WH Smith Earnings Call: Growth Intact, North America Drags

WH Smith ((GB:SMWH)) has held its Q4 earnings call. Read on for the main highlights of the call.

WH Smith Earnings Call Reveals Solid Sales but Mounting North America and Balance-Sheet Strains

WH Smith’s latest earnings call painted a mixed picture for investors. Management highlighted robust revenue growth, strong cash generation and standout performances in the UK and North American Travel Essentials, alongside a successful refinancing and disciplined capital allocation. Yet these positives were overshadowed by weaker-than-expected profitability in North America, significant one-off charges, higher leverage and the announcement of an FCA investigation. The tone was one of realism and repair: the core business is growing, but near-term earnings and the balance sheet remain under pressure as the group works through operational and governance issues.

Group revenue growth and like-for-like momentum

WH Smith delivered total group revenue of £1.6bn, up 5% year on year, with group like-for-like sales also rising 5% over the year and 3% in the final 13 weeks to 31 August. On a constant currency basis, revenue climbed 7%, indicating underlying demand remains healthy across the portfolio. This steady top-line growth provides a platform for recovery despite profit headwinds, and shows the travel-led strategy continues to benefit from robust passenger traffic and increasing spend per customer.

Strong cash generation and EBITDA

Headline EBITDA came in at £187m, underlining the business’s cash-generative nature even in a challenging year. With underlying capex at £81m and a £4m working capital inflow, WH Smith generated solid free cash flow drivers that help support investment in growth and store refurbishments. This cash performance is a key offset to rising interest costs and elevated leverage, and it underpins the group’s ability to maintain dividends and fund strategic initiatives while addressing problem areas.

UK division performance

The UK division remained a dependable earnings engine. Revenue increased 5% to £834m, while headline trading profit grew 7% to £130m, showing margin resilience. Like-for-like UK sales rose 3%, with travel formats performing well: Air was up 7% like-for-like, Hospitals up 4% and Rail up 4%. This reflects strong passenger flows and effective execution in higher-margin categories like food, convenience and impulse purchases, helping to stabilize group profitability while North America resets.

North America Travel Essentials outperformance

Within North America, Travel Essentials was the clear bright spot. Revenue in this category grew 19% in constant currency, with like-for-like sales up 7%. Travel Essentials now accounts for about 55% of North America revenue, up sharply from 37% in 2022, and delivers roughly a 10% trading profit margin on a fully allocated basis. This pivot towards higher-margin essentials is central to WH Smith’s strategy to rebuild profitability in the region and reduce reliance on more volatile segments like electronics and fashion.

Rest of World expansion and like-for-like growth

Outside the UK and North America, WH Smith’s Rest of World business continued to expand. Revenue grew 12% in constant currency, with like-for-like sales up 7%, supported by new store openings in key travel hubs. Management is increasingly shifting this division towards a franchise model, aiming to capture growth in international travel while reducing capital intensity and risk. This approach should support better returns on capital and more flexible expansion as new opportunities emerge.

Refinancing completed to secure near-term funding

The group has completed a sizeable refinancing to address upcoming maturities and secure liquidity. The package includes £200m of US private placement notes, £120m of three-year bank term debt and a £200m backstop facility to provide repayment certainty ahead of USPP completion. This structure gives WH Smith breathing space to execute its turnaround in North America and manage capex needs, albeit at the cost of higher interest expenses over the coming years.

Dividend and capital allocation discipline maintained

Despite the year’s setbacks, the board has proposed a final dividend of 6p, bringing the full-year payout to 17.3p and maintaining a policy of 2.5x cover. Management reiterated its focus on disciplined capital allocation, guiding FY26 capex to around £90m and targeting a normalised level of roughly £80m thereafter. With returns on capital a stated priority, investors can expect a measured approach to new openings and refurbishments, particularly as the balance sheet remains stretched.

Group headline trading profit decline

Headline trading profit at group level fell 6% year on year to £159m, with headline profit before tax at £108m. This decline stands in stark contrast to the solid revenue growth and reflects significant headwinds, especially in North America. The gap between growing sales and falling profits underscores the operational and margin challenges facing the group and helps explain the cautious tone around near-term earnings.

North America profitability materially weaker than expected

The biggest disappointment came from North America, where headline trading profit was just £15m, far below prior market expectations of around £55m. The adjusted margin in the region was roughly 6.5% before one-off inventory costs, compared with a restated prior-year margin closer to 8%. This shortfall is driven by a mix of weaker performance in certain formats, supplier income changes and inventory issues, forcing WH Smith to reset expectations for the region and commit to a detailed margin rebuild plan.

Supplier income reductions, restatements and inventory charges

North American results were heavily affected by supplier income and inventory adjustments. The group reported a net supplier income reduction of £23m in the year (from a £33m gross reduction, partly offset by a £13m prior-year restatement benefit). Inventory-related items totalled a net £12m, including a £5m increase in obsolescence provisions and a £5m stock loss provision. These charges are non-trivial, both in terms of the hit to FY results and what they reveal about prior practices and controls that are now being tightened.

Impairments, onerous charges and non-underlying cash costs

WH Smith also booked significant impairments and onerous contract charges: £25m in North America, £16m in Rest of World and £7m in the UK. Non-underlying cash outflows were £38m over the year. These items reflect the cost of cleaning up underperforming assets, exiting or resizing weaker formats and addressing legacy issues. While they weigh on current cash flow, they are part of a broader effort to reset the portfolio and improve future returns.

Leverage and net debt elevated

Headline net debt at year-end stood at £390m, comprising a £320m convertible bond, a £141m RCF drawdown and £71m of cash. Rolling 12-month net debt-to-EBITDA rose to 2.1x from 1.9x. Management expects headline net debt to be about £400m by FY26 but aims to bring leverage below 2x over time. For equity investors, this leverage trajectory, combined with rising interest costs, is a key risk factor, limiting flexibility if trading deteriorates further.

Operating pressures in specific North America formats

Within North America, not all formats are performing equally. InMotion, the electronics chain, saw like-for-like sales decline 3% over the full year and 4% more recently. The Resorts business was also weak, with like-for-like sales down 4% for the year and 7% in recent trading. Resort fashion, which accounts for around a quarter of resort sales, fell roughly 10% and is now considered unprofitable. These trends underline structural challenges in some categories and justify management’s plans to rationalise store numbers and refocus on stronger segments.

Interest cost and financing headwind

The refinancing comes at a price: WH Smith expects its average interest rate on debt to rise from 4.6% to about 6.3% by the end of FY27. For FY26, finance costs are guided to £33m–£35m, up from £26m in the year just reported. With profits under pressure, this higher interest burden will further squeeze net earnings and cash available for debt reduction or additional shareholder returns, at least in the near term.

Regulatory review and governance remediation

Governance and controls were another area of focus. A Deloitte-led review has resulted in a remediation plan and ongoing enhancements to financial and operational controls. In addition, WH Smith disclosed that the FCA has launched an investigation, with timing and financial impact still uncertain. While details are limited, this development adds another layer of risk and reinforces the importance of the group’s efforts to strengthen governance and restore confidence among investors and regulators.

Forward-looking guidance and margin rebuild plans

Looking ahead, WH Smith guided to mid-single-digit revenue growth in FY26, with the UK expected to grow 3–5%, North America 6–8% and Rest of World 4–6%. Group headline profit before tax and non-underlying items is forecast at £100m–£115m, with trading margins targeted at around 14–15% in the UK, 7–8% in North America and 5% in Rest of World. Central costs are seen at £30m–£32m and finance costs at £33m–£35m. Capex is set at roughly £90m in FY26 before normalising to about £80m, and headline net debt is expected to hover near £400m, with a stated goal of bringing leverage below 2x. In North America, management expects margins to trough around 4% in FY25 before recovering to 7–8% in FY26, helped by growing Travel Essentials (already over 50% of the regional mix and targeted above 70% medium term), and by rationalising underperforming InMotion and Resorts stores. The dividend policy is maintained, but investors are being asked to look through a transition period marked by one-off costs and higher interest charges.

WH Smith’s earnings call ultimately framed a company with resilient core trading but significant repair work ahead, especially in North America and on the balance sheet. UK and Rest of World operations, along with high-margin Travel Essentials, are providing growth and cash, while management tackles legacy issues, restructures weaker formats and tightens governance. For investors, the story is now about execution: if WH Smith can deliver on its margin rebuild and deleveraging plans, the current pressure on profitability may set the stage for a more robust, travel-led earnings profile over the medium term.