Smith's Family Kitchen Launch And US Expansion Will Strengthen Market Position

Key Takeaways

• WH Smith's travel business transformation and North American expansion strategy aim to increase sales and market share with rising passenger numbers.
  
• Focus on operational efficiencies and expanding food offerings enhances margins and profitability, while cash use for dividends boosts shareholder returns.
  
• Increasing U.S. store expansion costs and rising U.K. concession fees could strain capital expenditure and net margins, despite efforts to shift to higher-margin categories.

Catalysts

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

• WH Smith's strategy to transform its Travel business into a one-stop shop for travel essentials is expected to significantly increase sales per passenger and average transaction value (ATV), driving future revenue growth.
  
• The expansion of new stores in North America, including recent wins in major U.S. airports, positions WH Smith to substantially grow its market share and overall revenue, particularly as passenger numbers are forecast to grow.
  
• The ongoing focus on improving operational efficiencies through space management and retail expertise, especially in the U.S., is likely to enhance EBIT margins and drive profitability.
  
• WH Smith's intention to expand its food offerings, including the introduction of the Smith's Family Kitchen range and the development of hot food and coffee options, is expected to bolster revenue and improve gross margins.
  
• The strategic use of cash for dividends and share buybacks, supported by strong cash generation, suggests a focus on increasing shareholder returns, which could positively impact earnings per share (EPS).

WH Smith Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WH Smith's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 6.7% in 3 years time.
• Analysts expect earnings to reach £150.7 million (and earnings per share of £1.19) by about February 2028, up from £67.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2028 earnings, down from 23.2x today. This future PE is greater than the current PE for the GB Specialty Retail industry at 13.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.28%, as per the Simply Wall St company report.

WH Smith Future Earnings Per Share Growth

Risks

• U.S. like-for-like sales in motion technology were down 5% due to a lack of innovation in the headphone market, leading to a shift towards higher-margin categories. This could impact revenues if the transition does not yield higher sales.
  
• Total sales in the Las Vegas resort business fell 8% due to hotel closures, which, combined with ongoing softer trends from a higher mix of conference attendees, may depress overall revenue growth in North America.
  
• The company is subject to exchange rate fluctuations, with a 5 cent movement affecting the full-year profit by around £3 million. This could impact net margins and earnings when converting U.S. operations into sterling.
  
• Concession fees in the U.K. are increasing as the company competes for better retail space, which could raise rental expenses and potentially impact net margins if not offset by higher sales.
  
• U.S. store expansion involves higher costs, with American store builds costing about 2.5 times more than in the U.K., potentially affecting capital expenditure and return on investment.

Valuation

• The analysts have a consensus price target of £15.285 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 £17.0, and the most bearish reporting a price target of just £12.9.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.3 billion, earnings will come to £150.7 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of £12.19, the analyst price target of £15.28 is 20.2% 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.