WH Smith issues second profit warning as discounting and inflation squeeze margins

The convenience retailer has lowered its expectations amid ‘inflation headwinds’

WH Smith has trimmed its profit forecast for the second time, cautioning that aggressive discounting and “inflation headwinds” are weighing heavily on its finances.

The Swindon-headquartered convenience retailer had initially guided investors towards pre-tax profits of up to £105m for the year, before cutting that target to between £75m and £90m. On Wednesday, the group lowered its expectations further, to no more than £75m.

“This reflects lower trading profit margins driven by increased promotional activity, a reduction in brand marketing and inflation headwinds, offset by central cost reductions and lower interest costs,” the firm said.

WH Smith has struggled to build momentum in the wake of selling its 480 high street outlets to private equity firm Modella Capital.

The group has been left heavily dependent on its train station and airport stores, which it has flagged as particularly exposed to the downturn in tourism brought about by the Iran war, as reported by City AM.

The retailer’s anticipated £75m profit would represent a steep decline from last year’s £108m figure. Just months ago, the group raised £103m through an equity issue intended to strengthen its balance sheet and underpin its investment strategy.

WH Smith reported a modest uptick in sales during its fourth quarter, with summer trading nudging revenue growth from one to two per cent across the business.

In the UK, like-for-like revenue growth accelerated from two to four per cent in the fourth quarter, with the group’s hospital stores leading the charge, posting a like-for-like revenue increase of eight per cent.

WH Smith revealed it has refurbished its outlets at Heathrow, Liverpool, Belfast International and East Midlands airports in an effort to increase average basket sizes at these busy retail locations.

The group’s performance across North America has weighed on its overall growth in recent years. Like-for-like revenue in the region fell by three per cent in the fourth quarter.

The retailer’s like-for-like revenue at its North American airport stores declined by two per cent, hampered by reduced passenger numbers and “softer consumer demand”.

In June, WH Smith’s share price tumbled 16 per cent in a single day after the company cautioned that the downturn in consumer confidence and airport footfall caused by the Iran war was taking a toll on its sales.

The firm announced on Wednesday that it is making “good progress” towards its recovery plan. The group informed investors it is working to reduce costs, strengthen its cash management and drive sales in its more lucrative “travel essentials” range.

Analysts at RBC Capital Markets noted that WH Smith has delivered better-than-anticipated UK results, but is underperforming expectations in the North American market.

“We think WH Smith needs to rebuild credibility with the market, with scope for the rating to recover over time if WH Smith can reassure the market that its recent missteps won’t be repeated,” they said.

Shares in WH Smith opened largely unchanged in early trading, at 359p.