- WH Smith shares up 7.3% in morning trading as bargain hunters swoop in
- WH Smith’s 42% slump yesterday is the second biggest one-day share price crash ever among the current batch of UK-listed large and mid-cap retailers
- There is a read across from Tesco’s accounting slip-up in 2014
- Who are the biggest shareholders in WH Smith?
- Activist investor pressure and short selling could ramp up as a result of yesterday's share price decline
Dan Coatsworth, investment analyst at AJ Bell, comments:
“Bargain hunters have begun to sniff around WH Smith following its 42% share price slump on 21 August. The shares were trading more than 7% higher by late morning on Friday, suggesting certain investors believe that all the bad news from the accounting error has been priced in, and that the market over-reacted.
“The retail sector is no stranger to sharp downward movements. You might think that selling goods to a broad base of shoppers is straightforward, yet the industry has a history of experiencing earnings shocks.
“WH Smith’s 42% share price decline yesterday ranks as the second worst one-day fall ever among the current batch of mid and large-cap retailers on the UK stock market, according to analysis by AJ Bell.
“It is only beaten by Debenhams (aka Boohoo) which slumped by 43% on 7 January 2015 on a major profit warning amid heavy competition from rivals who were slashing prices to shift goods following unfavourable autumn weather conditions.”
“Since joining the stock market in 2001, ASOS has seen 34 trading days where its share price has fallen by more than 10%. That level of volatility is normally associated with a high-risk sector like biotech or mining, not a company selling t-shirts and dresses.
“Even the so-called ‘king of trainers’ has suffered its fair share of bruises. JD Sports slumped 23% on 4 January 2024 when it rolled out the big book of excuses for not shifting enough goods over the Christmas period.
“What separates some of these retailers from WH Smith is the root cause of the share price shock.
“Accounting issues can be harder to comprehend than disappointing sales figures and they leave investors wondering if there are more skeletons in the closet.
“Bargain hunters might now be prepared to buy WH Smith following its accounting warning given the shares fell to a 12-year low. However, there are more questions than answers following its shock warning. Principally, does the accounting issue mean investors can no longer trust historic profits for its US arm, and has the company made other accounting errors?”
Lessons from Tesco’s warning in 2014
“There are similarities between WH Smith’s warning and Tesco in September 2014 as they both overstated profit and cited the ‘accelerated recognition of income’. In plain English, this refers to incorrectly booking rebates or payments from suppliers.
“While it only took four months for Tesco’s share price to recover lost ground from its warning in 2014, sentiment soon waned again and the grocer’s stock spent most of 2015 in a downwards direction. Tesco had to dust off the crisis management playbook to repair its damaged reputation and the shares ultimately didn’t recover back to the pre-2014 warning level until 2018.”
Biggest investors in WH Smith
“WH Smith will now be under pressure from multiple sides to address the accounting issues and rebuild trust with the market.
“Its biggest shareholders are a mixture of private equity firms (Causeway Capital owns 12.26%) and asset managers including BlackRock, M&G and Artemis.”
Activist investor pressure could ramp up
“WH Smith is also a fresh target for activist investor Palliser which recently flagged the potential for 60% to 90% upside for the shares over the next three years. It will be furious at the accounting issue and will no doubt be spending the weekend preparing a strongly worded letter for management to explain the shortcomings.
“Palliser originally 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. It’s possible that Palliser will add a few items to that list given the shock news from the retailer this week.”
Short-selling activity
“The other area to watch is the amount of stock on loan as that can illustrate if the stock is being heavily shorted or not. Short sellers bet against a company and stand to profit from a falling share price.
“Prior to this week’s profit warning, 1.27% of WH Smith’s stock was on loan, according to data from the FCA. This was split across Citadel Advisors and GLG Partners.
“The market will be watching the FCA’s short-selling data over the coming days to see if additional names are betting against WH Smith in the belief there is more bad news to come.”
