street division should see its operating profits edge up from £56m to at least £57m this year, and an operating margin of well over 8% in the high street is a pretty remarkable achievement even if it is more reminiscent for some people of what a private equity firm would do to the business. Sustaining that profit in the long term will be a challenge, but people have been saying that for ages and WHSmith keeps defying gravity.

The transition from Kate Swann to Stephen Clarke clearly hasn’t changed WHSmith’s approach. One thing that is different, however, is the share price, which is up from not much more than 600p to over 1000p, implying that investors are very happy with the outlook for the group, with the value of its travel division and with its ability to generate and return surplus cash to shareholders.

About Nick Bubb

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.

WHSmith reports like-for-likes down over Christmas but profit solid