Digital Consumer Shift And Rising Costs Will Erode Value

Key Takeaways

• Heavy dependence on physical travel locations and declining demand for print media threaten long-term revenue stability and margin growth.
  
• Rapid international expansion heightens operational risk amid rising costs, volatile travel activity, and strong competition, challenging sustained profitability.
  
• International expansion and innovation in product mix, operations, and digital strategy are driving stable, diversified growth and resilience in the travel retail sector.

Catalysts

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

• As consumers accelerate their shift to digital purchasing and exhibit a stronger preference for e-commerce, WH Smith's heavy reliance on physical airport and railway locations is likely to erode long-term footfall and revenue growth, undermining the profitability of its travel retail-focused model.
  
• The increasing secular decline of physical print media and rising environmental sustainability pressures will reduce demand for key WH Smith product lines such as magazines, newspapers, and stationery, leading to a persistent contraction in high-margin categories and putting downward pressure on gross margins.
  
• Overdependence on high-traffic travel locations leaves the business acutely exposed to external shocks like travel disruptions, terrorism events, pandemics, or cyclical slumps in passenger volumes, creating the risk of severe revenue volatility and earnings deterioration in future downturns.
  
• Rapid international expansion, particularly in the United States, greatly increases execution risk for the group as it faces entrenched local competitors, complex regulatory environments, labor shortages, and significant currency fluctuations, which could result in inconsistent earnings and weaker returns on capital employed.
  
• As the cost base rises due to structural factors – including wage inflation, persistent staffing shortages, and rising commercial rents in premium airport locations – any inability to pass these costs onto passengers will result in structural compression of net margins and diminished free cash flow over the medium to long term.

WH Smith Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on WH Smith compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming WH Smith's revenue will decrease by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.4% today to 7.0% in 3 years time.
• The bearish analysts expect earnings to reach £120.9 million (and earnings per share of £0.98) by about July 2028, up from £7.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 192.9x 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 10.55%, as per the Simply Wall St company report.

WH Smith Future Earnings Per Share Growth

Risks

• Strong global growth in air travel and ongoing investment in airport infrastructure are driving higher passenger numbers and traffic, which create significant long-term opportunities to expand store count and potentially lift revenue across existing and new markets.
  
• The company's relentless focus on spend per passenger and adapting product mix (expanding into categories like food, health, beauty, and tech accessories) is driving successful like-for-like sales growth, supporting steady improvements in revenue and underlying net margins.
  
• WH Smith's aggressive and successful international expansion, especially in North America and Australia, is diversifying geographic risk and unlocking significant top-line and earnings growth potential over the medium and long term.
  
• Ongoing digital transformation, operational efficiency investments, and targeted IT upgrades are expected to improve cost structures, streamline operations, and drive sustainable gains in profitability and cash flow for years to come.
  
• The travel retail segment is supported by a stable, concession-based business model in high-barrier-to-entry environments (like major airports and hospitals), which provides predictable cash flow, operating leverage, and resilience, thus supporting long-term earnings stability and dividend growth.

Valuation

• The assumed bearish price target for WH Smith is £10.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of WH Smith's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be £1.7 billion, earnings will come to £120.9 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of £10.84, the bearish analyst price target of £10.0 is 8.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.