Are prospects brightening for WH Smith?

The short sellers are again targeting WH Smith, but analysts believe structural trends are finally moving in the newsagent’s favour.

Short selling in WH Smith has risen by 17.5% since the last week in June, with the proportion of its stock out on loan now at 11.42% according to publicly disclosed records – the highest on the FTSE and WH Smith’s highest level since August 2013.

The short interest reflects that the firm’s share price has risen by over 36% since August last year – though the shares have fallen by 8.7% since early April to 1,113p today, and short sellers are backing them to fall further still.

But this position is increasingly at odds with analysts who see a turnaround for the high street and travel retail sectors underpinning better performance for WH Smith and leaving the shares undervalued.

Last week, analysts at BNP Paribas reiterated its ‘outperform’ rating on the shares with a price target of 1,300p, while Oriel Securities underscored its ‘buy’ rating with a target of 1,250p.

This morning they were joined by Investec, which reiterated a buy rating with a target of 1,400 – a 31.3% premium on the shares’ current level.

So why the disparity?

The short sellers assume that WH Smith will inevitably fall victim to the growing power of online, meaning market share losses in its core lines of books, newspapers and DVDs.

The ongoing like-for-like sales falls of recent years seems to back that thesis up, but WH Smith has been able to increase profitability despite falling sales through cost cutting, efficiencies and scaling back its high-street operations.

Under new CEO Stephen Clarke the company is striving to make another £22m of cost savings over the next three years, but the real test is whether it can arrest its declining sales.

The signs at the moment look fairly positive. Ahead of the group’s full-year figures on 16 October, Investec said it expects to see improved Q4 like-for-like sales against Q3 as better air and rail numbers could translate to positive full-year travel like-for-like revenues for the first time since 2008. Additionally, Investec expects further high-street profit growth when the full-year figures come through.

A key plank of this positive momentum is the company’s foray into ‘food to go’, which the board is expected to talk up at its full-year results. This year Smiths is trialling expanded food-to-go ranges in key rail stations and hospitals and is partnering with Marks & Spencer’s Simply Food brand in some outlets.

Investec analysts concluded this morning: “With increasing exposure to a structurally growing international travel market and a cyclical upturn in UK Travel coming through, we expect upgrade momentum to continue in FY15E.”