Robert Stephens discusses why convenience retailer WH Smith could outperform its sector and the wider index.
While the prospects for the UK retail sector remain uncertain due to weak consumer confidence, last week’s trading update from WH Smith (LON:SMWH) showed that the company’s performance in the 2019 financial year has been robust.
The company’s Travel division, which represents 53% of its revenue, recorded strong sales growth across all of its channels. It has further growth capacity – particularly in international markets, where it now has 428 stores.
This indicates that the long-term outlook for the business is positive, with its valuation suggesting that it could outperform the wider retail sector, as well as the FTSE 250.
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The company’s growth plan points to a bright long-term financial future. In its Travel segment, it is seeking to continually evolve its store formats and ranges in order to align itself more closely with changing consumer tastes. For instance, it is seeking to improve its digital offer, with it having 42 ‘Tech Express’ sections that offer a range of digital accessories within existing stores.
In addition, WH Smith plans to open 15 new Travel stores per year in the UK over the next two years. Alongside this, it expects to increase the size of its international store estate following the recent acquisition of digital accessories travel retailer InMotion. It provides a growth platform for WH Smith in the US, where InMotion is a leading retailer across a number of airports.
Since WH Smith currently has a relatively small market share in the international travel retail market, it has scope to significantly expand its store estate. With net debt of £2 million and free cash flow of £96 million in financial year 2018, the business appears to have the financial firepower to invest in international growth opportunities in order to further diversify its operations and access faster-growing markets.
Although the outlook for the company’s Travel segment is positive, its High Street business (which accounts for 47% of total sales) continues to experience challenging operating conditions. Indeed, consumer confidence in the UK has been negative for over three years according to the GfK Index, with it currently having a reading of minus 14 (where zero reflects neither optimism nor pessimism).
As a result, WH Smith is making major changes to its High Street business. For example, it has refocused on core areas, reconfigured stores in order to maximise its use of space, and sought to expand its stationery offering. Stationery now accounts for half of its sales, with the company aiming to continually adapt its offering to capitalise on short-term sales trends.
Although WH Smith is a two-tier business, in terms of the strong growth potential of its Travel segment and the challenges faced by its High Street division, its financial prospects are relatively sound.
In the current year, for instance, it is forecast to record a rise in earnings per share of 8%. Since it trades on a forward P/E ratio of 16.8, it seems to offer good value for money given the long-term growth potential within its Travel segment.