In the mid-1990s, WH Smith stood tall as a colossus on Britain’s high streets. It owned Waterstones, was picking up Virgin stores to move deeper into music, and had just become the first British company to take a secure order on a nascent ‘world wide web’.
Its fall from grace over the next 20 years did not, unsurprisingly, go unnoticed by British shoppers. Echoing the thoughts of the nation last year, one Reddit user asked when WH Smith had gone from “a nation’s favourite to what is essentially a crappy jumble sale of a shop”.
“Probably when they decided that they didn’t need new carpets and that masking tape would gradually become their new floor covering,” came one response.
It meant WH Smith’s confirmation this week that its high street stores were up for sale was met more with weary resignation than anguished surprise.
Its trading update this morning encapsulates the issue. In the second half of last year, sales in its high street stores fell 6% as stores closed and customers increasingly sought out cheaper prices at the likes of B&M and Home Bargains.
By contrast, revenue for its travel arm in airports and railway stations grew 7%. Given this now makes up 85% of the group’s profits, it is understandably where management wants to focus its energy.
Investors are also seemingly keen on a more streamlined business, with the share price up 10% after the news of a sale broke over the weekend. Today’s results will only help WH Smith justify that strategic shift.
Has it jumped the gun?
But the timing does seem odd. WH Smith’s current struggles are partly indicative of a wider retail malaise and so it has hoisted the ‘for sale’ flag just as the sector enters a downturn. Pets at Home, Frasers Group and Shoe Zone were among seven London-listed retailers to issue profit warnings at the end of last year, while even high street darling Primark has now cut its sales forecast.
“WH Smith might have been better to wait until the economy is stronger before looking at its options,” says Russ Mould, AJ Bell investment director, suggesting the negative sentiment could encourage suitors to seek a bargain price by arguing the business is not as valuable as WH Smith thinks.
But do not bet against it. WH Smith should arguably have been doomed in the early 2000s. After all, what place does an expensive shop selling books, CDs and stationery have in an Amazonian world of same-day delivery?
And yet here it still is. Admittedly less profitable than it once was, but thanks to heavy swings of the axe, it remains profitable.
“It essentially has been run using the [private equity] playbook,” say analysts at Peel Hunt. “It may not be the apple in every UK shopper’s eye, but the cash generation has been a key positive factor in WH Smith’s ability to expand overseas into the global travel business it has become.”
What now for WH Smith?
One question now is what any potential buyer will want to do with it. Will they try and galvanise the brand’s power and history to revitalise profits? Or could the stores be put to more valuable use as cafés and supermarkets?
The latter will certainly be tempting, given the lack of obvious fat to trim. On top of that, WH Smith’s store portfolio has been well managed, with the average remaining lease under two years, points out Tash Van Boxel, a retail analyst at GlobalData. This means any buyer will not be committed to keep unprofitable stores open for long.
One concern surrounding this approach is the fate of the Post Offices sitting within 200 WH Smith stores. While WH Smith said this week its partnership with the Post Office was an important part of the business that “will continue should a sale of our high street business to new owners proceed”, the decision could soon be out of its hands.
Much will of course come down to who, if anyone, emerges as a willing buyer. Names being thrown about include HMV owner Doug Putman, Hobbycraft owner Modella Capital, and Bensons for Beds owner Alteri, with Peel Hunt estimating they would have to stump up between £100m and £130m to take on the business.
But is it worth it? WH Smith is reportedly keen on finalising a deal by this spring, meaning we shouldn’t have to wait too long to find out.
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