The Investment Column: WH Smith finds its footing again

Last year represented the nadir of WH Smith's fortunes, with a thumping pounds 200m loss, the first deficit in the group's 204-year history. After that experience what the company needed yesterday was a solid, almost boring set of results to show it was on a stable footing and heading in the right direction, however slowly. That is exactly what the market got. Margins are still poor for a retailer with such strong brand names and sales growth is feeble to say the least. But there were signs of gradual improvement.

Group like-for-like sales did show some growth, albeit a paltry 2 per cent. Net margins rose by a full percentage point at the core WH Smith chain and across the group they edged up from 2.6 per cent to 3.4 per cent.

Since taking over a year ago the chief executive, Bill Cockburn, has effected most of the textbook moves to reform WH Smith. Underperforming non-core businesses such as Do It All, the Niceday business supplies operation and the Playhouse video stores havebeen sold or closed. The jury is out on The Wall, the loss-making US music chain. The expensive Chelsea headquarters has been vacated and the pruning shears taken to the central HQ headcount.

The huge ranges at the core Smith's chain have been edited and the number of suppliers cut. The result has been higher sales and more space for more productive ideas such as the Discovery children's zones which group together, books, toys and multimedia products. All this has pleased the market and the shares have been on a largely upward trajectory since their low of 325p in mid-1995. They closed 4.5p higher yesterday at 434.4p.

But looking forward the going will become harder. The key question is can the group drive sales growth? So far Smith's seems to be struggling in this area and sales fell at Virgin Our Price and The Wall. WH Smith's market share is down in music and video and flat in stationery and magazines.

It is still the core WH Smith chain that holds the key to the group's future. A redesign might help and the new logo might give a fresher look. But the market will be looking for sales growth sooner rather than later.

The performance at Virgin Our Price is particularly woeful. Like-for- like sales fell by 2 per cent compared to double-digit growth at HMV. And the group turned last year's first-half profit into a pounds 1.4m loss this time.

The company blames lack of blockbuster new releases but this is only part of the problem. The group is losing market share to Woolworths and the supermarkets. Fortunately Waterstones continues to perform well.

So far, so good but a full WH Smith recovery is by no means certain. On analysts' profit forecasts of pounds 125m this year and pounds 145m next the shares trade on a forward rating of 15 falling to 13. A good hold, but not worth chasing.