WH SMITH PROFITS UP 39 PER CENT
WH Smith Group plc today announced its preliminary results for the year ended May 31 1997.
The highlights are:
- Sales from continuing operations - £2.75bn up 4%
- Like for like sales from continuing operations - up 3%
- Profit before exceptional items - £124m up 39%
- EPS before exceptional items - 29.5p up 54%
- Dividends - maintained at 15.65 pence
- Exceptional item - £73m pension fund prepayment write-off
- Gearing - improved to 8% from 26% (average gearing for year improved to 34% from 58%)
- Current trading - first eleven weeks of new financial year, like for like sales up 7%
Chairman, Jeremy Hardie, said: "These results represent the progress of the recovery programme announced in June 1996. So far they mainly reflect cost savings and improved efficiency together with the successful disposals of non core businesses and surplus assets. The results also show good performances from WH Smith News and Waterstone's. In addition, during a difficult period of restructuring, we have begun laying the foundations for better long term performance from WH Smith Retail, while expanding and developing our other businesses.
"Overall our performance represents an encouraging start to the work we are undertaking and we view the prospects for the current year with confidence."
REVIEW OF RESULTS - Year ended May 31 1997
The profit before tax (excluding exceptional items) has been increased to £124m from £89m - up 39 per cent. Sales from continuing operations have been increased to £2.75 billion - up 4 per cent.
Earnings per share (excluding exceptional items) have been increased to 29.5 pence - up 54 per cent.
The results reflect the first stage of the implementation of the recovery programme announced in June 1996. Actions to improve efficiency have resulted in cost reductions of £14m. The disposal of non core businesses and surplus assets has also contributed £17m to the improved profits, (including interest benefits).
WH Smith Retail experienced problems in achieving target levels of buying and stock management efficiency resulting in year end stock being £20m above plan. The profits are after a provision of £6m for the cost of realising slow moving lines and plans have been developed to progressively achieve more satisfactory stock levels, while improving in-store availability for key products.
Work has continued on developing the WH Smith Retail organisation with UK Travel Retail and Supply Chain Services being established as separate entities. During a difficult period of restructuring, sales have grown by 1.5 per cent and profits by 5 per cent. There have been strong financial performances from WH Smith News and Waterstone's. The USA Travel Retail business, Virgin Our Price and Waterstone's have been significantly expanded.
Progress has been made in strengthening the balance sheet and year end gearing was down to 8 per cent.
WH Smith Retail
Sales were up 1.5 per cent at £788m. Profits increased to £43m from £41m.
Profits are after a £6m stock provision and loyalty card set up costs of £2m.
During the year the business has undertaken a major reorganisation - with new organisational structures and the strengthening of the management team. The product range has been reduced and we are focusing on new product development. We now aim to enhance customer service and improve the efficiency of store operations and distribution.
Six new stores have been opened, including The Fort (Birmingham), Leeds White Rose and Harrogate.
Beverley Hodson was appointed Managing Director on 2 June.
UK Travel Retail
UK Travel Retail, currently comprising 96 airport and station stores, is being set up as a separately managed business to focus on the higher margin opportunities available in the travel market.
Sales were up 7 per cent on last year at £122m and profits increased by £0.5m to just over £5m.
Over the last three years the business has experienced 7 per cent annual sales growth, underlying the potential for this business.
Sales have grown by 11 per cent to £200m. Sales growth on a like for like basis, after adjusting for new store openings, was 8 per cent. Profits rose to £20m from £15m - with net margins being improved to 10 per cent.
Eight new stores were opened, adding a net 35,000 square feet of selling space. The business now operates from 106 stores. Waterstone's will open its new 28,000 square feet Glasgow store in September. This will be the largest bookstore opened in the UK for over 50 years.
The business has announced plans for expansion through smaller stores and through English language book retailing in Europe. Waterstone's has also commenced trading on the Internet.
Virgin Our Price
Sales were up 2 per cent on last year at £451m. However, like for like sales were down 3 per cent, reflecting difficult conditions in the sector. Profits were down £4m to £14m. Second half profits were stabilised at £15m.
During the period, 23 new Virgin stores were opened and 19 Our Price stores were closed. The expansion has resulted in a net additional 90,000 square feet of selling space - an increase of 10 per cent, and included new Virgin Megastores in Leeds, Peterborough and Watford. Over half the turnover now comprises sales from stores trading under the Virgin brand.
USA Travel Retail
The North American Travel Retail business, comprising hotels and airport stores, achieved good volume growth. Sales reached £153m - an increase of 12 per cent, with like for like sales up 7 per cent. Profits rose by £1m to £10m - with the results for the year reflecting additional start up costs as the business is developed.
During the year airport retail contracts were signed for Chicago, Los Angeles international terminal and New Orleans. The business also entered the lucrative Las Vegas market with the signing of a 5 year contract to run retail stores in the New York New York hotel and casino.
The business has been operating two stores in Singapore Airport and has recently been awarded a 5 year contract to operate 5 book and gift shops in the new airport in Hong Kong which will open in the Spring of 1998. Work is continuing on further opportunities for development.
The USA music retail business broke even in a very weak market. Plans for this business will continue to be examined as the market recovers.
WH Smith News
The WH Smith News business, which distributes magazines and newspapers, produced strong results with sales of £928m - up 5 per cent. This was helped by strong sales of men's magazines.
Profits were increased to £44m, up £9m (26 per cent), including £4m of costs savings.
Work is continuing to improve operational efficiency, to develop new systems and processes and to improve services to customers, distributors and publishers.
Total capital employed at the year end amounted to £404m. This has been reduced since the end of the previous financial year from £511m.
Following a review of property values, the carrying value of freehold and long leasehold properties has been written down to £98m. The write down of £21m has been taken against the relevant valuation reserve surpluses from the 1990 revaluation.
The company has reduced its long term investment in freehold and leasehold properties and has realised £55m from sale and leasebacks. It has also realised £62m from surplus asset sales and the settlement of outstanding amounts for prior period disposals.
A consolidation of the company's banking relationships and a restructuring of its financing facilities has recently been completed. Total committed bank facilities amount to £350m, all of which were unused at the year end. The average maturity of the committed facilities is 4 years.
Net debt at the year end amounted to £31m, down from £105m. Average net debt for the year was £140m - down from £220m.
At the year end net debt represented 8 per cent of total equity - improved from 26 per cent. Average gearing was 34 per cent, improved from 58 per cent.
Interest cover has been improved to 14.9 times (from 5.9 times) and fixed charges cover to 1.6 times from 1.5 times.
Because of a surplus in the group's main pension fund it has not been necessary to make employer contributions to that fund since 1989. During the year the accounting variation to regular cost was equal to the regular cost - with the result that a nil pension cost has been charged to profits. In prior years the variation to the regular pension cost arising from pension fund surpluses has been greater than the normal regular cost. In accordance with the relevant accounting standards this difference has been accounted for as a profit in each year's accounts resulting in a pension prepayment of £73m in the balance sheet as at June 1 1996.
In the Budget on July 2 1997, the Government announced that pension funds will no longer be able to recover Advanced Corporation Tax suffered on dividend income. The impact of this significant change is currently being evaluated in connection with the triennial actuarial valuation as at March 31 1997 which is yet to be finalised. However, the fund valuation is now subject to significantly increased uncertainty over the basis of valuation and the amount of any surplus.
Under the group's previous accounting practice and assumptions, the net pension cost for the period would have been a credit of £2m. Based on preliminary estimates of the impact of the tax change it is considered appropriate to record a net pension cost of nil in these accounts. Whilst the preliminary valuation estimates indicate a potential continuing surplus in the fund, in view of the long term uncertainties relating to the surplus as a result of the tax change, it is prudent to write-off the prepayment of £73m as an exceptional item and not to recognise negative pension costs for the present. The tax effect of this write-off is to reduce deferred tax liabilities by £14m which has been reflected as an exceptional tax credit in the accounts.
At the beginning of the year the company brought forward a prior year provision of £73m to cover redundancy and property costs and £42m to cover WH Smith Retail stock.
During the year, £44m of the redundancy and property provision was utilised - comprising cash spend of £28m (redundancy costs of £13m, costs associated with vacant premises of £12m, including rent of £3m, and other costs of £3m) and fixed asset write-offs of £16m.
WH Smith Retail has also been working on the clearance of accumulated prior year redundant stock which has been achieved in line with the provision established last year. No profits have been recognised on the sale of stock written down.
The remaining reorganisation provision comprises £25m, as at May 31 1997, for the cost of vacant properties and £4m for committed restructuring costs.
Operating free cash flow amounted to £33m (1996 - £28m), after cash spent on reorganisation of £28m.
Capital investment amounted to £65m (1996 - £95m) mainly relating to the expansion of Waterstone's and of the Virgin Megastores.
Cashflow was adversely affected by £20m of stock above target levels in WH Smith Retail and by £30m arising from the timing of cash payments to suppliers at the year end, compared with the previous year.
The current year has started on an encouraging basis with sales for the first eleven weeks up 9 per cent with like for like sales up 7 per cent. WH Smith Retail sales are up 3 per cent (like for like up 2 per cent). Sales to date normally represent approximately only 15 per cent of total sales for the year and is too early to say that the trends will continue for the full year.
The proposed final dividend is maintained at 10.4 pence per share - giving a maintained total dividend of 15.65 pence per share. The dividend was covered by earnings 1.9 times, against 1.2 times in the previous year.
The board anticipates introducing a progressive dividend policy as the company's financial performance improves and when an appropriate level of dividend cover has been achieved.
CHANGE OF YEAR END
The board has reviewed the current accounting reference date of May 31. This gives rise to a six month reporting date of November 30 - which is during the peak pre-Christmas trading season.
The board has decided to change the year end to August 31. As a result the next accounting period will be the 15 month period to August 31 1998.
It is intended to report results for the 6 months to November 30 1997, the 12 months to May 31 1998 and the 3, 12 and 15 months to August 31 1998. Supplementary information will also be provided for the 12 months to August 31 1997 and the 6 months to February 28 1998.
An interim dividend will be paid in April 1998 (in connection with the six months to November 30 1997) and in October 1998 (in connection with the six months to May 31 1998 but comparable with the previous final dividend). A final dividend will be paid in January 1999 (in connection with the stub period to August 31 1998). Subsequently interim dividends will be paid in July and final dividends in January.
Advisory to editors:
The above press release, and the accuracy thereof, is wholly the responsibility of the originating company. Under no circumstances shall UNS be liable for any loss resulting from the use of information contained herein. All facts should be independently checked.
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