WH Smith is flying amid travel business boom

WH Smith continues to reap the reward of a Travel business which is doing much of the heavy lifting, and where expansion continues apace, including its foray into international markets.

The Travel business now accounts for 74% of group revenues and 85% of group profit, within which Travel UK is the largest unit with 40% of overall sales. North America is growing strongly and accounts for 21% of group revenues, with the Rest of the World near doubling revenues for the year, although its share of sales overall is 13%.

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However, the growth has been significant for each of these units in the year ended 31 August 2023, with Travel UK increasing revenues by 36%, North America 32% and the Rest of the World 99%. This leads to average overall growth of 43%, with trading profit increasing sharply from £89 million to £164 million. 

The numbers provide further proof that the group has edged further to becoming a global travel retailer, and it is keeping its foot firmly on the accelerator to maintain expansion. WH Smith has won 110 stores over the period, including more than 60 in North America, and in terms of strategy expects to open between 50 and 60 new stores each year in the foreseeable future. 

The reasons behind this burgeoning business are largely due to what the company describes as “structurally advantaged markets”. WH Smith benefits from “captive” customers in many of its key sites, such as railway stations, motorway services, hospitals and, in particular, airports, which sets it aside from much of the retail competition.

The return of near normality in air travel has been a particular boon to this segment of the group. In addition, research suggests that air passenger numbers will finally return to pre-pandemic levels during the course of next year.

In the meantime, and at each of its locations, the group is aiming for a one-stop shop approach by expanding its more traditional books and newspaper offering to include health and beauty, technology, food and pharmacy products. Technology is a relatively new area of focus, with the group’s InMotion brand often in adjacent stores to the main space, and where the group is keen to expand its international presence. The overall offering is thus able to provide time-pressed customers with all their travel essentials under one roof with a fast and convenient shopping experience.

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The High Street business is showing signs of maintaining rather than contributing to growth. Trading profit for the year was basically flat at £32 million versus a previous £33 million, with revenues slipping by 1% to £469 million, now accounting for the balancing 26% of group revenues.

WH Smith remains committed to a high street presence, with a tight focus on cost control, which has seen more recent success given rent savings on average of 50% at lease renewals, and where around 480 renewals are due over the next three years, which could result in further significant savings.

Overall, the group is committing further capital to investment, and its strong cash flow has enabled £150 million of expenditure towards growth, as well as a significant boost to the dividend payment. While this increase takes the projected yield to just 2.4%, it nonetheless illustrates the group’s progress, with the dividend only recently having been reintroduced, and where the rise is a clear statement of management’s confidence in prospects.

In addition, the new financial year is off to a strong start, with revenue growth of 13% in Travel UK, 15% in North America and 27% in the Rest of the World.

Despite its demonstrable progress, the group has fallen foul of a deteriorating economic outlook, especially in the UK, while geopolitical concerns have also had a detrimental effect on the travel sector as a whole. At the same time, part of its product suite such as books can be purchased online prior to travel, while an increasing international business adds the potential complication of currency headwinds.

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The business is arguably in better shape than pre-pandemic, although the share price remains some 55% below those levels. Of late, further pressure has been heaped on WH Smith, with the price having fallen by 9% over the last year, as compared to a drop of 4.3% for the wider FTSE250. Even so, the direction of travel looks increasingly positive and the market consensus of the shares as a 'buy' tends to look through any current difficulties to the longer term.