WH Smith’s Funkypigeon outlet at Paddington Station

WH Smith seems to be doing its best to disprove the theory that a business can’t cut its way to success.

The newsagent today posted an 8% increase in full-year pre-tax profit, despite a 3% decline in like-for-like sales as it once again turned the screw on costs.

The cost-cutting strategy – and WH Smith today said another £21m of cuts are on the way over the next years – has delivered sustained profit growth, but many investors seem to think the situation cannot last.

WH Smith remains the FTSE’s most shorted stock, according to publicly released information compiled by the FCA, with 11.6% of its shares out on loan – touching the highest level of shorting since May 2013.

Ruthless cost cutting to protect (and grow) margin is generally viewed as something of a short-term measure as eventually it will inhibit growth potential and chip away at the core capabilities of a business.

So why should we believe that WH Smith can continue bucking the market’s conventional wisdom?

Certainly, there is plenty of anecdotal evidence in recent years that the focus on costs has not helped the reputation of WH Smith’s retail outlets. Joseph Robinson, research director at Conlumino, today noted the “constant criticism levelled at the customer experience and, in particular, the condition some of the retailer’s stores”.

However, criticism of WH Smith’s in-store standards seems rather uncharitable when you look at the fate of some of its fellow UK high-street stalwarts like Woolworths or HMW. The newsagent chain found itself with vast swathes of high-street space, selling low-margin products to a customer base that was rapidly shifting to online purchasing and media consumption. It is little surprise that the company has reacted by cutting its cloth accordingly.

Painting WH Smith as cutting its way to profitability also does a disservice to the significant strategic changes it has made and which are still underway.

The retailer has not just shifted its focus from high street to travel outlets (last year it launched 30 new travel stores taking its total to 596), it has also looked to maximize space utilization, moved its product mix toward higher-margin categories, and driven income from third-party partnerships, such as Kobo shop-in-shops, post offices and Funkypigeon.

Conlumino’s Robison comments: “As some of its regular customers would no doubt testify, WH Smith is far from the most glamorous player in UK retail. However, its operational strengths and strategic focuses are to be applauded. Primarily an entertainment retailer, faced with a shrinking sector, WH Smith did what many, such as HMV, failed to do and bit the bullet; it began to diversify, bringing in new product categories and tapping into the travel space.”

There are signs that WH Smith’s future might include some elusive revenue growth, too.

Its travel business had flat overall like-for-like sales, but like-for-like sales edged up 1% in the second half – in what Investec called the company’s “highlight of the year”.

“Travel remains the driver of group growth,” Investec’s analysts said. “We see [the company] increasingly as a play on International travel as this division builds critical mass.”

The signs are that WH Smiths sees itself this way too. While cuts focus on the high street, the company has pledged to grow its international footprint. The retailer said it had made progress in its primary hubs of Australia, South-East Asia, Middle East, India and Europe, and now has 138 units open across four channels (air, rail, hospitals and malls), with a further 27 units in the pipeline.

This morning it also announced it would extend its WH Smith LOCAL franchise concept to 30 stores, along with the trial of a small number of budget greeting cards stores to be called Cardmarket. It is also expanding its partnership with Marks & Spencer; it opened four more M&S Simply Food units last year, and further openings are planned.

It is certainly true that growth is unlikely to occur quickly in its high-street estate and significant investment to modernise some of the tired shops is even less likely. So it is probably still fair to view WH Smith as quite an old-fashioned retailer. But it is by no means standing still or just cutting until there is nothing left to cut.

Given the recent share price plunges of the supermarkets, it seems the short-sellers may have bet on the collapse of the wrong retail institution.