The chain has triumphed against eight years of adversity under the guidance of Kate Swann. But the retail environment never seems to get any easier. - Nils Pratley - The Guardian, 10 November, 2011
WH Smith: 6% fall in like-for-like sales. Photograph: Frank Baron for the Guardian
WH Smith, during Kate Swann's eight-year reign, is rightly acknowledged as a triumph against tough odds. Amazon transformed book retailing, the bottom fell out of the CD and DVD market and, all the while, WH Smith has had to fight incursions onto its patch by the supermarkets. Yet impressive sums of cash have been wrung from this seemingly unpromising prospect and the shares have marched steadily upwards. There's only one question: can it last?
Wednesday's news was a fall of 6% in like-for-like sales in the high street shops and a 4% decline in what WHS calls "travel," meaning shops sited in railway stations, airports, bus stations and the like, including 60 abroad.
But like-for-like sales, as Swann has demonstrated, tend to be a poor guide to WHS's profits. On the travel side, the company generally enjoys turnover-based rents, so the trick is to ensure that only products that can be sold at healthy profit margins find their way onto the shelves.
On the high street, where retailers mostly still labour under leases with upward-only rental clauses, the game is about shedding costs faster than sales fall and defending the chain's share of the same higher-margin products.
That, in a nutshell, is how Swann has defied the sceptics who thought WHS would end up like HMV or, worse, go the way of Woolies. Call it a classic demonstration of the retailers' motto that "sales are vanity, profits are sanity". The decision to exit gradually the CD and DVD market was spot-on.
But mottos are one thing. Common sense also says that no business can suffer declining sales indefinitely without running into problems. Take a look at those like-for-like sales statistics on the high street side since 2005-06. The run has been: minus 7%, minus 6%, minus 3%, minus 6%, minus 4%, minus 6% and, if current trends hold for the rest of the financial year, minus 6%.
A quick back-of-the-envelope calculation suggests that, on a same-store basis on the high street, WHS is selling roughly £68 for every £100 of custom seven years ago. Surely that spells trouble one day: running up the down escalator is not easy.
The timing is the unknown. It was only last month that Swann announced she had identified a further £11m of costs to be removed, which is an excellent advert for the productivity improvements in modern retailing. On the other hand, the number of shop staff can't be cut to nothing, and fresh discoveries of savings may still be required if Kindles at £89 ignite a fresh crisis in the physical books market, still a core area for WHS.
We shall see. In profits terms, WHS is a roughly even split between travel and high street. If the former, with new openings in the pipeline, can keep improving profits while the latter continue to manage its declining sales efficiently, WHS can still be viewed as a growth company. But an acceleration in the rate of drop-off in sales on the high street would change the outlook: Wednesday's numbers suggest the risk is real.
Wednesday's news was a fall of 6% in like-for-like sales in the high street shops and a 4% decline in what WHS calls "travel," meaning shops sited in railway stations, airports, bus stations and the like, including 60 abroad.
But like-for-like sales, as Swann has demonstrated, tend to be a poor guide to WHS's profits. On the travel side, the company generally enjoys turnover-based rents, so the trick is to ensure that only products that can be sold at healthy profit margins find their way onto the shelves.
On the high street, where retailers mostly still labour under leases with upward-only rental clauses, the game is about shedding costs faster than sales fall and defending the chain's share of the same higher-margin products.
That, in a nutshell, is how Swann has defied the sceptics who thought WHS would end up like HMV or, worse, go the way of Woolies. Call it a classic demonstration of the retailers' motto that "sales are vanity, profits are sanity". The decision to exit gradually the CD and DVD market was spot-on.
But mottos are one thing. Common sense also says that no business can suffer declining sales indefinitely without running into problems. Take a look at those like-for-like sales statistics on the high street side since 2005-06. The run has been: minus 7%, minus 6%, minus 3%, minus 6%, minus 4%, minus 6% and, if current trends hold for the rest of the financial year, minus 6%.
A quick back-of-the-envelope calculation suggests that, on a same-store basis on the high street, WHS is selling roughly £68 for every £100 of custom seven years ago. Surely that spells trouble one day: running up the down escalator is not easy.
The timing is the unknown. It was only last month that Swann announced she had identified a further £11m of costs to be removed, which is an excellent advert for the productivity improvements in modern retailing. On the other hand, the number of shop staff can't be cut to nothing, and fresh discoveries of savings may still be required if Kindles at £89 ignite a fresh crisis in the physical books market, still a core area for WHS.
We shall see. In profits terms, WHS is a roughly even split between travel and high street. If the former, with new openings in the pipeline, can keep improving profits while the latter continue to manage its declining sales efficiently, WHS can still be viewed as a growth company. But an acceleration in the rate of drop-off in sales on the high street would change the outlook: Wednesday's numbers suggest the risk is real.
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