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WH Smith (LSE:SMWH) reported its results for the six months leading up to 28 February and the share price is failing this morning (16 April) as a result.
This is the company’s first report since it announced a deal to sell its High Street stores, leaving its Travel division for it to focus on. And I think there’s plenty for investors to feel positive about.
The results
Overall, sales were up 3% and earnings per share went from 13p to a 33.6p loss. On the face of it, that’s alarming.
Neither of these numbers, however, is the one I’m paying attention to as an shareholder. I’m focused on the Travel division and what’s been going on there, which has been… mixed.
Sales in this part of the company were up 7% (significantly better than the declines from the High Street division). But even that isn’t the most important number.
The key number I’m focused on is like-for-like sales. This measures how much revenues are growing adjusting for the fact WH Smith decreased its store count by 13.
What actually matters
Like-for-like sales are a crucial metric for retail businesses. In my view, it gives the best indication of the company’s long-term growth prospects.
In the short term, firms can increase revenues by opening more outlets. But they can’t do this forever, so growth eventually has to come from doing more with their existing outlets.
Like-for-like sales have been weak for several UK retailers recently. Associated British Foods, Greggs, JD Sports and B&M European Value Retail have all posted poor results.
Against this backdrop, WH Smith’s 6% from its Travel division (down from 15% in the previous year) isn’t a huge surprise. But despite the recent disappointment, I still think there’s value here.
Valuation
I was disappointed when I heard WH Smith was set to sell its High Street division for ‘only’ £76m. I thought it was the right move, but I had much higher expectations in terms of price.
It leaves the company with more debt on its balance sheet than I’d like and this is a risk. The question for investors is whether or not the share price is cheap enough to offset this.
I bought the stock recently because I was convinced the Travel division by itself was enough to justify the share price. And despite the latest developments, I still think this.
Over the last 12 months, the Travel business has generated £198m in profits. In the context of a firm with a market value of £1.2bn, I think that’s worth the share price.
I’m buying
WH Smith has been part of the UK high street since 1792. But while it’s going to be gone soon, reports of this company’s death are greatly exaggerated.
I think the Travel business looks like an extremely strong operation. And that’s why I’ve been buying it and why I intend to keep doing so.
