Yahoo Finance The high street is dying and Covid ruined travel – but we're still upbeat about WH Smith
Many firms that rely on the travel industry have yet to recover fully from the pandemic. Despite the easing of lockdown restrictions, their financial performance and share prices remain significantly below pre-Covid levels.
In Questor’s view, this presents a buying opportunity for long-term investors. Although the virus could still surprise us, it now seems likely that the travel industry will gradually recover from its recent turbulence.
Companies that depend on it could benefit as a return to normality gets their lowly share prices moving. WH Smith is a perfect example of such an opportunity.
Its shares trade 38pc lower than their pre‑pandemic level as reduced passenger numbers have prompted a decline in footfall at its airport and railway station locations. In addition, visiting restrictions have hurt the performance of its shops in hospitals.
Now, however, the firm’s all‑important travel segment looks poised to experience a significant recovery. Revenue as a proportion of 2019 levels has risen dramatically over recent months in its travel business in Britain. In September last year sales were just 60pc of their pre‑pandemic levels, but by March the figure had risen to 90pc.
In the eight weeks to April 23, sales had risen further to 97pc of pre‑pandemic levels. Further details on recent trading will be included in an update due on Wednesday.
While WH Smith expects to open further travel stores across Britain in the coming years, its international growth plans are likely to have a far more dramatic impact on its bottom line. Currently, international locations account for 50pc of its 1,162 travel stores.
However, it has only a 13pc market share of the lucrative US airport retail market. It plans to increase this figure significantly and has ambitious expansion plans in other territories where it already has a presence. It has a pipeline of more than 125 new travel stores. They could both improve its financial performance and broaden its geographical footprint to reduce its reliance on Britain.
Of course, WH Smith’s high street business offers a far less compelling growth opportunity than its travel segment. A long‑standing decline in footfall in Britain’s high streets limits its expansion potential.
That said, the performance of its high street shops has been relatively resilient in recent months. Their sales in the first half of the current year were flat and trading profits were slightly higher than in the same period last year, while the company’s plan to reduce costs through lease renegotiations should boost profitability. Rent savings at lease renewal have averaged 50pc this year and are expected to contribute to savings of £41m for the full year.
Cost reduction should help the company to overcome a period of high inflation. Its travel division’s locations also have near-monopoly status, which gives them significant pricing power. This will become increasingly useful if, as the Bank of England now expects, inflation reaches 10pc later this year.
Clearly, though, any worsening of the cost of living crisis risks further harm to consumer confidence and challenging conditions for the wider retail sector. However, in Questor’s view the environment for WH Smith will improve as the effects of the pandemic subside.
The company’s shares have been a thorough disappointment since this column first tipped them in December 2017. Since then they have lost a third of their value, whereas the FTSE 100 is roughly flat over the period.
The vast majority of the decline can be blamed on the pandemic. Although recovery is unlikely to be smooth or quick, the company’s expansion plans, efficiencies and increasing international exposure highlight its long-term potential to generate strong returns as market conditions improve.
Questor says: buy
Ticker: SMWH
Share price at close: £14.77
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.
