Shares have gone into freefall at WH Smith after investors reacted in horror to the shock news of a £30m black hole in its profits.
The group revealed an accounting error had been discovered in the North American division during the preparation of the upcoming preliminary results.
WH Smith’s share price tanked by 41% as markets opened in London today, wiping £586m off the market cap and sending the stock to a more than 10-year low of 660.4p.
A surprise update detailed an overstatement in earnings in North America due to “accelerated recognition of supplier income”. Normally retailers would record these payments from suppliers for discounts and promotions gradually over time once the related sales take place.
The retailer, which runs more than 1,000 travel stores in airports and railways stations across the globe, said headline trading profits for the North American operation were now expected to be about £25m for the year to 31 August 2025, down from previous forecasts of £55m.
It means group profits before tax and non-underlying items for the year will be in the region of £110m, compared with market expectations for £140m.
WH Smith has instructed accountancy giant Deloitte to conduct a full-scale review into what has gone wrong. The group will provide more details when it publishes the annual results in November.
AJ Bell investment analyst Dan Coatsworth said the news was “nothing short of a disaster” and had “tarnished” what WH Smith would have hoped could be a fresh start for the business following the sale of the high street business to investment group Modella Capital earlier this year.
“The North American business is crucial to the company’s growth ambitions and the loose thread of an accounting error in this part of the group will create concern about a potential greater unravelling to come,” he added.
Kate Calvert at Investec highlighted similarities with the accounting scandal that hit Tesco in 2014, but pointed out WH Smith management were clear this was strictly a US issue and other divisions did not report in this way.
“The ongoing hit to WH Smith’s US profits is likely to be less than the impact on FY25’s profits, as the recognition of supplier income normalises back, but until the market has a clear view on underlying US profitability, the share price is likely to drift after an initial fall today,” she said.
Jonathan Pritchard of Peel Hunt said the WH Smith shares were likely to “remain friendless for some time”.
“It now transpires that this practice has been in place for some time in the US, and an investigation has been set up to root out historic overstatements,” he added.
“Management is clear it has no intention to change its growth strategy in the US, which is an aggressive store roll-out programme, but until there is clarity it is impossible to imagine that investors will give the equity story the benefit of the doubt.”
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