UK. WHSmith today reported a strong revenue and profit performance from its Travel division for the year ended 31 August. Revenue climbed by +8% (like-for-like +3%) and trading profit rose by +7% to £103 million which included £11 million from the fast-growing international business. Crucially, Travel now represents 63% of group profit from trading operations.
CEO Stephen Clarke said: “Travel accounts for over half our sales and two-thirds of our profits and continues to perform strongly. This performance has been driven by our ongoing investment in stores and growth in passenger numbers. We have a fast-growing international business with 286 units open across 27 countries and 50 airports. We are pleased to have won 42 new units this year including some significant tenders in South America and Europe.”
Total group revenue was up +2% at £1,262 million with like-for-like revenue flat compared to last year.
Travel – UK: In air, total revenue was up +7% with like-for-like revenue up +4%; in rail, revenue rose by +1% and in hospitals, total revenue was up +6% with like-for-like revenue up +3%. Gross margin increased by 120 bps, driven by mix.
WHSmith said: “This year has seen an increasing focus on improving our digital offer to customers and we now have 42 ‘Tech Express’ in store zones or standalone units open across air and rail.
“A key focus for us this year has been investing in store layouts and store environment, as well as developing new formats that position us well for the future. An area of particular focus is our large airport format where our experience and analysis shows that we can deliver superior average transaction value and sales per passenger from larger store footprints. Larger stores enable improved customer circulation which drives customer conversion. We now have three stores open showcasing this new format in Gatwick North and Gatwick South terminals and Heathrow Terminal 3. All of these stores are trading well with sales growth in both Gatwick and Heathrow ahead of passenger growth. Landlord and customer feedback has been positive.”
The retailer expects to open a new, extended store at Heathrow Terminal 4 over the coming weeks. It also plans to further extend the footprint of its ‘Tech Express’ format. The books business is also a key focus, with 13 standalone bookshops open across air and rail.
Travel – International: Revenue for the year was £132 million, up +22%. Like-for-like revenue was up +4% on a constant currency basis. Trading profit for the year was £11 million, an increase of £2 million on the previous year. The company won contracts for 42 new units during the year and 58 units opened, making a total of 286 units open as at 31 August.
WHSmith added: “However, our share of the global news, books and convenience (NBC) travel market is still very small and we continue to see opportunities to grow using our three economic models of directly-run, joint venture and franchise.”
Of the 42 new units won in the year, 13 are in Europe, 13 are in South East Asia, 5 are in Australia and 11 are in South America, including four units in São Paulo Airport in the second half. Including the stores at Rio de Janeiro Galeão Airport, WHSmith has captured 11 units in South America through its joint venture with Duty Free Americas. It also won its first stores at Amsterdam Schiphol, which it will run directly. Of the 286 units open in this International division, 52% are franchised, 8% joint venture and 40% directly run.
The analyst view: Responding to today’s results, Bank of America Merrill Lynch (BofAML) maintained a neutral rating on WHSmith stock. Its Global Research team noted: “Group revenue was in line with consensus and BofAML estimates. Group operating profit was in line with our expectations and consensus at £147 million (+4% YoY). Nonetheless, exceptional items mean that EPS came in c. -10% below expectations. The stock currently trades at (11.4x 2018 EV/EBITDA). We maintain our Neutral rating and PO of GBP2,100.”
The research team added: “WHSmith incurred £11 million of exceptional items related to: (1) wind-down of non-core initiatives (WH Smith Local and Cardmarket); (2) restructuring of some operations, and; (3) charges related to closure of six loss making stores (£6 million). Those items are one-off in our view and positive for the business in the medium term. Investment thesis remains unchanged: Travel performs well, High Street is challenged but well managed and cash is being returned to shareholder on a consistent basis (£109 million expected in 2019).
+We forecast c.+6% EPS CAGR over the next three years, broadly in line with consensus. The company is fairly valued, in our view: its premium to peers is warranted by a superior management team, attractive positioning in Travel (convenience), better free cash flow margin (c.8-10%) and higher cash returns to shareholders (we expect c.90% modified pay-out ratio).”
