Bottom Line: Do It All should do the sensible thing

SIR SIMON HORNBY, chairman of WH Smith, was determined to restrict questions about the appalling performance of the Do It All chain at yesterday's results presentation. Unfortunately, that merely underlined how much difficulty the group is facing in coming up with the answers.

Its claims that the new, project-oriented format, which will be installed in 53 of the 220 stores by February, is doing well raises the question of why the conversion programme is proceeding so slowly.

Perhaps the answer lies in WH Smith's reluctance to spell out the level of sales increase being achieved - let alone which comparatives it is using for the claim that the increases are close to double figures. Given that overall sales fell 7.3 per cent, such assertions merely emphasise how bad the rest of the chain must be.

WH Smith and its joint venture partner Boots appear to have resigned themselves to some closures when a strategic review is completed in the autumn. It should think about closing them all.

The costs sound horrendous - a possible pounds 300m in asset write-offs, assumption of off-balance-sheet debt, redundancies and other burdens - but less than pounds 200m of that would be cash flowing out of the business. It would, of course, make a large dent in WH Smith's balance sheet but, with gearing static at 17.8 per cent, it is strong enough to stand it.

Split between the two partners, and with interest rates at their current low levels, it is difficult to envisage closure being other than earnings-enhancing. It will take a dramatic recovery in the housing market, not to mention a sea-change in consumers' attitude to the chain, before Do It All's performance has the same effect.

It would also focus investors' attention on how well the rest of the business is performing. Despite a pounds 5m increase in the Do It All loss to pounds 14.3m, and a disappointing first half, it still managed to increase profits by 5.3 per cent to pounds 113.8m.

That was partly due to the pounds 4.6m profit on the sale of its stake in Yorkshire Television, but it is also reaping the benefits of tight cost management.

Margins improved to 6.3 per cent in the second half, compared with 5.6 per cent for the year as a whole - well below the 11 per cent earned by Boots, whose fast-turnover, low-price products are similar, but still a step in the right direction.

The sales increases enjoyed in the second half have continued, albeit at below the bumper 14 per cent seen in May, and WH Smith is optimistic that the trend is now firmly, if unspectacularly, upward. That makes forecasts of about pounds 125m for the current year look achievable and puts the shares, up 16p at 471p yesterday, on a multiple of about 15.

While Do It All and the looming Monopolies and Mergers Commission report on newspaper distribution will continue to be a brake on the shares, there should also be limited downside at these levels.