The WH Smith (LSE:SMWH) share price crashed 42% on 21 August after the FTSE 250 retailer announced that it had uncovered a bit of a problem in its North America division.
Its accountants were recognising supplier rebates and discounts before they had been earned. The upshot is that the trading profit from the territory for the year ended 31 August will be £25m-£30m lower than previously thought.
But as the saying goes, one person’s trash is another’s treasure. Stock exchange rules require shareholders with a 5%+ interest in a company’s stock to disclose their transactions. And a review of these since 21 August shows some interesting movements.
Different reactions
Morgan Stanley’s reduced its position from 6.78% to 5.11%, Wellington Management International’s gone from holding 5.12% of the group’s shares to 2.84%, and BlackRock now owns less than 5%, having previously held 8.36%.
By contrast, Causeway Capital Management’s increased its shareholding from 12.05% to 15.79%.
Opinion’s clearly dividend among some of the retailer’s larger shareholders. But I can see why some might be tempted to take advantage of the recent share price fall.
A new business model
Earlier this year, the group, which started life in 1792 as a newsagent in London, announced that it was selling its high street stores to Modella Capital. It also offloaded its online personalised greetings card business, funkypigeon.com, to Card Factory. It now trades exclusively from airports, railway stations and hospitals.
And anyone who has been on a flight lately — or taken a train — will know how eye-wateringly expensive some of its prices are. On a recent trip, I couldn’t believe that it was charging £4.19 for a 500ml bottle of Pepsi Max. It would have cost £1.59 in Tesco. But with few alternatives, people are prepared to buy. That’s why its newly restructured business can earn higher margins than those achieved in the high street.
In addition, the global travel retail market is forecast to grow by 2.5 times from 2024 to 2050.
Also, based on amounts paid over the past 12 months, the stock’s now offering a dividend yield of 4.9%. However, given the uncertainty over its earnings in North America, this could be under threat.
Not for me
However, I don’t want to invest. I’m fearful this isn’t a one-off mistake — previous earnings may also have been overstated.
| Travel trading profit | FY23 (£m) | FY24 (£m) | H1 25 (£m) |
|---|---|---|---|
| UK | 101 | 126 | 40 |
| North America | 52 | 58 | 18 |
| Rest of the World | 13 | 18 | 5 |
| Total travel trading profit | 166 | 202 | 63 |
At 31 August 2024, the group disclosed that it had £33m accrued for “supplier income relating to retrospective discounts and other promotional and marketing income that has been earned but not yet invoiced”. It’s possible that some of this has been recognised too early.
Understandably, the company’s launched an investigation. A further update will be provided on 12 November when the retailer is due to publish its interim results. But it’s a long time to wait. And the uncertainty’s likely to weigh heavily on the group’s share price. It’s hard for a management team to quickly regain the confidence of investors.
Vistry Group, the FTSE 250 housebuilder, revealed a similar accounting problem in October 2024. Its share price crashed and it’s never recovered since. I’m sure some of this reflects the state of the housing market but I reckon a loss of faith is the biggest reason.
Until the situation becomes clearer, I think it’s best to consider steering clear of WH Smith’s stock.
