It’s been a terrible week for the FTSE 250’s WH Smith!
The share price of WH Smith (LSE:SMWH), the FTSE travel retailer, plummeted on Thursday (21 August). Reason? It revealed it had identified an overstatement of âaround £30mâ in its expected headline trading profit in its North America division.
What’s going on?
The problem relates to the treatment of supplier income — incentives and discounts — that appear to have been recorded too early in the group’s accounts. Accounting standards require these to be reflected over a period of time rather than as one lump sum. Indeed, the groupâs own financial statements explain how they should be treated: âThese incomes are recognised as a deduction from cost of sales on an accruals basis as they are earnedâ.
Given the straightforward nature of the issue, this weekâs reaction of investors isnât a surprise. As the company itself admits: âThe level of complexity and judgement is low in relation to establishing the accounting entriesâ.
A revised strategy
Shareholders will be bitterly disappointed as the groupâs coming to the end of a period of reorganisation. I suspect theyâll have looked forward to a period of relative calm as the retailer streamlines its operations to focus exclusively on its shops at airports, railway stations and in hospitals.
In March, it announced the sale of its high street stores. Four months later, it disposed of funkypigeon.com, its online personalised greetings card business, to Card Factory. After costs, these transactions should generate £47m of sales proceeds.
Looking ahead
I suspect it will be a while before confidence is restored in the groupâs management.
All eyes will be on the findings of the âindependent and comprehensiveâ review thatâs now underway. A further update will be provided in November. That’s when the groupâs due to report its preliminary results for the year ended 31 August (FY25).
To me, WH Smith’s emphasis on travel sites and its exit from the high street makes sense. The problems experienced by retailers in our towns and cities are well documented.
By contrast, air and rail passenger numbers are expected to increase over the next decade. And as I found out earlier this month at one of its airport shops, the prices charged for basic food and drink items are far higher than elsewhere. Iâm confident that the margins on products sold at its travel sites are much bigger than those earned previously from its high street shops.
Not for me
However, despite this, I donât want to invest. The accounting error means itâs difficult to know how profitable the group really is. Itâs now forecasting FY25 pre-tax earnings of £110m compared to the £157m predicted by analysts before this week’s announcement.
One benefit of the drop in the share price is that, based on amounts paid over the past 12 months, the stockâs yield is now 5.2%. The average for the FTSE 250 is 3.4%. Of course, there are no guarantees when it comes to dividends and, given the circumstances, there could be a cut. However, the accounting problem identified doesnât call into question the existence of the supplier income only the timing of its recognition.
Another possible benefit is that the groupâs current share buyback programme will go further than previously anticipated. However, due to the uncertainty, I donât want to buy any of the groupâs shares.
The post It’s been a terrible week for the FTSE 250’s WH Smith! appeared first on The Motley Fool UK.
Should you invest £1,000 in Rolls Royce right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls Royce made the list?
More reading
- Would I be mad to buy shares in WH Smith after news of an accounting irregularity?
- How 129 words just wiped 40% off this FTSE 250 stock!
James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
