Does 4% sales loss on the high street make this stalwart stock a sell?

Should you ditch this stock after a rather mixed update?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The UK high street faces a difficult 2017. The potential impact of Brexit may not yet have been felt, with higher inflation on the way and consumer disposable incomes likely to be hurt to at least some degree. Against this backdrop, retailers could see their sales performance come under pressure. Today’s update from WH Smith (LSE: SMWH) shows that it’s already recording disappointing sales numbers. Its high street sales have fallen by 4%. Does this mean it’s a stock to sell?

Mixed performance

Although the company’s high street sales were in line with expectations, they were nevertheless rather disappointing. On a like-for-like (LFL) basis they fell by 3% in the 21 weeks to 21 January, and on a total basis they were down 4%. This was despite a seemingly sound strategy which included a number of successful ranges, as well as strong promotions in the seasonal stationery categories. An additional 32 Post Offices were opened to give a total of 145 within the stores. With 23 more to open this year, this could prove to be an area of growth for the business.

While the division struggled, there was much more impressive performance from its travel unit. It saw revenue rise by 5% on a LFL basis, and by 10% on a total basis. This was driven by ongoing investment in the business and continued growth in passenger numbers. This was especially the case over the Christmas holiday period. Although 3% of the total sales growth was due to positive foreign currency adjustments, gross margin growth and a significant store opening programme mean that profitability from the division should move higher.

Outlook

WH Smith is expected to record a rise in earnings of 5% this year and 6% next year. While this is a better performance than for many UK-focused retailers, other retailers such as Tesco (LSE: TSCO) offer more impressive outlooks. For example, it’s forecast to record a rise in its bottom line of 31% next year, followed by 30% the year after. This puts the company’s shares on a price-to-earnings growth (PEG) ratio of just 0.5, while WH Smith’s PEG ratio stands at a much higher and less attractive 2.3.

Of course, Tesco is in the midst of a major transformation programme and that’s a key reason why its financial performance is set to improve dramatically. WH Smith arguably offers greater consistency than its retail peer, which may mean lower risk for investors. However, given the uncertain outlook for UK retail, investors may wish to seek out stocks with a wider margin of safety than that offered by WH Smith. As such, while it’s not hugely expensive, there may be better options elsewhere in the sector. Tesco is an example, since it offers more growth at a lower price.

While both companies could be hit by Brexit-related problems, Tesco’s scope to benefit from a new strategy could help it to buck the wider retail trend. As such, it remains an attractive investment, while WH Smith appears to be a stock to avoid or even sell at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »