WH Smith shares tumble after accounting blunder

WH Smith shares slumped 38% on Thursday morning following an accounting error which led it to overstate its North America profits.

The company has cut its profit forecasts in the region as a result and has ordered a review by auditors.

The firm said the mistake was because of an issue in how it calculated the amount of supplier income it received – essentially causing it to be logged too early.

Experts have said the error is a “huge embarrassment” for WH Smith which is looking for a fresh start after selling its UK high street division earlier this year.

The error means the group is now expecting a trading profit for North America of about £25 million for the year to August – a cut from the £55 million initially forecast.

As a result, the company lowered its outlook for annual pre-tax profits to around £110 million.

The company has asked accountancy firm Deloitte to conduct a review into the blunder. WH Smith said it will provide an update on this review alongside its full-year results.

AJ Bell investment analyst Dan Coatsworth said the error was “nothing short of a disaster”.

He said North America is crucial to WH Smith’s growth ambitions, and “the loose thread of an accounting error in this part of the group” will cause concern about further problems.

He added that the cut in profit forecasts “will cause huge embarrassment to management”.

“Investors will be sobbing into their cornflakes on the news.”

WH Smith, which is London-listed, sold its High Street arm to Hobbycraft owner Modella Capital in June.

As part of the deal, the WH Smith name disappeared from British high streets and was replaced by brand TGJones.

Meanwhile, WH Smith now trades exclusively as a travel retailer based mainly at airports, railway stations, hospitals, and service stations around the world.

Mr Coatsworth said these shops “benefit from a captive audience allowing the company to generate strong margins”.

“However, the US news has tarnished what WH Smith would have hoped could be a fresh start for the business.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said shareholders were “reeling” from the error.

“Getting it so wrong is not a good look and affects the reputation of the company.

“It’s particularly bruising for WH Smith given that it has its sights set on global expansion, with the US market a big part of its plans.”

Retail analyst Catherine Shuttleworth said WH Smith’s sale of its high-street retail business was largely predicated on its potential for North American growth, but the company faces stiff competition from chains like Walmart.

“Just buying and selling isn’t enough for high-street chains anymore,” she added.

“A lot of their money is now made from working with retailers, paying for listings for their products to be seen in stores.”

Chris Beauchamp, chief market analyst at IG, said the drop in share price show that “investors are fretting that this could be the tip of the iceberg”.

“Perhaps the reaction seems a little overdone, especially now it has shed itself of the underperforming UK High Street arm.”

He added that WH Smith “needs to get ahead of this situation as quickly as possible and make the necessary changes to rebuild credibility with the market”.