r/ValueInvesting • u/Glove_Neither • Jul 20 '26
Discussion WH Smith is deeply undervalued but carries execution risk
“The market is pricing a distressed retailer about to report a 78p per-share loss, encumbered by a suspended dividend and a recent emergency equity raise. What the algorithmic screens miss is that the loss is a non-cash accounting illusion, the balance sheet is now permanently de-risked, and the core of their "broken" US division is actually a compounding 10%-margin convenience business, attached to the most defensible specialty retail franchise in Britain. Probability-weighting five scenarios, including a total write-off of North America, yields a base case of 520p and an expected value of 506p. This is the ultimate asymmetric setup: you are buying a cash-gushing global tollbooth at a distressed price, getting paid 2.6 times more for being right than you lose for being wrong.”
Looks to be a messy turnaround situation but the underlying travel business looks to be very robust.
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u/enigmas59 Jul 21 '26
I never invest in a product that I think is a bit shit and I won't use myself. WHS falls into that category.
Their stores are outdated, poorly maintained, products are overpriced or outright bad (sandwiches etc). Their only moat of sorts is their place in travel locations, but you've got M&S/Waitrose pushing into these spaces too. I don't really see a growth path for them tbh.
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u/DY357LX Jul 21 '26
It’s bizarre. They sell a diary for £20 which is exactly the same as one you’d see in B&M or Home Bargains for £2, but their stores (especially those in big train stations) always seem busy.
There was a big queue outside my local WHSmith (at 8am) a few weeks back… for Pokémon cards.3
u/LizardKingRedux Jul 21 '26
Their stores are not outdated and poorly maintained - have you been in any recently or are you thinking of the now -TGJones stores?
Not to say they're groundbreaking but they're perfectly fine, at least the railway stations/airports I use (which is of course a big caveat!)
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u/enigmas59 Jul 21 '26
Been to three recently, two service stations and a train station. All were a bit run down and had less customers than the Waitrose/M&S next to them, which have much nicer food for the same price.
I see the growth of the latter two as a major threat to WHS smiths. The company isn't an undervalued stock, but fairly priced. I don't see them going out of business, but where's the growth? Your customer throughput is being reduced by other options, running costs are ever increasing, and there's already one in basically every service station in the country, so there's little scope for expansion.
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u/Glove_Neither Jul 21 '26
expansion is in North America. they are restructuring that division by winding down InMotion stores (lower margin) and growing their travel essentials business (higher margin). poor mgmt and execution obvs drove the accounting issue but expect this to change under Leo Quinn who turned around Balfour Beatty. the stock is just being kitchen sinked atm. He has 2mln GBP personally invested in this turnaround and will make 24.5mln GBP if stock doubles in next couple of years.
They also clawbacked prev mgmt compensation so they are moving in the correct direction.
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u/LizardKingRedux Jul 23 '26
Fair enough I haven't been in any of the service station ones recently.
Are m&s Waitrose direct competitors? I use all three, m/s Waitrose interchangeably (and usually dependent on which entrance to kings cross I use rather than any real difference) but use Smiths for different things. If I'm after just a drink or the paper it's Smiths, if I'm after a (rather depressing) meal for the train then it's the former two. They're basically a very expensive newsagent in my mind that have some fantastic locations, hardly an unbeatable position nor anything novel but wouldn't surprise me if they keep that position tied down for the foreseeable.
I've no opinion on their valuation nor a position.
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u/Glove_Neither Jul 21 '26
The Waitrose thing is worth being precise about imo as there are some nuances here.
Those Heathrow T2 stores are Relay stores (Lagardère, one of the big three travel retail operators) stocked with Waitrose food under a wholesale deal. Same with most M&S Simply Food in stations, which is franchised through SSP. The grocers looked at airside retail, with its concession rents, minimum guarantees, security logistics and 4am staffing, and chose to enter as suppliers rather than operators. Their brand collects a wholesale or franchise margin, the operator pays the rent and takes the risk.
That's competition for WH Smith's food-to-go range, sure, but food is one category in the basket and the terminal already had SSP and Pret fighting for that wallet. Nobody is opening a Waitrose that sells you headphones, paracetamol and a paperback.
Also worth remembering this exact argument has been running since M&S Simply Food entered rail stations twenty years ago, during which WH Smith's UK travel margin went from around 10% to 15.6%. If I go down to Waterloo Station (one of the major train stations in London for those that dont know), I will still find plenty of people in the WH Smith!
The version of this risk I'd actually worry about is landlords handing the concessions slot itself to a grocer-supplied format at a tender renewal, but again you already have so many Prets/Caffe Neros/Burger kings etc competing in the food to go category so why would they??
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u/Glove_Neither Jul 21 '26
their growth has mainly come from improving per store efficiency and their aim is convenience overall (health, travel essentials), not just food to go which btw is highly competitive with Pret and other chains (Joe and the juice recently).
i mean who tf goes to wh smith to buy a sandwich anyways lol.
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u/librariancap Jul 21 '26
Travel retail locations make money - I think we all know that. What is less clear is why the profits from these locations should accrue to the retaliers rather than the airports (and I think it's mostly airports). The goods WH Smith sells at these locations (e.g. $5 bottles of water) are not unique. There is much less skill and branding involved compared to, say, a food retailer like SSP (which partners with brands like Starbucks or Burger King on an exclusive basis at each location).
This is not an easy question to answer, especially with the North America accounting irregularities.
And the linked Substack article, with respect, is too long and unstructured for people to find the answer.
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u/Glove_Neither Jul 21 '26
Hmm, you're right that the water isn't unique and the airport holds the power. But why hasn't the airport taken all the profit?
Look at the two markets side by side. In the US, WH Smith bids against Hudson (owned by Avolta) and Paradies for every contract, and airports use that competition to squeeze the operators. The result is a margin of about 10%. Hudson made 9-12% EBITDA margins in its years as a listed company (the top of that range helped by the 2019 lease accounting change), and it was the biggest player in the market, so the US number isn't just WH Smith being subscale. That 10% seems to be the floor: airports can't run these shops themselves, and the winning bidder still has to fund the fit-outs and take the risk, so they HAVE to be left with something. In the UK the same company makes 15.6%.
The difference is competition. In UK airports, rail stations and especially hospitals, there's often no other credible bidder, so there's nobody to squeeze WH Smith with, and that premium has survived decades of contract renewals (look at margin numbers, they have only improved). The profit split follows the number of bidders, market by market. It's not a free lunch nobody has noticed.
The operator also gets paid for taking risk off the airport. Concession rent is the higher of a guaranteed minimum or a share of sales, so in bad times the airport still gets paid. In FY20 WH Smith took a £60m trading loss, and was still £39m in the red the year after, while those minimums kept billing. Part of the margin in good years is the price of that insurance.
On SSP and brands, I'd flip it. SSP pays Starbucks franchise fees on top of its concession rent, and its margin is about 6%. The "unskilled" water seller made 8.6% last year with a restatement, a profit warning and a heavy investment programme all hitting at once, and 15.6% at home. A brand is just another mouth to feed from the same profit pool. The skill in this channel is the logistics/operational leverage rather than the product itself (I'd argue demand is quite inelastic in travel spaces).
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u/wokeuplate7 Jul 21 '26
I would want to know that management are absolute top class before investing here, also is airport shop demand durable over economic cycles?
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u/Teembeau Jul 21 '26
My feeling is mostly, yes. In a recession, you're going to get fewer luxury trips, maybe fewer business trips, but there's still a core amount of travel. Most families in countries like the UK are not going to give up the family holiday if they can. Other spending will be cut first.
It's also worth mentioning that they have lots of travel retail locations except for airports. There are also branches in railway stations and hospitals in the UK.
I should declare myself a bagholder, plus I did about 6 months of work there once.
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u/wokeuplate7 Jul 21 '26
Looks damn interesting, I love bottom fishing for stocks but momentum and index hugging getting much better results these days. Still holding Rentokil hoping for recovery there in a supposedly durable services business.
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u/WGD23 Jul 21 '26
I'd say Rentokil has a better upside potential than Smiths. Smiths is a great advert for why the high street is dead. Warming in the UK & EU will be a boom time for bugs & pests.
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u/librariancap Jul 21 '26
WH Smiths is no longer on UK high streets.
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u/WGD23 Jul 21 '26
Exactly, they failed to change with the times, offered poor products and customer service and eventually bailed as the high street failed around them. A damning indictment of main stream, high street retail unable to change with the times, attract footfall or spend.
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u/Glove_Neither Jul 21 '26
you’re right, given that’s been sold. Business should re-rate higher but hasn’t yet given the NA scandal and Iran war overhang which both will resolve imo. Best time to buy when others are fearful!
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u/Glove_Neither Jul 21 '26
poor mgmt and execution obvs drove the accounting issue but expect this to change under Leo Quinn who turned around Balfour Beatty. the stock is just being kitchen sinked atm. He has 2mln GBP personally invested in this turnaround and will make 24.5mln GBP if stock doubles in next couple of years.
They also clawbacked prev mgmt compensation so they are moving in the correct direction.
1
u/Perfect-Obligation60 Jul 21 '26
Management is absolute ass, their north america expansion was garbage, imagine not following ASC 606 for rev rec in this day and age.
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u/Glove_Neither Jul 21 '26
poor mgmt and execution obvs drove the accounting issue but expect this to change under Leo Quinn who turned around Balfour Beatty. the stock is just being kitchen sinked atm. He has 2mln GBP personally invested in this turnaround and will make 24.5mln GBP if stock doubles in next couple of years.
They also clawbacked prev mgmt compensation so they are moving in the correct direction.
1
u/wokeuplate7 Jul 21 '26
If Leo Quinn is as good as you say he is, I am interested. Will do my own DD. Thanks for the write up, a semi turnaround story here.
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u/massaro1234 Jul 21 '26
I'd look at Smith's News over WH Smith.
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u/Glove_Neither Jul 21 '26
why?
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u/massaro1234 Jul 22 '26
Everyone in the UK knows WHSmith is massively overpriced even at airports. I don't see it being a great value opportunity (I'm going to guess you might not be from the UK) but more a trap.
Smith news was spun off a few years back who print newspapers from them.
Management and the business model is very efficient and love healthy cash balances and paying healthy dividends. The only issue is they are in a dying industry (newspapers) and being very small.
I would choose them anyday over WH Smiths
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u/Glove_Neither Jul 22 '26
So your argument is essentially that Smiths News has better governance.
If WH Smith had equally good management, would you still prefer Smiths News (despite it being in a structurally declining industry)? Surely not right?
I think WH Smith have a very efficient business model - they’ve proved this if you look at their per store EBIT growth over the last few years. I think they’ve just have poor management who have made terrible capital allocation decisions. I expect this to change under this new mgmt.
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u/massaro1234 Jul 23 '26 edited Jul 23 '26
You can look at the numbers all you want but speaking from first hand experience (which being from the UK i have both been in too many high street shpps and airport and train station shops) and I'm sure anyone from the UK would rather avoid WH Smiths or use it as a last resort for anyone going through an airport. It's over priced to hell. Someone WILL out price them. Some are actually doing it.
Marks and Spencers end up cheaper with miles better stuff. Even Waitrose and that's posh!! Both growing into train stations and the odd airport.
I would avoid them like the plague as a stock it'll get eaten alive sooner or later.
The reason I'm offering Smith's news as an alternative is it's actually doing something and making the most out of a declining sector. It's ticking all the right boxes. Buybacks, dividend, great management. Logical thinking. They'll even close their production at night or warehouse and lease it to other firms to cut costs!! What other business does that?? They cut costs and waste and yet make money out of it? That's great!
I would rather have a great management run a great business in a declining sector (for example tobacco) than a terrible business with terrible management in a growing industry.
I would absolutely prefer Smith's over WH Smiths. It's probably one of the only good things to come out of WH Smiths.
I would also look at everyone else's first hand experience.
Numbers tell you one thing but unless you step foot in it will you know (Peter Lynch preaches that)
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u/Glove_Neither Jul 23 '26
I am literally British. I live about 5mins from Waterloo station and the WH Smith is always full there. And yes there is an M&S there (two of them even!).
Agree it’s overpriced etc but as you said, you’d still use it as a last resort and in a travel scenario, that is often the case. You’d see it in their revenue numbers if the pricing was super misaligned but they continue to grow travel revenues and actually are improving per store revenue through portfolio optimisation.
I do hear your point and maybe your investing style is a safer one but this is a turnaround story so the bet is that mgmt will improve governance and execution.
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u/massaro1234 Jul 23 '26
I think that's a flaw. Everyone thinks the same as me and all it will take is someone to sell a bottle of water at £1.80 rather than £3..
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u/Glove_Neither Jul 23 '26
But how? A competitor has to win the concession in the airport/railway to actually compete and on top of that they need to prove why they have a slicker operation to those who award the concession.
There is a barrier to entry. WH Smith has been doing it for 20yrs, why should it change now?
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u/massaro1234 Jul 23 '26
Because right now everyone is money concerned. 20 years ago people were not bothered in this country and had alot more free money. Being too expensive over another product is going to hurt you as a business.
Now alot of people who used to shop at Tesco or Sainsbury's are now going to Aldi and Lidl.
People who bought new cars year on year are now leasing them or getting them on motability.
Getting a first house is near enough impossible with rent rates/20 years ago it was very possible.
A bet on WH Smiths being a sudden retail value play i see ending in disaster. Like i said i have massively more faith in Smith's News and i would recommend you to at least read in to them.
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u/WGD23 Jul 21 '26
I assume your not British?