WH Smith faces a bleak winter as ‘stay at home’ decree set to derail travel hub strategy

Railway stations offer little respite from the cold wind blowing through the high street

“Carl is in the perfect position to pick up the reins from me as I leave the business,” said Stephen Clarke about his successor just over a year ago. “I feel really confident that not only am I leaving the business in great shape, but I’m leaving it in excellent hands.”

That same day, WH Smith spent $400m (£305m) on Marshall, the US travel retailer, in a move that cemented its plans to concentrate less on the struggling high street and more on stores in airports. Weeks later, coronavirus started to spread across the globe, emptying its shops in both travel hubs and city centres.

Carl Cowling, who ran both the travel arm and the high street business before he took over, now faces a resurgence of the pandemic that threatens to slow down WH Smith’s recovery and derail the crucial festive shopping season.

“Travel abroad for work will still be permitted, but remains subject to existing quarantine rules, travelling abroad for holidays will be banned, and restrictions on leaving home will effectively prevent travel for leisure or visiting friends,” says Richard Chamberlain, a retail analyst at Royal Bank of Canada. “This, and the risk of further lockdowns, means the prospects for recovery are likely to be pushed out.”

Cowling has already faced some tough decisions. In April, he was forced to go cap in hand to shareholders to raise £166m in an emergency cash call and four months later he cut 1,500 jobs, the equivalent of 11pc of its workforce – despite receiving £6m a month in furlough support at the height of the crisis.

Shares fell accordingly.

Last week, the company decided to ditch a £5m share windfall for Cowling after an investor accused the chain of being “tone deaf” to the prevailing mood around excessive executive pay. It had begun sounding out top investors about the one-off award.

The criticism is somewhat surprising, says a rival, as WH Smith is renowned for keeping investors on its side, mostly thanks to its generous dividends over the years.

The episode comes after the retailer was warned in January by the Investment Association that Cowling’s pension was too high compared with that of the average worker.

The retailer is expected to plunge into the red when it updates the City on Thursday, with a £75m loss for the year to the end of August. The share price has crept back up to £10 since March, albeit it is still 53pc down compared to a year ago.

High street survivor?

Despite the bleak winter ahead, the City is largely bullish about WH Smith’s recovery. Kate Calvert, a retail analyst at Investec, says: “Assuming no long-term structural changes in the market, we believe WH Smith will quickly return to profitable growth and strong cash generation when the inevitable bounce back comes in global travel.”

This time around, the retailer has been allowed to keep 560 high street branches open after the Government said that newsagents can continue trading. During the first wave of the pandemic, only 300 of its 1,600 total stores worldwide stayed open.

In August it had access to £380m of cash, excluding a loan from the Government. Calvert says all eyes will be on the company’s “cash burn” as the reopening of shops during summer did not reduce it. “Assuming cash burn is still £20m a month, WH Smith could last 19 months without an issue,” she adds.

The firm has been adding stationery brands such as Typo and Tinc to its physical shops and has more store openings in hospitals in the pipeline. It has been moving away from books, newspapers and magazines as other products have higher margins.

One industry observer says: “WH Smith is a great survivor of the UK high street. They are one of the few multiple retailers left standing.

“There was no reason why WH Smith should not have gone the same way as Woolworths. They were both legacy retailers focused on categories that you could buy increasingly online, but they’ve been really ruthless about switching categories and removing costs.”

Hospitals prove hospitable

Cowling recently told analysts that “things have slowed down completely in rail, but there’s a lot of ongoing conversations with hospitals”.

He added: “Probably about 300 that could take some sort of offering from us because we operate WH Smith stores, we operate Marks & Spencer stores, we operate Costa Coffee franchises. And we can combine all of those into one store or we can have three separate stores. We’ve got quite a bit of space to go after.”

Cowling said the company’s reputation has been “high” during the pandemic “because in many hospitals we’re the only place open”, so it was well placed to strike more deals.

Like many of its peers, WH Smith has also been trying to renegotiate contracts with landlords after months of lost sales during the first lockdown.

It did not pay rent in the March quarter. “They’ve been in constructive talks with the vast majority of landlords and they are paying rent,” an insider said.

The chain has been on a mission to change its leases and is seeking more rent reductions as part of its cost-saving plan. The firm has around 400 stores with leases coming up for renewal in the next three years.

“With [some] airports where there’s minimum guarantees in place, we’ve been pretty successful at negotiating our way out of those and getting them to just turnover-based rents,” Cowling said.

“We’ve got really good relationships with the vast majority of our travel landlords.”

Cowling will hope the second year of his tenure will be a lot less eventful than the first.