WH Smith tanks after profit warning

(Sharecast News) - Shares in WH Smith tumbled on Thursday after the retailer cut its profit outlook, having uncovered an accounting overstatement of around £30m for North America trading profit. For the year to the end of August, the group now expects headline trading profit from the North America division to be about £25m, down from previous market expectations of approximately £55m.

As a result, full-year headline profit before tax and non-underlying items will be in the region of £110m, it said.

The company, which has instructed Deloitte to undertake an independent and comprehensive review, said the overstatement is mainly due to "the accelerated recognition of supplier income" in the North America division.

"The group will provide a further update at its preliminary results announcement," it said.

At 1350 BST, the shares were down 40% at 662p.

Analysts weigh in

Dan Coatsworth, investment analyst at AJ Bell, said: "The latest update from WHSmith is nothing short of a disaster. The North American business is crucial to the company's growth ambitions and the loose thread of an accounting error in this part of the group will create concern about a potential greater unravelling to come.

"The business has identified an overstatement of profit linked to the accelerated recognition of supplier income. Uncertainty will dog the company until an independent review is concluded - with an update promised alongside full year results.

"Profit guidance for the American division has been cut by more than 50%, which will cause huge embarrassment to management. Investors will be sobbing into their cornflakes on the news.

"The sale of the structurally declining UK high street division was supposed to free WHSmith to concentrate on its airport, train, hospital and service station outlets. These benefit from a captive audience allowing the company to generate strong margins. However, the US news has tarnished what WHSmith would have hoped could be a fresh start for the business.

"It needs to get ahead of this situation as quickly as possible and make the necessary changes to rebuild credibility with the market."

Susannah Streeter head of money and markets at Hargreaves Lansdown, said: "Shareholders have been left reeling by this damaging accounting error. Shares have plunged more more than a third, reflecting the shock mistake and the big recalculation in annual profits for the year.

"Getting it so wrong is not a good look and affects for reputation of the company. What investors want to see is sound financial management, and errors of this kind shake confidence in future guidance. It's particularly bruising for WH Smith given that it has its sights set on global expansion, with the US market a big part of its plans. This hasty recalculation of its current opportunities demonstrates it's not in such a strong position as hoped to progress its vision."

Broker Peel Hunt downgraded its stance on the stock to 'hold' from 'add' after the profit warning and slashed the price target to 755p from 1,400p.

Analyst Jonathan Pritchard said the investment case has been "undermined" by today's update.

"It is unclear if this is a one-off timing issue for FY25, but there is a question mark about outer years as well," he said.

JPMorgan, which rates the stock at 'overweight' with a 1,550p price target, said: "The warning and the appointment of Deloitte to undertake an independent review raises a number of issues around its accounting, which are unlikely to be explained straight away and likely to drag on shares in the meantime.

"Questions include why such a high amount of supplier income was originally expected in North America for this year, what will be the impact on future financial years, and if there will be any other consequences for other divisions."

RBC Capital Markets, which has an 'outperform' rating and 1,200p price target on the shares, said: "The warning implies over a 20% downgrade to FY25 pre-tax profit expectations, although the cash impact should be much less at below £10m.

"WH Smith should recoup most of the shortfall in future years, but even so this is a material reduction in profitability for what has been seen as a key long term growth driver of the company."