Bottom Line: Smith's strategy has to prove itself

FOR THOSE who missed the message of the flamboyant green tie, Sir Simon Hornby spelt it out - he was ending his 12-year tenure as chairman of WH Smith on a high note. Christmas sales had been healthy, productivity gains are coming through across the business and he held out the promise of more to come.

Churlish as ever, the City begged to differ, marking the shares down 6.5p to 530.5p despite results in line with expectations. That may simply mean it has yet to come to terms with how dull British retailing has become.

WH Smith is doing most of the right things. Investment in new technology, such as scanning and distribution, pushed sales per employee up 10.7 per cent and profits 13 per cent. It is stressing value for money with the best, even leading the pack in areas like video. It is managing to hold its gross margin through a combination of better mix and higher volumes.

So far, however, the benefits are only showing in its distribution business, where costs are easier to manage and customers less fickle. It managed a 14.2 per cent rise in profit on sales just 4.2 per cent higher as margins expanded by three percentage points.

In UK retailing, however, margins slipped slightly from 5.6 to 5.5 per cent. While the group blamed that on higher depreciation following the investment programme, its lean and mean strategy has yet to prove itself.

On Do It All, the best news was that it is close to disposing of some of its sites. While that is likely to mean a hefty year-end provision, the company hopes the cash cost will be low, suggesting it has managed to avoid bribes like reverse premiums or picking up some of the rents.

Forecasts were shaved by about pounds 5m to pounds 122m before provisions, putting the shares on a multiple of about 17, below the sector average. While the excitement may be limited, the shares could still be worth tucking away.