Travel Retail Focus Will Strengthen North American Presence

Key Takeaways

• WH Smith's focus on the travel retail sector, particularly in high passenger volume markets, is set to enhance growth and profit margins.
  
• Strategic expansion plans, including new store openings and acquisitions, aim to drive revenue growth and market share in North America.
  
• Economic uncertainty, currency fluctuations, and supply chain disruptions pose risks to WH Smith's revenue growth and profit margins, while execution risks affect U.S. travel business expansion.

Catalysts

Operates as a travel retailer in the United Kingdom, North America, Australia, Ireland, Spain, and internationally.

• The sale of the U.K. High Street business allows WH Smith to focus entirely on its growing travel retail sector, expected to enhance growth, profit margins, and cash flow, impacting overall earnings positively.
  
• Increased penetration and significant space growth opportunities in high passenger volume markets like North America and ongoing investment in airport infrastructure can drive future revenue growth through heightened passenger numbers.
  
• Winning new tenders and opening 70 stores in North America, with future plans for expansion, positions WH Smith for substantial market share gains, expected to drive revenue and potentially increase net margins due to scale advantages.
  
• The introduction of scalable successful models such as the one-stop shop format in airports and health and beauty extensions in travel hubs can increase spend per passenger and revenues by offering broader retail propositions.
  
• WH Smith's strategic focus on growing through selective acquisitions and maintaining disciplined capital allocation allows for sustained investment and shareholder returns, potentially fostering earnings growth and enhancing dividend policies.
  

WH Smith Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WH Smith's revenue will decrease by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 6.3% in 3 years time.
• Analysts expect earnings to reach £118.4 million (and earnings per share of £0.91) by about August 2028, up from £7.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £104.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, down from 191.8x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.75%, as per the Simply Wall St company report.

WH Smith Future Earnings Per Share Growth

Risks

• Economic uncertainty and softening passenger numbers could impact revenue growth despite strong spend per passenger, potentially affecting future earnings and profit margins.
  
• A strong sterling exchange rate negatively impacted North America revenues by £7 million, and further currency fluctuations could affect the group's international earnings.
  
• Non-underlying cash items related to transformation and separation costs from the High Street business are anticipated to continue impacting cash flow and net margins.
  
• The U.S. travel business is subject to changes in demand and competition, and current timing and phasing of new store openings may pose execution risks, impacting projected revenue.
  
• Any potential tariffs or supply chain disruptions, particularly from China, could lead to increased costs or pricing pressures that might impact overall profitability.

Valuation

• The analysts have a consensus price target of £12.971 for WH Smith based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £16.0, and the most bearish reporting a price target of just £10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.9 billion, earnings will come to £118.4 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 10.8%.
• Given the current share price of £10.78, the analyst price target of £12.97 is 16.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.