Things are looking up at WH Smith.
Over the weekend, suspecting that I might be writing this item, I took advantage of a trip up North to pop into the WH Smith (LSE: SMWH) store in Sheffield's enormous Meadowhall Centre.
It was an interesting backdrop -- and reality check -- for the company's preliminary results for the year ending 31 August, which have just been announced.
And spread before me were all manner of things: the basic mix of books, magazines and stationery that form the business's heritage, certainly. But also video games, CDs and DVDs, computer accessories, toys and a rich miscellany of other items.
But was there, though, anything I actually wanted to buy? I came away disappointed: of the three items of stationery that I would have bought, two weren't stocked, and the other was too expensive.
The books weren't too inspiring, either, despite the percentage of floor space devoted to them. A cookbook that I'd bought at Tesco (LSE: TSCO) the previous week for £12.50, for instance, was selling at full price (£25). I did pick up a Gordon Ramsey book, though -- knocked down from £20 to £5.
And in terms of footfall, the outlet certainly wasn't one of Meadowhall's busiest. At the checkout, for instance, I didn't have to queue to pay -- unlike the 20 or so people patiently queuing at Primark, just a stone's throw away.
Sales down, profits up
So today's results weren't too much of a surprise, with chief executive Kate Swann mentioning 'challenging trading conditions' twice in three terse paragraphs of comment.
Like-for-like sales were down 5%, with full-year revenues at £1,340 million, compared with £1,352 million in 2008. But thanks to cost-cutting and improved category management, profits rose 8% to £82 million, with earnings per share rising nicely from 35.3 pence in 2008 to 41.3 pence.
But pointing to a strong balance sheet and a business that is generating cash, the board felt comfortable recommending a final dividend of 11.3 pence -- up 16% on 2008 -- making the full-year dividend of 16.7 pence, up 17% on 2008. In addition, a modest £35 million share buy-back was announced.
A tale of two halves
The trouble is, WH Smith is really two businesses, not one.
On the High Street, the company's aptly-named High Street division is a business that is focused on what the company describes as 'tightly controlling costs, optimising margins, and delivering the retailing basics'. Through better buying and better mix management, gross margins improved by 2.3%, although sales fell by 5%.
The division's 565 High Street stores delivered £15 million of cost savings during the year, with a further £14 million of savings identified for the next 3 years, making total targeted savings of £24 million between 2010 and 2012.
The other division, Travel -- which at 490 outlets is not that much smaller -- is the place to be, though. Located at motorway service stations, airports and railway stations, these stores saw sales rise by 8% and profits climb by 17% to £48 million -- contributing a decent-sized slug of the group's overall profit. And that, what's more, in a year hit by lower travel volumes.
While category management and better buying contributed once again to improved gross margins, the real story here is one of marketplaces.
In short, the Travel division earns a decent living selling stuff to people on the move, who are often making impulse purchases -- a book or magazine to read on the plane, for instance -- while the High Street division must tempt consumers who can always go home and order what they want from Amazon instead.
Is it a buy?
Chief executive Kate Swann has rightly won plaudits for turning the business around, refocusing it on its strengths, and improving its basic retailing disciplines. Once as moribund as Woolworths, Smith's would seem to have turned the corner.
Yet the shares remain cheap, trading at 12 times next year's forecast earnings -- even after today's 3% rise in the share price. The yield is a tad over 3%.
Better still, the shares look set to prosper further as travellers return to airports, and consumers once more start flocking to the High Street in force -- hopefully to find WH Smith stores in even better shape, as Ms. Swann and her team continue their good work of stocking them with products that yield a decent margin.
So with minimal debt, cash in the bank, and hefty cost savings in progress, Smith's is a retailer worth taking a look at. A dividend increase of 17% at this stage of the economic cycle speaks volumes for management's confidence in its ability to improve both the top and bottom lines -- and in a retail sector mired in red ink, the company stands out as cash generative and reasonably bomb-proof.
There are better bargains out there, but if your portfolio needs a cheapish retailer with both dividend and capital appreciation upside, Smith's looks to fit the bill.
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Malcolm owns shares in Tesco.
