Investment: WH Smith comeback hangs on its Net play

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The Independent Online
WH SMITH continued its recovery yesterday with a solid, if unspectacular Christmas trading statement that pushed the shares up 7.5p to 597.5p.

At its annual meeting in London, the retailer said total sales in the 19 weeks to 9 January were 2 per cent up on the period a year earlier. This included the John Menzies stores bought for pounds 68m last March and other new space. Underlying sales showed a 1 per cent rise, in line with figures reported at the time of the group's full-year results in November.

Trading was boosted by a late surge in demand in December and early January. Interestingly, a star performer was the Internet Bookshop, the online bookseller bought last summer. Its sales rose by 70 per cent to pounds 1.7m from September, with orders in December up by 170 per cent.

This business, together with WH Smith's plans to relaunch its website in the spring on the back of the acquisition of Helicon, the Hutchinson encyclopaedia publisher, earlier this month, has lit the Internet flame under WH Smith's shares. They have surged to record highs in recent weeks as the market anticipates WH Smith becoming an Internet portal with add- on services in electronic commerce. However, although much progress has been made under Richard Handover, who replaced Bill Cockburn as chief executive 18 months ago, there is still much work to do.

With Virgin Our Price, Waterstone's and The Wall sold and Menzies, IBS and Helicon acquired, the new structure of the business looks to be more or less in place. The central challenge now is twofold. First, management must drive the core retail chain forward, focusing on its chosen main markets of books, stationery and newspapers and magazines. The City is waiting for evidence that the company can drive margins and average customer spend higher as well as pushing sales forward. Second, WH Smith must develop a credible Internet strategy.

In the core chain, yesterday's figures showed that book sales were up by 5 per cent but magazine and stationery sales were flat, with music and video sliding. There is good progress on margins, the company says, with the performance particularly encouraging in the high-margin books sector where WH Smith has been losing share for 20 years. The difficulty is the Menzies high-street stores, which are taking longer than expected to integrate.

Ashley Thomas, retail analyst at SG Securities, says there is little downside in the current share price, with around pounds 250m of cash still in the business and a potential valuation of around 530p for the core business and 100p to 120p for the Internet Bookshop. Much will depend on the website relaunch: if it is just another service provider, such as Dixons' Freeserve, this will be a disappointment. But if it can leverage the educational strength of the WH Smith brand and include a range of extra services, the shares will respond accordingly.

On unchanged full-year forecasts of pounds 130m, the shares trade on a forward p/e of 16 and represent an intriguing prospect.