WH Smith's share price dropped 42% on Thursday after the retailer announced it had discovered a £30 million accounting error in its North American operations. The mistake resulted in nearly £600 million being wiped from the company's market value, reducing it from £1.4 billion to below £900 million in a single trading session. The error was discovered while the company was preparing its year-end financial results for the period ending August 31.
The accounting mistake primarily involved the timing of income recognition from supplier arrangements, including rebates for meeting sales targets and payments for marketing activities. WH Smith had incorrectly recorded this income in the current financial year rather than deferring it to the next period. This premature booking of revenue led to an overstatement of expected profits in the North American division, which operates over 320 stores across the US and Canada.
The company immediately announced that it would engage Deloitte to conduct an independent review of its accounting practices. WH Smith stated it would provide further updates when it announces its preliminary results. The retailer emphasized that the problem appears to be contained within the North American business unit, which recently appointed Huw Crwys-Williams as its new chief executive.
Impact on Financial Forecasts and Profit Expectations
WH Smith revised its profit forecasts significantly following the discovery of the accounting error. The company now expects headline trading profit from its North American division to reach £25 million, down from previous market expectations of £55 million. This represents a substantial reduction that directly impacts the group's overall financial performance for the fiscal year.
The overall group profit forecast has been adjusted accordingly, with WH Smith now expecting pre-tax profits of approximately £110 million. Financial markets had broadly anticipated profits of around £140 million before the accounting error was discovered. While WH Smith had not published official forecasts prior to the mistake being found, analyst expectations provided a benchmark for measuring the impact of the revised figures.
The North American division's performance is particularly significant given the company's strategic focus on travel retail following the sale of its UK high street operations. The division had been contributing approximately 20% of the group's revenue in fiscal 2024, making its financial accuracy crucial for overall corporate performance. The accounting error has therefore affected not just the division's reported performance but also investor confidence in the company's strategic direction.
Details of the North American Operations and Accounting Practices
WH Smith's North American business operates a complex network of retail locations primarily focused on airports, along with various franchise arrangements. The company runs stores under multiple local brands and its InMotion chain, while also serving as a franchisee for major brands including Lego and Harley-Davidson. Additional operations include local brands such as Paradiso and Havana Sundries through the MRG business unit.
The supplier arrangements that led to the accounting error involve rebate systems and marketing payment structures common in retail operations. These arrangements typically include performance-based incentives where suppliers offer rebates when retailers achieve specific sales targets on certain products. The complexity of tracking and properly timing the recognition of these payments appears to have contributed to the misclassification.
The timing of income recognition is a critical aspect of retail accounting, particularly when dealing with conditional payments and performance-based rebates. The error suggests that WH Smith's systems for managing these complex arrangements may not have been adequately robust to handle the intricacies of its expanded North American operations. The mistake was discovered during routine year-end preparation, indicating it was caught through normal financial review processes rather than external audit procedures.
Market Response and Analyst Commentary
Retail analyst Nick Bubb commented that the profit warning had been poorly received by investors, drawing comparisons to previous retail accounting issues. He specifically referenced the Tesco accounting scandal from 2014, when the UK's largest retailer admitted to overstating profits by £326 million due to incorrect booking of supplier payments. Tesco's recovery from that incident took several years to complete.
Dan Coatsworth from AJ Bell described the accounting error as a significant embarrassment for WH Smith's management team. He noted that the mistake had overshadowed what should have been a positive period for the company following the sale of its struggling high street division to private equity firm Modella Capital. The high street business is being renamed TG Jones under its new ownership.
The market reaction reflects investor concerns about financial controls and accounting accuracy within retail operations. Both WH Smith and Tesco were audited by PwC, though there is no suggestion of wrongdoing by the advisory firm, which works with thousands of companies globally. The comparison to Tesco's situation highlights how sensitive investors have become to accounting irregularities in the retail sector, particularly those involving supplier payment arrangements.
Strategic Context and Recent Business Changes
WH Smith's recent strategic transformation involved divesting its UK high street operations to focus exclusively on travel retail locations. The company operates stores in airports, train stations, hospitals, and service stations, which benefit from captive audiences and typically generate higher profit margins than traditional high street retail. This strategic shift was designed to position the company for sustainable growth in locations with consistent foot traffic.
The sale of the high street business was completed for £76 million, though the company had to reduce the sale price by £12 million due to deteriorating trading conditions in the lead-up to the transaction's closure. This reduction occurred just one month before the accounting error announcement, adding to concerns about the company's operational performance and financial management.
The accounting error's timing is particularly unfortunate given the company's efforts to establish a new identity as a focused travel retailer. The 233-year-old British business had been working to demonstrate that its travel-focused strategy could deliver consistent returns for investors. The accounting mistake has now created additional challenges as management must address both the immediate financial control issues and maintain momentum in executing their strategic vision for the reorganized business.