Things are going from bad to worse at WH Smith (LON:) and this statement is little more than a kitchen sink exercise.
Weakening trends, pockets of underperformance and a cloudy outlook have taken their toll. As a result, the group has issued another profit warning and announced a capital raise exercise which could prove to be the last roll of the dice for the company. In addition, the required revamp of the strategy has identified a number of non-performing outlets and a particular hit to the Resorts business in North America. As a result of a store exit programme, an ongoing review of the InMotion arm and restructuring in the Rest of the World geography, the group anticipates a significant non-cash impairment charge of up to £150 million relating to goodwill and store writedowns.
The capital raise comes at a time which will severely test investors’ patience and loyalty to the cause. Indeed, further investment into WH Smith will require something of a leap of faith as weaker consumer confidence has affected spend per passenger, a reduction in flights in the US has impacted airline capacity, while the Middle Eastern conflict has generally disrupted any progress which the group had been making.
The update to revenues shows some signs of growth, but against the wider backdrop of this announcement the numbers are something of a sideshow. Total revenues grew by 5% over the period (5% in the UK and 8% in North America), although on a like-for-like basis growth of just 2% comprised an increase of 2% in the UK and a decline of 1% in North America. The worsening conditions have resulted in a downgrade to the outlook for full year pre-tax profit, where the group is now estimating a number within a range of £75 million to £90 million. This compares to the previous profit warning in March, when the range was lowered to £90 to £105 million from a previous £100 to £110 million.
Lower consumer demand has also increased the need for promotional activity, while inflation headwinds and lower brand marketing investment all add to the pressure on gross margins. The North America Resorts business reported a like-for-like decline of 11% over this trading period as Las Vegas visitor numbers continue to fall, while 14 uneconomic fashion stores have either closed or are subject to agreed closure dates. The remaining 12 stores are also likely to be on the block, while the group’s Welcome to Las Vegas business is under review.
If the previous “annus horribilis” for the group, where an overstated profit forecast led to a sharp decline in the share price and with the CEO unfortunately falling on his sword as a result seemed uncomfortable, matters have now taken a turn in what could be an existential time for the company. The capital raise, if successful, is designed to draw a line under any legacy issues while positioning the group to be underpinned by a stronger balance sheet with the company having less of a reliance on debt to grow.
For the time being, any obvious strengths for WH Smith have been swept aside. The group previously announced the sale of the high street business, a strategically sound move which established a clear direction of travel for the remaining units, leaving the group as a “pure play travel retailer”. In turn, what was hoped to become a burgeoning business could then benefit from what the company described as “structurally advantaged growth markets”. WH Smith could benefit from captive customers in many of its key sites, such as railway stations, motorway services, hospitals and, in particular, airports, which set it aside from much of the retail competition. The return of near normality in air travel was previously a particular boon to this segment of the group.
However, such optimism now has a hollow ring. Even prior to today, the reaction to the previous update was proof, if it were needed, that investor confidence was sorely lacking. The shares had fallen by 54% over the last year, as compared to a gain of 7% for the wider index and some 81% lower than the pre-pandemic glories of December 2019. The announcement has seen a further raft of investors rushing for the exit and the market consensus of the shares as a hold can only come under intense downward pressure from here.