Upturn hopes at WH Smith

THE INVESTMENT COLUMN

Is sentiment at last turning in favour of W H Smith? The shares have underperformed the rest of the stock market by 35 per cent since the beginning of a very difficult year, but yesterday saw them bounce 22p to 375p as apparent signs of a sales recovery emerged from the annual meeting.

The company said sales in the UK retail business were an "encouraging" 7.4 per cent ahead in the first quarter to 2 September. But the WH Smith retail chain, which was at the root of May's profit warning, is clearly not out of the woods yet.

The headline growth rate of 2.8 per cent at Smith looked reasonable, given that economic malaise and hot weather kept consumers out of the shops over the three summer months. However, increased spending - on advertising, promotion and improved store layouts - has only barely reversed last year's 1.3 per cent underlying fall in sales, turning it into a rather anaemic 1.4 per cent like-for-like increase in the first quarter.

Smith warned yesterday that further rationalisation will shave pounds 20m from first half profits, leaving them "materially lower". Brokers are now looking for full year profits of below pounds 96m, putting the shares on a prospective multiple of 17. Smith still needs to put its long-sought after new chief executive in place to fully reverse the negative sentiment. Until then, the shares are high enough.

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