Stationery and magazines firm WH Smith (SMWH), which traces its heritage back to 1792, has nudged ahead of Microsoft (MSFT) as our stock of the week as voted by our Twitter followers. This week’s poll has a Back to School theme and readers of a certain age will remember the annual pilgrimage to the local WH Smith store to pick up pens and ring binders for the year ahead. The company has expanded significantly in the last few decades and now makes a large portion of its revenues from travel concessions, which include train stations and airports. It now operates in around 31 countries, including China and the United States, where it has more than 200 stores.
The 2020 shutdown has hit these outlets hard and this is fully reflected in the company’s share price, which was £26 at the start of the year and is now around £11, a fall of 58%. WH Smith has estimated that its annual loss for the year ending August 31 will be between £70m-£75m.
In a trading update last month, the company announced job losses as it said that the pandemic is still having a significant impact despite lockdown measures easing and international travel resuming.
“In our Travel business, while we are beginning to see early signs of recovery in some of our markets, the speed of recovery continues to be slow. At the same time, while there has been some progress in our High Street business, it does continue to be adversely affected by low levels of footfall,” said chief executive Carl Cowling.
Looking at total revenue in the four months, the impact of the Covid-19 shutdown is clear: in April group revenues were down 83% on the year before, but this decline had improved to -57% by July.
Shares Oversold?
Before coronavirus struck, the company was prized as a reliable income stock and is owned by a range of income funds, both passive and active. The last payout investors received was 2019’s final dividend, which was paid in January this year. In April the company said that as part of response to the crisis, that no interim dividend would be paid this year. WH Smith is owned by Silver-rated Royal London UK Equity Income, whose manager we spoke to during the peak of the stock market crisis this year. The company also makes up more than 3% of the Crux UK Special Situations Fund , which is managed by Richard Penny.
Interim results on May 14 revealed the full extent of the lockdown’s effects on the travel business. As AJ Bell investment director Ross Mould noted at the time, the company has been hit hard by events outside of its control.
“WH Smith has had the rug pulled out beneath its feet. Before coronavirus it astonished the world by proving it was capable of maintaining a profitable operation despite operating in a struggling channel (the high street) and selling products in a declining market (newspapers and magazines).”
Morningstar columnist Rodney Hobson said in May that WH Smith is a good example of a company whose shares had been oversold in the crisis and the shares have started to recover from below £10 earlier this year to above £11 in the last few weeks.
The company has made sure that it is in a strong financial position to weather the crisis, argues, John Moore, senior investment manager at Brewin Dolphin, with an equity raising of £166 million. In the August trading update, WH Smith said it had more than £60 million of cash in hand with a revolving credit facility of £200 million, with an additional £120 million available if needed. “The Board is confident that the Group has sufficient funds to allow it to operate throughout a prolonged downturn in our markets,” the company said.
