Shares in 225-year-old retail stalwart WH Smith (LSE: SMWH) may have tripled in value in just five years but I remain cautious on the £2.3bn cap’s outlook, particularly after today’s full-year trading update. Here’s why.
When ‘good’ isn’t good enough
In the 12 months to the end of August, total revenue rose just 2% — hardly exceptional stuff. What’s more, most of this can be attributed to the 9% rise in sales from the firm’s Travel business. In sharp contrast, revenue from its high street division fell 5%, suggesting that even WH Smith can’t escape the problems that many of its peers are experiencing as more and more of us migrate to shop online and buy fewer newspapers and magazines.
This kind of performance was largely replicated when it came to trading profits. These climbed 10% to £96m for the travel retail division (which now accounts for over 60% of overall profit) but remained flat — at £62m — for the High Street.
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Today’s numbers reflect my ongoing concern with WH Smith as an investment. While the company may explain the relatively uninspiring results from its high street store estate with reference to tough comparatives from the previous year, the fact remains that things aren’t going to get any easier going forward. Unless you are dealing with a captive audience (which is arguably why the travel stores are performing so well), what’s to stop patient shoppers from ‘road testing’ products in-store before returning home to buy them cheaper online?
Sure, a 10% rise in the final dividend, a proposed share buyback of up to £50m, and evidence of further progress overseas (including new store openings in Singapore and Rome), may be enough to convince many investors to remain. But I’m left questioning just how much positive upside is left in the shares, particularly if the uncertain economic environment makes consumers even more picky about where they spend their cash.
There’s also the valuation to think about. Trading at 19 times forecast earnings for the next financial year, a lot of good news appears already priced-in. Based on recent analyst estimates, the company’s price-to-earnings growth (PEG) ratio will also be around 2.7 for 2018/19, suggesting that the shares are no longer the deal they once were.
Keep on rollin’
Sausage roll-on-the-go retailer and fellow multibagger Greggs (LSE:GRG) — while just as susceptible to competition on the high street as the aforementioned newsagent — could be a better buy in my opinion.
Its recent Q3 trading update was encouraging with the company recording an 8.6% rise in total sales for the 13 weeks to the end of September. Year-to-date growth in total sales now stands at a very respectable 7.8% with like-for-like sales increasing by just below 4%.
The £1.3bn cap baker has opened 98 new shops so far in 2017 and plans to grow this figure to 140-150 by the end of the year. Recent investment in a new “forecasting and replenishment system” has ensured greater product availability for customers and early-morning sales “continue to grow strongly“, according to the Newcastle-Upon-Tyne-based business.
Going into the final quarter of its financial year, Greggs’ outlook also looks decent with previously flagged food ingredient cost pressures expected to ease as we approach the end of 2017.
Right now, you can grab a slice of the company for 20 times forecast earnings. With no online competitors to worry about, I still think that’s a price worth paying.
