WH Smith shares plunge after troubled retailer warns on profits

Head of UK retailing sacked after miserable Christmas trading. Swann gives notice of more job losses

WH Smith shook the retail sector yesterday with a swingeing profit warning after a disastrous Christmas as it sacked the head of its core UK retail business.

Shares in the company, which has been struggling to reinvent itself for years, slumped 11 per cent to 245p after analysts took a knife to their profit forecasts, slashing current-year expectations by up to 40 per cent. The music retailer HMV, Iceland-owner the Big Food Group, French Connection and Dixons were among those in the fallout.

The company, knocked sideways by an unrelenting barrage from supermarkets and specialist books and music retailers, warned job losses were likely as it announced that Beverley Hodson, the managing director of UK retail, was leaving "with immediate effect". It employs 1,200 staff at its head offices in Swindon and London and 20,000 across its 550 shops.

Ms Hodson's departure, widely anticipated after the company appointed an outsider, Kate Swann, as chief executive, is likely to reignite the row over payments for failure coming weeks after she was awarded a £112,000 bonus as compensation for missing out on the top job. Ms Hodson is in line for a payoff of up to £330,000, although the group said no settlement had been reached yet. Institutional investors, already concerned at the lavish scale of Ms Swann's pay packet, are limbering up for the annual meeting on 27 January.

In a hastily prepared trading update, the company blamed the double whammy of "disappointing sales and margin pressure" for warning of a "material profit shortfall against current expectations". Seymour Pierce cut its forecasts for 2004 from £108m to £68m and for 2005 from £125m to £78m. "What has emerged can only be described as disastrous," Richard Ratner, an analyst at the brokerage, said.

Like-for-like sales for the 17 weeks to 27 December were flat, while the gross margin fell by 2 percentage points, the company said. Entertainment fared worst, with underlying sales of videos, CDs and DVDs sliding by 3 per cent. Stationery was also poor, with underlying sales falling 2 per cent. Even the 2 per cent like-for-like sales gain in books was viewed poorly given the retailer's aggressive sales push.

Ms Swann, who took over from Richard Handover in November, said Christmas trading had been "very disappointing". She was blunt about the challenges facing the group. "A lot needs to change in our high street retail business. It has not had a good Christmas, partly because the high street is soft and partly of our own making. The business has lost its way. We need to be brutally honest and deal with the real issues even if they are unpleasant, such as writing down stock."

She was critical of the retailer's festive strategy, intended to compensate for a poor Christmas the previous year, singling out a "confusing" promotional strategy for particular censure. A lack of focus on core products and teething problems with a new operations system also hindered, she admitted. The plethora of offers - from two books or DVDs for £20, to "three for two" on books, cards, gifts and wraps - had bewildered customers so much that they had left the store empty handed, Ms Swann admitted.

Some analysts were sceptical that the group, a high street stalwart for more than 200 years, could be salvaged. "Kate Swann has got a very major problem. A lot of people struggle to see what the solution is. There isn't a compelling logical rationale for the group to exist in its current format," one said. "Smith's falls between two stools. It doesn't offer a sufficiently wide range of products like Argos, but is not particularly authoritative on the likes of books and music," Mark Charnock, at Investec Securities, said.

Most analysts believe one of Ms Swann's tasks will be to cut the dividend, which yields some 8 per cent. They have also raised question marks over the future of the Hodder Headline publishing arm, its news distribution operation and its 200 stores in Hong Kong, Singapore, Australia and New Zealand, arguing there are few synergies between the divisions. It has already sold its loss-making airports and hotels business in the US. Asked if she planned to reshape the group, Ms Swann said: "My focus is on retail. Therefore I don't plan to change anything so far as news and publishing are concerned."

Smith yesterday warned its dire Christmas, responsible for 60 per cent of group profits, had left it with mountains of unsold books and CDs.

WHStricken: Stationary Times

May 1995: Profits alert as core chain loses appeal.

August 1995: Unveils "Project Enliven" to make shopping "exciting, lively and colourful".

January 1996: Bill Cockburn is surprise choice as chief executive.

June 1996: Axes 1,100 jobs; sells 50 per cent stake in Do It All to Boots; disposes of office stationery arm; expandsrecords, books and airport retailing businesses.

August 1996: Announces worst figures in 204-year history: £195m loss after restructuring charges. Warns recovery will take four years.

May 1997: Appoints Beverley Hodson head of UK retail.

June 1997: Bill Cockburn quits.

September 1997: Company veteran Richard Handover takes over as chief executive.

October 1997: Audacious £1bn hostile bid from Tim Waterstone fails; forced to demerge Waterstone's and sell Virgin-Our Price.

March 1999: Embraces digital age with education-focused ISP.

May 1999: Bolsters publishing arm with £185m acquisition of Hodder.

January 2001: Axes plans for magazine distribution deal with Tesco.

October 2001: Abandons sale of news distribution after failing to agree price.

January 2003: Sales slide over festive season.

August 2003: Profit warning blames hot weather. Finally sells loss-making US hotels and airports business.

November 2003: Kate Swann, former Argos head, named chief executive; Richard Handover steps up to chairman.

January 2004: Fresh profits warning blamed on tough trading conditions. Beverley Hodson sacked.