Fool's Eye View

[ April 18, 2000 ]

WH Smith Interims Down

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- WH Smith (LSE: SMWH) this morning announced worse-than-expected interim results for the six months to 29 February 2000. Profit before tax was £101 million compared to £105 million last time. Most people had been expecting profits of about £110 million. Sales were up 6% to £1,355 million. Most of the blame for the fall in profits seems to be being placed firmly at the door of squeezed margins in CD and video sales, with music sales down 13% and video sales down 8%, which resulted in a reduction of bottom line profits of about £8 million. The squeeze was brought about by intensive high street competition and increased price competition from Internet retailers. Profits were also hit by an additional £2 million of investment to develop their Internet business. It's all the Internet's fault, then!

They are looking to expand their Internet activities significantly online sales were up 60% to £4m (out of total sales of £1,355 million -- wow!). The company is trying to expand on the Internet by developing strategic alliances. They have an agreement with BT (LSE: BT.A) which covers bookselling on all existing and future platforms including BT Easicom and BT WAP, which they say will give them immediate access to 1.3 million users.

They have a "strategic partnership" with Carlton to develop a co-branded online offer through WH Smith's online business and Carlton.com. WH Smith will provide the online transactional capability and Carlton will provide access to 22m viewers, and this will be supported by a £15m advertising campaign. An agreement has also been reached with Telewest (LSE: TWT) to be the bookseller on their broadband interactive TV services.

Other Internet developments include the formation of Connect2U, which is 80% owned by WH Smith and 20% by the software company Axon Group (LSE: AXO). The idea is that this will provide a business-to-business Internet trading portal linking independent retail outlets to WH Smith News Distribution and other suppliers. The aim is to reduce costs significantly and develop additional online revenue streams. They claim that they will initially sign up 8,000 independent retail outlets out of the 20,000 currently supplied by WH Smith.

WH Smith is making a lot of noise about its potential in the Internet arena, but it will be very hard for them to achieve the momentum and speed that is needed by an Internet company to succeed. If their Internet ventures are a roaring success then they risk taking business away from their high street stores, so while they may 'win' with one hand they will be 'losing' with the other. This is a very difficult balancing trick to manage successfully. They also risk neglecting their core business while senior executives concentrate on the exciting sexy Internet developments.

Smiths are an institution on the high street. Wouldn't it be better for them to concentrate all of their efforts on improving their core retailing, publishing and distribution businesses rather than dabbling in e-commerce? People will always want to buy books, newspapers, stationery, and magazines on the high street; if they neglect the development and improvement of their core businesses they risk losing their pre-eminent position. My advice, for what it is worth, is that they should stick to the knitting and use the Internet to reinforce their high street, publishing and distribution businesses rather than trying to compete head-to-head with the specialist online retailers.

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