WH Smith optimistic despite profits fall

WH SMITH yesterday reported a fall in first-half profits but cushioned the blow with upbeat comments about prospects for the core high street brand and its fledgling Internet service.

However, the results were overshadowed by the announcement that Open, the interactive digital television service, has signed up six new content providers including Smith's, which will start selling books via the new medium in September. Smith's will later expand its product offering on digital television to include various "educational products".

Smiths has been selling books and CDs through its own site on the Internet for some time and this week launched WH Smith Online, a new free Internet service provider to rival Dixons' Freeserve.

This so-called "Internet factor" has put a rocket under the company's shares, which have soared by 50 per cent since the start of the year. All this has made valuing Smith's difficult.

SG Securities reckons the online business could be worth around pounds 200m, or 80p per share of the current share price, down 25p at 731.5p yesterday. The company could build up significant revenues, say pounds 20m a year, from product sales and banner advertising on the sites, pushing the value still higher.

The unknown in all this is how much cannibalisation there will be from the online sales on Smith's stores. Books and CDs are among the most popular items bought on the Internet although Smith's may find it can target a new, younger audience via its interactive media while still catering for its more traditional customer base through its stores.

While Smith's surfs the Internet learning curve it is also making gradual progress with its core business. Although group profits fell from pounds 128m to pounds 105m in the half year, trading profits at the core Smith's high street business improved by 10 per cent to pounds 73m.

Margins edged up by one percentage point and book sales increased by 5 per cent. This is the first time in around 20 years that the group has increased market share in this key sector.

The average spend is still too low and the integration of the John Menzies stores has been slower than expected. It is also important for the group to stabilise the news distribution business where profits were hit last year due to the loss of a big contract. Looking forward there is till lots of room for improvement in both margins and average customer spend.

Culturally Smith's may seem an odd company to be adopting such a pro- active Internet strategy but it is right to be swimming with the sharks given how vulnerable its core business could be to Internet sales erosion.

On SG Securities full-year forecast of pounds 135m the shares trade on a forward multiple of 19. Given the stratospheric rating of Dixons at the moment that does not look expensive.