Open book on WH Smith

SHARES Investors held firm as the retailer reported its first- ever loss, but a bold recovery plan will need time to work

When WH Smith last week reported its first-ever losses in 204 years of trading, it was no half-hearted effort: losses hit pounds 195m, after pounds 254m of provisions and write-offs. Yet the shares lost only a few pence, and are more than 180p up from their five-year low of 324p in mid-1995.

And when the Blue Chip column last examined the case for and against the retail chain, in January l995, its advice was that patience may well reward investors. Perversely, perhaps, that outlook proved correct. Despite a precipitous collapse in the shares soon afterwards, they staged a handsome recovery.

So although a whiff of disaster and despondency surrounds the shares - whose performance over the past five years has been mediocre - fears of a financial apocalypse are wide of the mark. Also rather over the top seem some of the more strident views: that there is no longer a place on the high street for the retailer, and that its core business is rapidly being eroded by supermarkets and specialist retailers. But outgoing finance director John Napier concedes: "WH Smith management shot itself in the foot, repeatedly, over the last five years."

The radical recovery plan outlined at the results is the work of WH Smith's new chief executive, Bill Cockburn, formerly chief executive of the Post Office. Without any family links to deflect him, he is set on a course of big change and says it will need four years to drag the company back to fighting fitness.

Among the weaknesses he pinpointed were an old-fashioned culture, which had encouraged an increasingly sclerotic administration. Measures are already in hand to tackle this. The managers of almost half the group's stores have been changed; 1,000 of the 34,000 jobs have been cut; and costs have been reduced by 6 per cent. But so far the chief impact of the provisions is that Smiths no longer has to suffer the expensive disaster of Do-It-All, the DIY stores group. Although it had to pay its partner, Boots, pounds 63.5m to relieve it of its 50 per cent stake, WH Smith's management has been freed to focus on growing the profitable parts of the chain.

Undoubtedly, improvement is most pressing for the core retail business, where profits slumped to pounds 47.6m, from pounds 65m. Ideas under consideration include reformatting the stores and even introducing Post Office counters. Loyalty card schemes also are a possibility. Management has been streamlined, with teams now responsible for children and education; organisation and gifting; entertainment and relaxation; and "express", a new convenience shopping format. The move has been accompanied by the recent advertising campaign - featuring actor Nicholas Lyndhurst - one of the group's first, emphasising the stores' attractions for all ages. The product range has been cut by 29 per cent to focus on higher-margin items.

One should not overlook some of the gems in the group, such as Waterstones, the high- street bookstore chain that Smiths bought in 1989. Since then, its annual profits have soared, reaching pounds 12.8m last year. With 100 bookshops at present, Waterstones plans some 26 new openings in the next three years.

Elsewhere in the group, while margins at the Our Price music chain remain slim, its profits also rose, to pounds 16m (from pounds 11.3m) on sales of pounds 444m. And the US businesses are finally taking off; Smiths has the retail rights for Los Angeles Airport, which it manages on behalf of City Hall, renting out most of the space.

On paper, it would seem that Mr Cockburn has carried out a textbook campaign to restore confidence. His experience at the Post Office could prove very useful as he tries to turn around another sleepy culture and release some value, though running a quoted retailer is a different challenge. But it is still too early to say if he has the right blend of retail flair and management and financial skills. Four years may be a sensible time- frame but, as Mr Napier noted, the City has a short attention span, and WH Smith might not be granted such a long grace period.

Ever since the likes of Next and Asda, spotting the next retail recovery story has been a favourite City pastime. The rise in WH Smith shares since last July may suggest counting one's chickens before they hatch. At any rate, the shares already count on a strong recovery. On a historic p/e of 30, and around 17 times 1996 earnings, they leave nothing to chance.

Despite a good start, it is too soon to say if Mr Cockburn will reach his goals. Best to await further confirmation of the new regime's ability, before committing oneself to a purchase.