WHSmith shares plunge by third on profit alert: What investors need to see
“It’s particularly bruising for WHSmith given that it has its sights set on global expansion, with the US market a big part of its plans” – Susannah Streeter, Hargreaves Lansdown
WHSmith saw its share price plunge after it warned that annual profits will be lower than previously expected due to an accounting error in the US.
The group said it discovered its trading profit in North America had been overstated by about £30 million, when reviewing its finances. It means the group is now expecting a trading profit for the US of about £25m for the year to August - a cut from a previous £55m forecast. As a result, the company lowered its outlook for annual pre-tax profits to some £110m.
The business spans travel locations, such as shops in airports, railway stations and hospitals, which total about 1,300 globally. It sold its high street chain of about 480 shops to Hobbycraft owner Modella Capital in June. As part of that deal, the WHSmith name will disappear from British high streets and be replaced by the TGJones brand.
The travel locations were not included in the sale and will not be changing.
Shares were down by more than a third in Thursday morning trading, hitting a new five-year low.
Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, noted: “What investors want to see is sound financial management, and errors of this kind shake confidence in future guidance. It’s particularly bruising for WHSmith given that it has its sights set on global expansion, with the US market a big part of its plans. This hasty recalculation of its current opportunities demonstrates it’s not in such a strong position as hoped to progress its vision.”
Chris Beauchamp, chief market analyst at IG, said: “WHSmith’s bid to turn around its flagging share price has been dealt a major blow by today’s news. The [share price] drop shows that investors are fretting that this could be the tip of the iceberg, especially since the firm has called in the auditors.
“The news means that the three-year recovery in earnings will take a big hit, but perhaps the reaction seems a little overdone, especially now it has shed itself of the underperforming UK high street arm.”
AJ Bell investment analyst Dan Coatsworth added: “The latest update from WHSmith is nothing short of a disaster. The North American business is crucial to the company’s growth ambitions and the loose thread of an accounting error in this part of the group will create concern about a potential greater unravelling to come.
“Profit guidance for the American division has been cut by more than 50 per cent, which will cause huge embarrassment to management. Investors will be sobbing into their cornflakes on the news.
“The sale of the structurally declining UK high street division was supposed to free WHSmith to concentrate on its airport, train, hospital and service station outlets. These benefit from a captive audience allowing the company to generate strong margins. However, the US news has tarnished what WHSmith would have hoped could be a fresh start for the business.
“It needs to get ahead of this situation as quickly as possible and make the necessary changes to rebuild credibility with the market.”
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