Shares in WH Smith (SMWH) slumped 42% on 21 August, the second worst one-day fall ever among the current batch of UK-listed mid and large-cap retailers according to analysis by AJ Bell, after the travel retailer said it had uncovered a £30 million accounting error in its North America operations.
This major accounting gaffe and associated profit warning represent a big blow to the credibility of the FTSE 250 retailer, which has slimmed itself down through the recent disposal of its structurally-challenged UK high street division to Modella Capital and the sale of online greeting cards business Funky Pigeon to Card Factory (CARD) for £24 million in cash.
WH Smith’s board has instructed Deloitte to undertake an independent and comprehensive review of the accounting clanger, but investors will be wondering if the accounting blip is the tip of an iceberg of other issues. The retailer will also now be under pressure from shareholders including activist investor Palliser, which recently flagged the potential for 60% to 90% upside for the shares over the next three years, to address the accounting issues and rebuild trust with the market.
WH Smith said that while preparing its results for the year ending 31 August 2025, it identified ‘an overstatement of around £30 million of expected headline trading profit in North America’, largely due to the ‘accelerated recognition of supplier income’ in this division. In plain English, this refers to incorrectly booking rebates or payments from suppliers.
As a result, WH Smith now expects this year’s headline trading profit from the North America division to come in at roughly £25 million, down from previous market expectations of around £55 million. For the group, full-year pre-tax profit is now seen ‘in the region of £110 million’, implying a near-35% year-on-year decline from the previous year’s £166 million haul.
Accounting issues can be harder to comprehend than disappointing sales figures and they leave investors wondering if there are more skeletons in the closet at WH Smith. There are similarities between WH Smith’s warning and Tesco (TSCO) in September 2014, since they both overstated profit and cited the ‘accelerated recognition of income’.
Dan Coatsworth, investment analyst at AJ Bell, said: ‘Bargain hunters might now be prepared to buy WH Smith following its accounting warning given the shares fell to a 12-year low. However, there are more questions than answers following its shock warning. Principally, does the accounting issue mean investors can no longer trust historic profits for its US arm, and has the company made other accounting errors?’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Tom Sieber) own shares in AJ Bell. James Crux has a personal investment in Card Factory.
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