WH Smith (LSE: SMWH) shareholders got a nasty surprise yesterday (21 August) when the share price crashed 40% to 660p. That puts the FTSE 250 stock at a 12-year low. Ouch!
I was bullish
In recent months, I had started to warm up to the WH Smith investment case. It was selling its high street stores, which were in structural decline, to focus on outlets in airports, hospitals, train and service stations.
I found the idea of WH Smith becoming a pureplay global travel retailer quite attractive. That’s because there’s a captive audience in airports, where people are often wadded up with holiday money (or what’s left of it), and usually in high spirits (at the start, at least).
Speaking personally, I’ve found myself reaching for pricey items in airports that I wouldn’t dream of buying in a local store. In theory, these locations should offer decent growth (higher footfall) and attractive retail margins.
Profitable niche businesses like this can make for very tidy investments. I’ve found this in my own portfolio by owning shares of Intuitive Surgical (robotic-assisted minimally invasive surgery) and Games Workshop (tabletop miniature wargaming). Both stocks have more than doubled in the past three years.
Moreover, WH Smith’s operating in a growth market because international travel’s expected to surge over the next two decades as hundreds of millions more enter the middle classes. This will necessitate the buildout of airport and rail infrastructure (and more locations for WH Smith stores to pop up).
Accounting blunder
However, the investment case was damaged Thursday with a 129-word stock market update from the travel retailer: “A current financial review identified an overstatement of around £30m of expected Headline trading profit in North America… WH Smith now expects Headline trading profit… for the financial year ending 31 August 2025 to be approximately £25m, down from previous market expectations of approximately £55m“.
The company said this was “largely due to the accelerated recognition of supplier income“. This income involves rebates and discounts from suppliers, and is recognised as a deduction from cost of sales as they are earned for each contract.
This is a technical way of saying the firm booked money it was expecting to get from suppliers before it had actually earned it. WH Smith was counting its chickens before they had hatched, as it were.
Consequently, full-year pre-tax profit is expected to be around £110m rather than £140m. The board is parachuting in Deloitte to carry out “an independent and comprehensive review“.
Opportunity?
Is this an inviting dip-buying opportunity to consider? I’m not sure it is yet, even if this is just an accounting timing issue.
North America was WH Smith’s second-biggest profit driver last year. It has 340 stores there, including the InMotion chain, and it has been pitched as the key growth story. The waters are now muddier.
WH Smith also had net debt of £454m back in February. So this adds risk.
The dust needs to settle
This might be similar to housebuilder Vistry, which in late 2024 announced that a division had underestimated build costs. But then it kept delivering more bad news and the stock kept falling.
Due to all the uncertainty, which is likely to persist for some time, WH Smith could be a falling knife. I’m in no rush to buy the shares.
