Business Briefing: WH Smith plays it by the book to lift profits

Retailer should post a 25% rise. Now the focus is on sales

What are people talking about?

When WH Smith announces its preliminary results on Thursday, the City will be expecting a 25 per cent increase in profits. But it will also be focusing on overall revenues and the prospects for growth.

"We know from WH Smith's trading statement that profitability is at the top end of expectations, so people will certainly be looking at revenues and at what the following year holds," said Ramona Tipnis, analyst at Numis Securities.

The company has undergone some huge strategic changes in recent months and the City is anxious to see what impact these will have on revenue.

What does the future hold?

Analysts are expecting to see continued improvement from WH Smith's revitalised book departments. "Books began improving about a year ago and are an important part of future growth," explained Ms Tipnis. "They currently account for roughly 30 per cent of store sales."

She added that books at WH Smith had been performing well at a time when booksellers in general had been suffering the effects of competition both from online booksellers such as Amazon and cut-price supermarket sales. But WH Smith's competitive pricing and astute choice of titles was proving a success.

According to Ms Tipnis, the company is employing a shrewd strategy in the positioning of post offices within its stores, placing them so that customers will have to pass through stationery in order to reach them.

The Post Office agreed to open outlets in 70 WH Smiths following a trial in six of the retailer's stores. The Post Office sees this strategy as a way of continuing to provide services in locations where traditional branches are closing.

"Incorporating post offices is a good move for WH Smith as it will increase footfall in the stores," said Ms Tipnis.

Analysts expect the company to have installed the majority of the 70 post offices by autumn 2008. The retailer is scaling down its DVD and CD departments to allow more space for books and stationery.

There is also bullishness among analysts about the prospects for the WH Smith Travel network. This has traditionally comprised over 200 shops in key rail and air locations. The City is keen to hear news of WH Smith's 50 new travel stores in Moto Hospitality and Swayfield Group's motorway services areas. The majority of the 48 Moto stores will be opening this year.

What will the figures show?

Analysts are predicting a pre-tax profit of £63m for the year ended August 2007, an improvement on £51m the previous year.

But some analysts, such as those at Deutsche Bank, are taking the company's pre-close trading statement – that the results should be at the top end of market expectations – to mean it may report a £64m profit.

Deutsche predicts that although profits will be up, sales will have fallen 4 per cent to £1.29bn from £1.34bn in the previous year. It is estimated that earnings before interest, tax and amortisation for high-street retail will be £46m, a 9 per cent rise, and that travel retail will have increased by 16 per cent to £36m.