'WHSmith’s American dream takes on nightmarish hue'

Travel retail specialist WHSmith dropped a bombshell this week when it flagged accounting concerns at its US business.

The timing could hardly have been worse. WHSmith has only just offloaded its UK high street division, long seen as a bit of a millstone by investors who wanted the retailer to focus entirely on travel.

There were big expectations about prospects in the US – a market that has frequently proved a graveyard for British retailers’ ambitions. But WHSmith has disclosed that it had “identified an overstatement of around £30m of expected headline trading profit in North America” that was “largely due to the accelerated recognition of supplier income in the North America division”. In layman’s terms, the retailer had booked rebate on sales yet to be made.

British retailers’ ambitions of Stateside success have frequently been dashed so the latest development has prompted some to wonder whether the same is now likely to be true of WHSmith.

City analysts greeted the news by making comparisons to Tesco, the grocery giant whose stellar success was brought to a crashing halt after an accounting scandal a decade ago. Is that comparison justified?

Without diminishing the seriousness of the issue, it can be argued with some justification that there are some big differences.

First, the scale of the problem. The concern, certainly as far as anybody knows at the moment, is limited to WHSmith’s US arm rather than being business-wide.

At Tesco back in 2014 while accounting was at the heart of the matter – leading to overstating of profits by hundreds of millions of pounds as a result of recognition of commercial income and timing of costs, there were also fears about the whole business and its fundamental trading performance.

“It’s a baptism of fire for WHSmith chief financial officer Max Izzard, who has been in post less than a year and has headed to the US to assess the situation”

That is not, at least right now, the case at WHSmith, which appears to have acted rapidly as soon as it became aware of the problem. They came to light in the last few days, before full-year results expected in November.

While it is likely to reduce WHSmith’s group profit for the year from £140m to £110m, the retailer’s other travel markets – such as the UK, which makes sales and profits on its own twice as great as the US – are not affected and were growing at the time of WHSmith’s interims.

It’s a baptism of fire for WHSmith chief financial officer Max Izzard, who has been in post less than a year and has headed to the US to assess the situation. The retailer has also appointed Deloitte “to undertake an independent and comprehensive review”.

All that said, there’s no doubt how serious today’s news from WHSmith was. At the time of writing, the retailer’s shares have been decimated – its market cap was down close to 41%.

Broker Peel Hunt noted that “there is a question mark about outer years as well, and the implied margin assumptions” and concluded: “Forecasts are very difficult to make without a degree of guesswork…and the shares are likely to remain friendless for some time.”

AJ Bell analyst Dan Coatsworth said: “The North American business is crucial to the company’s growth ambitions. The loose thread of an accounting error in this part of the group will create concern about a potential greater unravelling to come.”

WHSmith looks as if it is acting quickly and transparently. It needs to, because until there is full clarity, questions will remain over the company’s ongoing potential in a key market it has heavily invested in – and whether it will represent an American dream or more of a nightmare.