WH Smith warns as cuts backfire

SHARES in WH Smith slumped today after the retailer issued a torrid profits warning and sacked Beverley Hodson as head of the core UK chain.

In the first Christmas trading statement from a listed retailer, Smith warned that profits would be materially below current City expectations. Heavy promotions and price cuts had failed to boost sales, it said.

Hodson, managing director of UK retail, was going 'with immediate effect'. Group chief executive Kate Swann, who joined in November from GUS, will take over.

The sacking is likely to trigger a fresh 'rewards for failure' row. Hodson is in line for a £330,000 pay-off on top of the controversial consolation prize of £112,000 she was given when she was recently passed over for the top job.

Swann warned there would be further job losses among the 1,200 management staff in London and Swindon after a three-month review.

Smith's shares plunged 30 1/2 to 245p as analysts downgraded full-year profits forecasts from between £90m and £100m to between £60m and £70m. It is the retailer's third profits warning in 12 months.

Swann, revealing that sales in the 17 weeks to 27 December were flat and the gross margin down by two percentage points, admitted: 'These are, by any standards, disappointing results reflecting tough conditions in the High Street.' But she added: 'We have not dealt with those conditions as well as we should.' Displays were badly configured, promotions were 'confusing' and 'execution was quite poor', with shelves not being properly replenished. The decision to cut prices aggressively in the pre-Christmas period backfired.

'Sales volumes, particularly in the entertainment category, did not compensate for the fall in gross margin,' the company said. In stationery, margins held up well but sales were disappointing.

Alerting the stock market to more trouble ahead, WH Smith also warned it would have to clear surplus stock in the New Year and there would be a one-off write-down. Furthermore, a 'full operational and financial review' would necessitate 'a further stock clearance with a consequent material write-down'.

The publishing division Hodder Headline and newspaper distribution arm continued to trade well. Total like-for-like sales were flat. The biggest problem areas were entertainment, which was down 3%, and stationery, down 2%.

Swann said that it had been a mistake to relegate core lines such as books and stationery to the back of the shops to make room for gifts. Customers had not always understood the 'three for two' and 'two for £20' promotions, and getting to grips with a new stock replenishment system had taken time.

Swann admitted that it was not the first eight weeks in the job she had expected. 'But it's not all gloom and doom. It's a business with a lot of things going for it.'

False market claim denied
WH SMITH laid itself open to a charge of misleading shareholders by waiting two and a half weeks to confirm the bad news.

The Mail on Sunday said on 14 December that WH Smith would issue a profits warning, that sales of CDs and DVDs were poor and that Beverley Hodson would be dumped. But the company stayed silent.

Spokeswoman Louise Evans said: 'We still had two weeks to Christmas to get through.'

The Financial Services Authority is expected to investigate.