WH Smith’s results: good news or bad for UK publishing?

WH Smith PLC today announced preliminary results for the year ending 31 August 2011. The top-line (i.e. revenue) is down, from £1312 m to £1273 m. But a reduction in costs has enabled the group to increase the bottom line (i.e. operating profit), at least in nominal terms (from £89 m to £93 m).

WH Smith is such a long-established, conservative, part of the industry and most of its stores stock such a narrow range of titles that it’s easy to overlook its importance. The story of indie booksellers is more evocative and generates richer personal narratives and so tends to gain more column inches and word-of-mouth news. Yet for many people in the UK WH Smith is the local bricks-and-mortar book retailer. And the chain has a symbolic importance in maintaining the presence of book retailing on the high street. In short, WH Smith still matters to publishing.

Looked at in more detail, the latest results seem to be a case of good news, bad news, and good news for the book industry.

The first tranche of the good news is that the group remains in profit (and continues to generate cash). The operating profit of the group’s High Street division (which includes book retailing) was up, as was the gross profit margin on books. 

The bad news is that it is far from clear that WH Smith’s profitability is sustainable. It is being driven by cost reduction – specifically, reduction in cost of sales. There is a limit to how long one can continue to increase profits in that way. Eventually, WH Smith has to find a way to increase revenue. Moreover, books emerge as a relatively weak part of the operations. While operating profit of the Travel division was up 8%, in the High Street division it grew by only 2% and like-for-like sales for books were down.

On e-books the group’s press release comments that WH Smith has “continued to develop [its] presence in the growing eBooks market”. This is such a vague comment that I take it to mean “We’re not making much money out of e-books”. Indeed, the presentation released by the group to accompany the results indicates that though sales of e-books are growing (mainly in the academic and textbook sectors), they remain a small part of the overall book business.

The further good news is that there are signs that WH Smith is perhaps now getting its act together on e-books. The company has teamed up with Kobo to launch low-cost e-book readers. Though techies may regard this news as unexciting, it is potentially important: precisely because WH Smith is not an avant-garde brand, it is understood by mainstream consumers. Deciding to buy an e-book reader and downloading e-books involves a degree of trust on the part of the consumer. (Though I’m an experienced e-book consumer, I still experience that anxious will-this-work-on-my-gadget-and-what-if-it-doesn’t-download-properly feeling). Perhaps the WE Smith brand will be found to have developed that trust sufficiently to build an e-book market for itself. Let’s hope so.

The central theme of this post is ‘boring-but-important’. On that note let me add one observation. WH Smith have for some time offered a ‘free delivery to store‘ option for purchases from its online bookstore. That’s always seemed to me a nice add-on – one that most other online retailers can’t offer. Yet so far as I can tell, they’re underwhelming at publicising the service. Whenever I’ve mentioned it in conversation, the response has been. “Oh, I didn’t know that”.

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One Response to “WH Smith’s results: good news or bad for UK publishing?”

  1. […] results tell a comparable story to those I analysed last year (the analysis is here). There is again plenty of good news. Group pre-tax profit, earnings per share, and dividend are […]

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