Almost £600m was wiped off the market value of WH Smith on Thursday after the retailer cut profit forecasts and launched an independent review when it discovered an accounting blunder at its North American arm. Shares plunged 42% after investors took fright at the news that profits at the division had been overstated by £30m.
The group said it discovered the mistake while preparing its year-end results, and that it was “largely” because some income had been logged too early. The error relates to arrangements with suppliers, which offer rebates if the retailer hits sales targets on certain items and payments for marketing and promotions. It is understood that income should have been logged in the next financial year rather than the 12 months to 31 August.
WH Smith said headline profits from its North American business – which serves the US and Canada – were now expected to come in at £25m, down from previous market expectations of £55m. As a result, the company expected the group’s pre-tax profits to be in the region of £110m, compared with market expectations of £140m. The board has instructed Deloitte to undertake an independent and comprehensive review.
The problem is believed to be contained within the North American business, which in recent months brought in a new chief executive, Huw Crwys-Williams, previously the strategy director for the whole group. WH Smith operates more than 320 stores across the US, mostly in airports, under a variety of local brands and its InMotion chain, as well as franchised outlets for brands including Lego and Harley-Davidson.
Retail analyst Nick Bubb said the profit warning had “gone down like a lead balloon with investors”, adding that it was “reviving unhappy memories of the Tesco accounting scandal a few years back”. Dan Coatsworth at the broker AJ Bell said the error was a “huge embarrassment to management” and had “tarnished what WH Smith would have hoped could be a fresh start for the business” after the sale of its ailing high street division to private equity firm Modella Capital. The drop in shares left WH Smith’s value below £900m on Thursday morning, down from £1.4bn at market close on Wednesday.
