WH Smith pays the price for poor Christmas sales

WH Smith shares fell to their lowest level for 13 years yesterday when the high street retailer announced a drop in underlying sales over Christmas. The company said it had made a deliberate decision not to chase unprofitable sales in areas such as CDs in order to build margins instead.

But analysts cut their profit forecasts and said Smiths was being squeezed between the major supermarkets on one side and specialist stores such as HMV and Waterstone's on the other. "The market is getting tougher and they have lost their top line (sales) momentum," one analyst said. "They are going to struggle to grow the top and bottom lines at the same time." The shares closed 12.25p lower at 284p.

Smiths said that in the five weeks to 11 January UK like-for-like sales were down 2 per cent on the same time last year. Underlying sales in the main high street chain were down 3 per cent though margins were up 2 percentage points.

Entertainment sales were down 6 per cent as the company refused to match what it described as the "kamikaze" pricing of CDs at £9.99 by rivals such as Tesco. Richard Handover, the chief executive, said: "Take the VAT out of that and you're selling at a loss."

Analysts were concerned about a 3 per cent fall in book sales. This was largely in fiction where Waterstone's ran strong Christmas promotions.

Analysts were gloomy with ABN Amro, Smith's house broker, cutting its current year profit forecast from £128m to £120m.

Nick Bubb, retail analyst at Evolution Beeson Gregory, said: "It's déjà vu. Every time Smith's reports, there are downgrades. They clearly got the trade-off (between sales and margins) wrong in UK retail with losses of market share in key areas."

But Mr Handover expressed cautious optimism in Smiths. "The principle we adopted was to not chase sales at the expense of margin. We may have over-compensated a little but the problem is tactical not fundamental." On the outlook for consumer spending, he said: "We are managing the business in anticipation of a continuing difficult and uncertain environment."

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