Shares of WH Smith plunged by nearly 40% on Thursday after the travel retailer revealed it had overstated earnings at its North American division, forcing a steep downgrade to its annual profit forecast.
The company said a financial review found that supplier income in the region had been booked too early, inflating headline trading profit expectations by around £30 million ($40.34 million).
The discovery has cut expected profit for the division to roughly £25 million, less than half of the previous estimate of £55 million.
As a result, WH Smith now anticipates group pre-tax profit for the year ending August 31 will be about £110 million, sharply lower than the £156.9 million forecast by analysts polled by LSEG.
Independent review launched; shock compared to Tesco profit overstatement
The company said it had instructed Deloitte to conduct an independent and comprehensive review of the accounting issue.
“The group will provide a further update at its preliminary results announcement,” WH Smith told investors.
The profit warning has rattled investors and revived memories of past accounting scandals in the UK retail sector.
Analyst Nick Bubb said the announcement “went down like a lead balloon with investors” and compared the shock to Tesco’s 2014 profit overstatement, though there is no suggestion that WH Smith’s case is linked to similar practices.
Tesco revealed in 2014 that it had overstated profits by £326m after wrongly booking supplier payments tied to marketing and sales targets, a scandal that took years to overcome.
WH Smith’s accounting error is not linked to the same issues.
Market reaction and debt concerns
The sharp sell-off sent WH Smith shares to their lowest point since March 2020, making them the biggest percentage decliners on the FTSE mid-cap index.
The news comes just months after the company sold its UK high street operations to focus fully on its travel retail business.
North America, its second-largest market, has been a key pillar of growth, accounting for about 20% of group revenue in fiscal 2024.
However, its aggressive expansion there has coincided with rising debt, putting pressure on cash reserves at a time of heightened global economic uncertainty in the travel sector.
Analysts say development to pressure share price in the near term
Market commentators warned that the accounting error could undermine investor confidence.
JPMorgan analysts said the development was “a big negative surprise” and warned that questions over accounting transparency would linger, weighing on sentiment in the near term.
“This raises a number of issues around its accounting, which are unlikely to be explained straight away and are likely to be a drag on the shares in the meantime,” they said.
AJ Bell’s Dan Coatsworth called the update “nothing short of a disaster,” adding it would fuel fears of further problems.
“WH Smith needs to get ahead of its North American unit accounting issue quickly and make the necessary changes to rebuild credibility with the market,” Coatsworth said.
RBC analysts, however, struck a more measured note, saying WH Smith should be able to recover most of the overstated profits in future years, with the immediate impact limited to a small hit on cash.
They added that WH Smith has the potential to return to strong long-term travel growth with cash returns, but this is taking longer than they expected.
For now, WH Smith faces the challenge of reassuring investors that its controls are robust and that its North American expansion, a central plank of its growth strategy, can remain on track despite the setback.
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