WH Smith’s (LSE:SMWH) one of the UK’s great ‘Jekyll and Hyde’ stocks. While growth at its Travel division remains strong, trouble at its High Steet unit remains a drag on its shares.
But with its beleaguered traditional business being offloaded, things could be looking up as WH Smith ramps up expansion across the world’s airports, rail stations and other travel hubs.
Could it now be one of the FTSE 250‘s best growth stocks to consider buying? Let’s take a look.
Mixed bag
WH Smith’s tired, cluttered high street stores have long lagged in the cut-throat retail market. With consumer spending also on the ropes, it’s no surprise the division again disappointed in Wednesday’s (16 April) half-year update.
Sales across the company’s 480 stores dropped 7% in the six months to 28 February, while trading profit slumped 32%. So once again, it was left to its Travel unit to come to the rescue. Revenues and trading profit rose 6% and 12% respectively in the period, reducing the decline in group trading profit to just 1%.
Sales in Travel UK rose 7% in the first half, while the North America and the Rest of World sub-segments grew 5% and 9% respectively. Around three-quarters of group turnover came from Travel stores in the period.
The good news is that the headwinds from Smith’s High Street operation will soon be consigned to history. Modella Capital has purchased its traditional business for £76m in a deal due to complete by the autumn.
Travel titan
In my view, WH Smith’s transition to a pureplay travel retailer provides substantial growth potential, supercharged by the firm’s commitment to rapid expansion. In particular, it plans to raise its exposure to more lucrative international markets, and especially in North America. It’s described the territory as “our most exciting growth opportunity“.
The company opened 30 new stores in the first half (or 13 excluding closures of existing outlets). It has a store pipeline of around 90 stores for the next three years too, which will add another 70 units to its portfolio. Unsurprisingly, WH Smith will focus new openings on the US, the world’s biggest travel market
Its Travel-based growth strategy leaves Smith well placed to capitalise on an expected boom in air travel. According to analysts at ACI World, the number of passengers worldwide will almost double between now and 2053, to 22.3bn.
Rising investment in airport infrastructure also bodes well, as does the company’s plans to accelerate rollout of its highly-scalable one-stop-shop travel essentials format.
Growth hero?
I’m not suggesting it will be plain sailing for WH Smith from this point onwards. Competition is high across its markets, while passenger numbers are sensitive to economic conditions.
The company’s pan-global presence also leaves it vulnerable to currency movements. Adverse changes knocked 2% off sales growth in the first half.
But on balance, I think it could become one of the FTSE 250’s standout growth shares. And in the nearer term, City analysts expect earnings to grow 8% and 10% in the next two financials years (to August 2025 and 2026 respectively).
With the stock currently trading on a forward price-to-earnings (P/E) ratio of just 10 times, I think it’s worth serious consideration right now.
