In many parts of the world there are certain stores that have existed in every town or city centre for as long as anyone can remember. If you hopped into your time machine and jumped from 2025 to any 1970s town in the UK, for example, you would be likely to see a Boots (chemist), a WH Smith (newsagent, bookseller, travel agent) and/or Marks & Spencer (fashion and food; we have previously covered some of M&S’s accounting treatment).
With the news that the retail stalwart WH Smith is planning to sell its UK high street stores (but not its train station or airport outlets), this is a good time to look at some key issues surrounding the company’s results and potential sale, which will have wider resonance for other retailers and for those as fascinated by financial reporting as me.
The high street stores are identified as a separate segment
While WH Smith has existed as a retailer for over 200 years, the focus has become increasingly on the travel side of the business, with the vast majority of its profits coming from this segment.
The most recent annual report of WH Smith gives us some headline figures on the performance of the retail segment, and using these figures we can see why having some accounting knowledge can be helpful in understanding the situation.
Operating segments
In its financial statements for the year ended 31 August 2024, the high street stores are identified as a separate segment; under IFRS 8, Operating Segments, entities must report all segments making up at least 10% of their revenue, profit/loss or assets. Under these disclosures, it can be seen that the high street segment has made £452m revenue compared with £1,918m for the entire group.
For some accountants, the use of the term ‘trading profit’ will quickly raise a flag as an APM
As we look deeper down the segmental analysis, we see that the high street segment trading profit is identified as £32m, out of a total group trading profit of £221m. This shows the scale of the business that can be disclosed.
Alternative performance measures
For some accountants, the use of the term ‘trading profit’ will quickly raise a flag as an alternative performance measure (APM), rather than the actual statutory profit, which is stated in the income statement as £158m.
This £32m profit figure is included within the key performance indicators in WH Smith’s annual report (page 16). The prominence of this figure may well be called into question following recent concerns that APMs are presented more prominently than statutory figures.
As will be required for management performance measures under IFRS 18, Presentation and Disclosure in Financial Statements, there is a reconciliation of these figures to statutory figures, but this is found in the glossary on page 177, meaning that possibly only the keenest accountants will look here.
It is reasonable to assume that a good amount of the impairment relates to high street stores
When we do look at this figure, we see that some non-underlying items of £55m are the main cause. This figure contains some amounts relating to some M&A activity, some IT costs and some pension adjustments. But there are also approximately £36m of impairments and onerous contracts, with the majority of these to do with the group’s property assets (explanations of those figures and breakdowns begin in the glossary on page 177 of the annual report).
These are not split out further, but it can be seen that the number of UK retail stores has been reduced while the number of travel agency sites has grown. It is therefore reasonable to assume that a good amount of the impairment relates to high street stores, meaning that the £32m trading profit is likely to be much lower, or even loss-making in a statutory context.
Leases
Some of these impairments are related to right-of-use assets, which are the assets held under leases by the company. The 500 high street stores are all held under leases, meaning that WH Smith is committed to those payments but doesn’t actually own the premises.
A key rule of IFRS 16, Leases, is that all assets and liabilities held under leases are recorded within a company’s balance sheet so that investors can see the present value of payments that the entity is committed to.
Consistent with other retailers in recent times, the company has negotiated leases to have a much smaller average lease term. This clearly gives the opportunity to exit poorly performing stores, while also meaning that lower liabilities are recorded. The lease liabilities are the largest category of liability held by the group, representing £626m, and would be a consideration for any potential acquirer.
In its annual report, the average lease length is identified as being lower than two years, with 470 of the 500 leases being due for expiry or renewal within the next three years. This would give any interested the party the opportunity to look at the store portfolio and decide on the viability of each.
Discontinued ops
The one particularly relevant standard not yet mentioned is IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. In the annual report, there is no mention of the high street segment being identified as held for sale. At 31 August this would not have met the criteria, as the assets did not appear to be available for immediate sale with a sale being highly probable.
It will be interesting to see if the £32m trading profit figure changes dramatically
If a sale of the segment is not completed by 31 August 2025, it does appear that these will then qualify for disclosure as assets held for sale, as long as the sale is to be expected within 12 months. If this is the case, all assets and liabilities in the group will cease depreciation and will be held separately from the other assets and liabilities.
In addition to this, the results will be shown as a discontinued operation in the statement of profit or loss. This is likely to be the case whether the division has been sold or not, as a discontinued operation is a major line of business that has either been sold or is classified as held for sale.
This will mean that one line will be shown in the income statement as the total profit or loss from the discontinued operation, with a full analysis of this figure in the notes. It will then be interesting to see if the £32m trading profit figure changes dramatically following the full breakdown of the results.
So, when you next travel through an international airport looking for WH Smith to buy a travel pillow and phone charger, spare a thought for its high street siblings…
