Week ahead: Sell-offs could be the key to a comeback by struggling WH S mith

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The Independent Online
WH Smith, one of the dinosaurs of the high street, may provide more details of its desperate bid to recapture past glories when it produces interim figures on Thursday.

Like so many proud retailers with a long and distinguished history, Smith has been slow to accommodate the more demanding attitudes of customers and meet the superstore challenge.

Last week its arch-rival in the high street, John Menzies, tossed in the retailing towel. It intends to dispose of its 232 Menzies stores, selling confectionery, greeting cards and newspapers, probably to the management in a pounds 50m buyout backed by Alchemy Partners. The Early Learning toy shops are to be demerged as the old established group concentrates on distribution.

Smith has more than 400 branches, far too many in the view of some observers. It would not be surprising if it cut back its retail spread, although indications are that sales have been encouraging with a 5 per cent like- for-like increase in the Christmas run-up.

Since Richard Handover got the job as chief executive in September, Smith's shares have made headway although they remain sad under-performers.

There has been no shortage of action during Mr Handover's brief reign. Tim Waterstone, founder of the Waterstone's book shops chain, has, with SBC Warburg, made an audacious but predictably unsuccessful takeover approach. Smith is the current owner of Waterstone's.

But things have moved on since then. Mr Waterstone, with the EMI showbiz group as a partner, is now negotiating to buy Waterstone's and it is likely a deal will be clinched before long.

EMI plans to merge Waterstone's with its Dillons book shops, creating the nation's largest books chain, and the HMV record stores. Mr Waterstone, sacked by Smith, will, therefore, assume control of his old books empire.

Eventually EMI intends to float the retailing business, possibly retaining a significant minority stake.

Mr Handover could also be near to giving up control of the Virgin/Our Price records chain. Smith has 75 per cent, with Virgin sitting on the remaining 25 per cent. Although it has an option to buy full control there is now every chance that a sale, perhaps even a demerger, is on the Smith agenda.

Virgin made a pounds 135m bid for Smith's controlling stake a year ago. It was rejected by the then chief executive, ex-Post Office supremo Bill Cockburn who subsequently decamped to BT.

The sale of Waterstone and Our Price, together with other bits and pieces, could produce a pounds 500m-plus windfall, paving the way for a cash handout to shareholders.

If the sale programme goes as expected Smith will be left more or less how it spent most of its 200 years, distributing newspapers and running shops. It is aware of the uphill struggle it faces on the retail front as the superstores draw away its traditional customers.

Retail strategy is being completely overhauled and various concepts considered. Stores are being refitted, delivering sales growth of up to 14 per cent in larger branches.

Unlike Menzies, the Smith philosophy is to develop its retail spread, giving more space to books, stationery and newspapers. The obligatory loyalty card club, launched in July, has been well received and already embraces 1.5 million members.

In the meantime, Thursday's interim profits are likely to be an unexciting pounds 40m. For the year to the end of May around pounds 140m is likely.

Charterhouse Tilney analysts Mark Charnock and Iain McDonald believe Smith shares could be worth up to 500p. "We expect sentiment towards the shares will continue to improve," they say.

As Smith has struggled to get on top of its problems its shares have been as low as 324p. They ended last week at 431p.

Retailers invariably dominate the opening weeks of the year and they remain conspicuous this week, with Allied Carpets and UNO also offering interim figures.

Northern Rock, the building society turned bank, is another to get in on the results act. It will report last year's results on Wednesday and around pounds 200m is expected against pounds 157m last time.

The accountants at Northern Rock are certainly on the ball. It will have taken them just 28 days to add up their figures - an example to others who often sweat for many months performing the same chore.

The old building society's shares have had an outstanding run since they arrived in October. Opening price was 463p; they ended last week at 612p. Not bad for a company described as "boringly consistent" by its chief executive, Adam Applegarth, at the time of the flotation.

Naturally takeover stories have swirled. But rumour has yet to become reality.