WH Smith: Moving In The Right Direction (OTCMKTS:WHSTY)

The U.K.-based travel and high street retailer has updated the market with a trading statement which bodes fairly well for the company and also sheds some light on the wider retail market in the U.K.

High Street Sales are Back at Three Quarters of Normal

The most interesting nugget in the update was a chart showing how sales are performing versus the norm. The table shows the percentage decline, so a smaller number is better. The company noted that sales are still materially down versus the prior year. However, there is a clear upwards trend, which is encouraging.

For July, for example, the high street revenue is at three quarters of its normal level. This is strikingly similar for me to the numbers recently put out by Greggs (OTC:GGGSY), who reported that their most recent week at that point (in late July) had reached 72%.

April 2020

May 2020

June 2020

July 2020

Travel total revenue

(92)%

(91)%

(84)%

(73)%

High Street total revenue

(71)%

(65)%

(41)%

(25)%

Group total revenue

(83)%

(82)%

(69)%

(57)%

Source: company trading update

Moreover, there is a consistent upward trend in the high street division, so it looks as if August will be even better. While Greggs were broadly at breakeven with 72% of sales, Smith should do better as their mostly non-ambient offering means that they don’t have the same wastage issues.

Travel Retail Continues to be a Major Drag

The chart above also shows that the travel retail division continues to recover, but at a slower pace.

This segment includes the international travel shops, at airports around the world. One would expect that this would be very far down. But it also includes a substantial number of properties in the U.K., including at travel hubs such as train stations, and in hospitals. The numbers are picking up month on month, in line with the high street segment, but they are still barely at a quarter of the normal rate.

That is worrying, given the size and importance of the travel segment to the overall company.

However, this partly reflects the fact that the travel shops have been reopening at a slower rate than the high street ones. Only 53% of the U.K. travel stores have reopened to date, albeit that in U.K. air and rail, the company has opened its larger stores which normally generate the most revenue. In the U.S. travel stores which have reopened so far, sales are at about 50% of normal levels, which is better than I would expect. Given how low U.S. air traffic currently is, I suspect this reflects the often overlooked fact in travel retail that the stores are used not just by passengers but also by staff at the airports, many of whom remain working even if passenger numbers are low.

The Company Has Liquidity and a Plan to Cut Costs

As I outlined in a previous article (W. H. Smith: Wait For The Dust To Settle), the company took a number of moves earlier this year to shore up liquidity. It also raised more money in the markets.

As at 4 August, cash on hand was approximately £63m, and the company had £320m of undrawn facilities.

Monthly cash burn on an underlying trading basis in July was between £15m and £20m. That marks an improvement over the £25m-£30m estimate it had provided previously for an extended lockdown.

So, the company has the liquidity to sustain a prolonged trading downturn. However – and at this point, future retail sales are clearly highly speculative as there are many unknowns about future lockdowns and travel patterns, for example – the trading trajectory suggests that the company should be back to a fairly decent high street performance (say, 90% of the norm) by late Autumn, and the same in travel by the end of the year or first quarter of next year, on my guess. So, cash burn will likely ease further in coming months.

The company also announced plans to sack up to 1,500 staff as part of cost saving plans. I am not sure this is a great idea – the shops feel woefully understaffed as it is, although, frankly, my personal experience of a lot of the staff in the U.K. high street stores is that they aren’t that helpful anyway and sometimes force one to use a self-service machine anyway, so maybe getting rid of them won’t make a huge difference. There will be a one-off charge associated with this plan in this year’s results.

An Annual Loss and Likely No Dividend

The company gave a specific forecast that it expected a headline loss before tax for the financial year ending 31 August 2020 of between £70m and £75m. That compares to a headline group profit before tax of £155m last year, so COVID-19 and the economic environment will cost the company around £230m in the current financial year. There will also be an impact in at least the first few months of the coming financial year.

On that basis, I do not expect any dividends this year and expect that at least the interim dividend next year may also be scrapped.

I previously expressed uncertainty at how quickly the company can move from cash burn back to cash generation and its liquidity runway. I think the trading statement helps provide clarity on both of these issues. Cash burn is falling, and it looks reasonable to expect it to turn positive in the coming six to twelve months. The liquidity runway is ample, for now.

At 995p, the shares seem fairly priced to me. At the time of final results, if there are no further lockdowns, they may rise, and then, next year, if business continues to improve, they may rise further. But there are multiple risks betwixt here and there – mostly external, as the company is managing the changing environment well – and the share price reflects that for now.

Conclusion: Heading in the Right Direction

WH Smith continues to make progress in terms of increasing revenue and reducing cash burn. But the travel business, in particular, has a lot of ground still to make up. This year and next will be a far cry from the strong results of the past few years, so at today’s share price, I see no rush to invest in the company yet.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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