WHSmith 20-week update: What the analysts say

WH Smith’s like-for-like sales at Christmas were slightly disappointing, but another terrific performance on improving gross margins and cutting costs has delivered a small increase in overall profit expectations for the year, which should be enough to send the bears running for cover today. The last 10 weeks are much more important than the previous 10 weeks and we’d hoped for a slightly better outcome, but it was hard going. The other news is that a further £4m of cost savings have been found in the High Street (some £2m of which were volume related), with £1m dropping through to improve the bottom-line in the high street (to £56m), which is also reflected in a £1m nudge up to overall group profit before tax expectations for the year from £105m to £106m - Nick Bubb, independent analyst

WH Smith has reported a ‘good’ period of profit growth, driven by the usual focus on cash profit, rather than sales, which will probably result in small upgrades to consensus profits. We see this formula extracting more cash out of the business over the next few years, which should result in decent returns for shareholders. Nothing much to see, with the usual drivers in place. We think that WH Smith has continued solid cash generation in prospect on the high street and an organic growth opportunity in travel - Philip Dorgan, Panmure Gordon

The shares are at the same level as when Kate Swann announced on October 11 that she would step down as chief executive after nine years in July 2013. They have struggled to perform as the market debates whether she is leaving at the top. We believe there is still plenty of growth to go for, particular in travel and internationally, and the high street business market position is probably strengthening given recent high profile administrations as there become fewer places to shop on the high street. We believe her successor, Steve Clark, who joined WH Smith in 2004 and has run the high street business since 2008, is a safe pair of hands and he has been very much involved in the strategic direction of the business - Kate Calvert, Seymour Pierce

As cost cutting opportunities dwindle, these are things that the new management will need to grapple with if WHSmith is to regain sales momentum. Simply put, the new era for Smiths is one that will require more investment and lower returns for shareholders if the business is to remain sustainable over the long term. While there are some good potential growth vectors, including the development of the Funky Pigeon chain and continued international expansion, these areas remain relatively small compared with the core business. It is this core area that is now in need of some focus and, indeed, TLC – Neil Saunders, Conlumino

WHSmith’s results are disappointing rather than disastrous. In these market conditions, a 5% sales decline combined with gross margin improvement isn’t a crisis – especially for WHSmith, which is heavily exposed to the turbulence of the current retail market. Indeed, Kate Swann’s pre-Christmas cost-cutting diet has enabled WHSmith to enter 2013 in relatively good shape - Peter Saville, Zolfo Cooper

WH Smith trading in both high street and travel divisions has been in line with recent trends and market expectations. Gross margin gains continue to build, underpinning profit expectations for the year. While digital trends are currently seen by management as an opportunity, we remain concerned over the medium term impact - John Stevenson, Peel Hunt