- WH Smith CEO to leave after accounting scandal
- Independent review finds accounting problems and poor management oversight
- Second downgrade to North American profit guidance
- WH Smith shares take another hit on the news
- All eyes on what activist investor might do next
Dan Coatsworth, head of markets at AJ Bell, comments:
“No chief executive is going to survive an episode as catastrophic as the one that wiped £594 million off the value of WH Smith overnight.
“Carl Cowling was clinging on to his job the second WH Smith announced an accounting setback in the summer, and now he’s done the decent thing and stepped down. Even if Cowling hadn’t resigned, his credibility at WH Smith was shattered by the scale of value destruction straight after selling the UK high street business. That strategic shift was meant to be a defining moment for the company, but it has gone down in history for the wrong reasons.
“WH Smith had pinned its future on the travel sector, running shops in airports and train stations to take advantage of a captive audience looking for snacks, books and electronic items. The retailer charges a premium for these goods because customers rarely have many options to shop around, and they have time limitations. While this proposition sounded straightforward, accounting issues have muddied the water.
What went wrong?
“The company shocked the market in August by saying it had overstated profit as well as incorrectly booking rebates on payments from suppliers.
“Someone had to take the blame for the mistake and inevitably that’s fallen to the person in charge. Given the errors were accounting-based, one might have expected the chief financial officer to be the one putting their pot plant and family photo in a cardboard box. However, the fact chair Annette Court describes it as ‘an extremely serious matter’ implies that it had to be the CEO who fell on their sword.
“Finding a new CEO won’t be easy, given they’ll need to rebuild credibility with the market the moment they walk through the door, rather than simply focusing on corporate strategy.
Outcome of review
“An independent review by Deloitte has flagged limited group oversight of the finance processes in WH Smith’s North American operations. Given the US is central to its growth plans, one must question why the group’s management team had taken their eye off the ball and didn’t spot the problems. Chief financial officer Max Izzard will now be all over the US finance team like a hawk, checking there are no more shortcomings.
“The hit to earnings is worse than previously thought, with new profit guidance for North America significantly below the revised expectations after the company’s problems went public in August. That’s a major blow to shareholders who have already suffered considerable value destruction.
Activist investor
“Activist investor Palliser has a 2.07% stake in the business and ahead of the summer setback, it demanded three things from the company.
“Palliser called for better investor communication and disclosures from WH Smith to help the market better understand the equity story; leverage targets and a clear capital allocation policy to target high returns; and an executive incentive structure to better align with shareholders and return on capital. The list of things it wants improved is now likely to be much longer.
“All eyes will now be on Palliser to see if it is satisfied with the remedies outlined by WH Smith following the Deloitte review. Don’t be surprised if it takes a more aggressive stance to try and drive a rapid recovery in the share price.”
