Smith shares plunge 16%

There was more bad news on Britain's beleaguered high streets yesterday when WH Smith, one of the country's leading retailers, issued a profits warning.

The company blamed difficult trading conditions and intense competition from the supermarket operators for a fall in performance at its main WH Smith stores but said its other divisions such as Our Price records and Waterstones bookshops were trading well.

The warning wiped 16 per cent of the value off WH Smith shares and dragged other retail stocks down. WH Smith shares finished 65p lower at 351p. John Menzies shares slid 14p at one stage before recovering to close 2p down at 537p. John Menzies was forced to issue a trading statement of its own which said that while it, too, was experiencing difficult conditions on the high street, its profits for the year should be "satisfactory".

Sir Malcolm Field, chief executive, said: "The sector has been pretty flat; people are not spending as much in our categories. Sales in WH Smith retail were 1.3 per cent down whereas we expected them to be up."

Problems centre on the main WH Smith high street stores, where profits this year will be pounds 14m lower than in 1994. Group pre-tax profits are now expected to be only pounds 115m compared with last year's pounds 124m. Analysts had been expecting group profits of at least pounds 128m.

The company blamed lower consumer spending in the non-food sector and reduced consumer traffic on the high street for the decline. However, it admitted the expansion of supermarket operators such as Sainsbury, Tesco and Asda into the newspaper and magazine sector had also affected sales.

Kwik Save, the discount supermarket group with nearly 1,000 stores, is discounting a range of magazines by up to 20 per cent and plans to extend the offer to more stores.

Smith's has also been selling more lower-margin products such as music and videos rather than items with higher mark-ups such as stationery, greeting cards and books.

The company denied that the National Lottery had been a contributing factor. Smith's has lottery machines in 290 of its 500 outlets but says the only effect was increased costs as more staff had been recruited to man terminals.

WH Smith emphasised that trading difficulties were restricted to its core business. Other divisions such as Our Price Music, Waterstones bookshops and the Virgin megastores were doing well. However, some analysts feel branches of Waterstones and Our Price have been taking sales.

WH Smith had warned in January that trading was difficult and that it did not expect an improvement in the second half. However, the profits warning caught City analysts by surprise.

Julie Ramshaw, retail analyst at Morgan Stanley, said: "We were expecting to be disappointed but we didn't think it would be this bad."

John Richards, of NatWest Securities, said bad news was expected and that there would be more to come. "It is confirmation of long-held concerns that stores such as Woolworths and Superdrug which sell low-price commodity products are facing strong competition from the superstores."

There are also concerns that WH Smith management, often viewed as stuffy and remote, has been slow to adapt to change.

Sir Malcolm responded: "I don't think we've been slow taking action. We may have been slow to see the profit decline coming."

To combat the problems, WH Smith is expanding its Multimedia sections from six to 50 outlets by September, adding children's themed areas to 100 stores and doubling its advertising spend to pounds 10m this year.