WH Smith Faces Uphill Battle to Restore Confidence Amid Accounting Scandal and US Uncertainty

WH Smith has entered a critical phase in its transformation, following the sale of its historic high street stores and a significant accounting blunder that rocked investor confidence and forced the resignation of its chief executive. Under Kate Swann’s leadership from 2003, the company made a remarkable pivot from struggling high street retailer to a profitable international travel retailer. Her strategy delivered tangible results, reversing losses of £135 million and recording profits of more than £100 million by 2013. The current leadership now finds itself tested by circumstances demanding similar resolve.

This year was set to be pivotal for the FTSE 250 retailer, following the completion of its shift to a dedicated travel retail business through the sale of its high street operations to private equity. Expectations for rapid expansion in North America were high, fuelled by substantial acquisitions including InMotion and Marshall Retail Group. However, an accounting error surfaced in August, revealing that profits in the North American division had been overstated for years. The resulting shock erased nearly £600 million from WH Smith’s market capitalisation in a single day and triggered a record fall in the share price, raising urgent questions about the integrity of its financial controls.

Auditors postponed signing off the annual accounts twice, reflecting the scale and gravity of the issue. Post-review, group profit before tax forecasts were cut to between £100 million and £110 million, down from pre-scandal estimates of £140 million. The North American division, once heralded as the primary driver of future growth, has seen profit forecasts reduced from £58 million to little over £5 million, with profitability now under intense scrutiny. Investors are seeking assurances that previous expansion plans were based on accurate performance metrics rather than inflated figures.

The response to the crisis is mixed. Institutional shareholders such as Causeway Capital, Artemis Investment Management, and Royal London have expressed a degree of relief that accounting failures did not extend beyond the US unit. The remainder of the business which operates 900 out of 1,220 global stores was effectively given a clean bill of health. Nevertheless, shareholders highlight ongoing concerns about transparency and the need for deeper clarity regarding North American operations. The full report by Deloitte has yet to be published and the Financial Conduct Authority may still investigate.

The transition to new leadership comes at a delicate time. Interim chief executive Andrew Harrison takes the reins with experience leading the UK travel division and previous senior roles at Manchester Airports Group. The North American business has also installed a new chief executive, Huw Crwys-Williams, and is reviewing regional management and board composition to bolster US retail expertise and tighten financial oversight. There are growing calls amongst shareholders for direct North American retail experience at the group’s highest levels to avoid the pitfalls of remote management and insufficient oversight which contributed to the crisis.

There are broader challenges to overcome. Margins remain thin and consumer demand is subdued, both in the UK and North America. Uncertainty over US consumer sentiment and travel demand, particularly following political changes, clouds the outlook for subsidiaries like InMotion. The board is also considering reclaiming bonuses paid to previous executives associated with the accounting failures, a step seen as essential for restoring accountability and confidence within the organisation.

WH Smith’s share price remains significantly below its levels at the start of the year, despite modest gains since the initial shock. Analysts warn that the path to recovery will be gradual. Sustained progress in stabilising US operations, restoring financial discipline, and rebuilding management credibility will be required to convince the market that the retailer’s international ambitions are built on solid ground.