If you were asked to name a household UK company that has made 500 per cent over the past decade, WH Smith would be unlikely to top your list. At first glance, the retailer appears to be a prime candidate to follow the likes of Woolworths and Thomas Cook into oblivion, with its offerings of stationery, newspapers and magazines among the products most at risk from the rise of smartphones and the internet.
Yet George Godber (pictured) and Georgina Hamilton have found WH Smith to be an unlikely driver of returns since they bought it in 2012, first for the Undervalued Assets and UK Value Opportunities funds they ran at Miton, and now for Polar Capital UK Value Opportunities
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While the managers say they are “value to our core” and “bore on continually about price”, they point out looking at valuations alone is not enough to outperform. For example, they will not buy a company if it is being disrupted, which is often evident from a falling return on invested capital.
What may be surprising to investors is that WH Smith has managed to keep this figure relatively stable over the long term.
“WH Smith still actually makes £60m a year on the high street and unlike something like Marks & Spencer, it has retained its profits through a relentless focus on cutting costs and taking out all the stuff that is unprofitable,” said Godber.
Hamilton added: “The range has changed dramatically, it’s not a bunch of magazines like it was 10 years ago. The percentage of its high-street space in stationery has gone up and that is its highest-margin product.”
However, cost-cutting and simply maintaining profits and earnings are not a route to growth. Godber said the reason WH Smith has been able to progress is through taking its format into areas where, unlike the high street, there is a captive audience.
Performance of stock vs index over 10yrs
Source: FE Analytics
For example, WH Smith is in 100 out of 300 hospitals in the UK, where it also operates the M&S Simply Foods stores, and it has also begun to export the travel side of the business abroad.
“It is in 190 airports around the world now,” Godber continued. “It is the newsagent in Singapore airport.
“And rail stations, obviously, which is when people now do buy newspapers or chargers or even shampoo.
“The amount of AirPods it now sells is extraordinary. If you are at Euston and you’ve left your charger or AirPods behind, there’s only one place to buy them.”
The managers said the company has also made a number of smart acquisitions. For example, in the US it bought Marshall Retail Group (MRG), which should result in attractive synergies, as well as tech-accessories firm InMotion, which it is now rolling out to the rest of the world.
However, what Godber said he has been most impressed by is how the business has done when compared with its competitors.
“It has been very clever at finding areas where it can use its retail expertise where a business model has perhaps faltered,” he continued.
“If you use an example like Dixons Travel, it is still selling SLR cameras and laptops – I mean, when was the last time someone bought a laptop in an airport?
“WH Smith’s offering is more current and better thought out. I also hadn’t appreciated it is much more female friendly – it has 15x more female customers than Dixons.”
Hamilton added: “Although everyone thinks WH Smith is the high street, the travel business is growing really well: I think the last like-for-like sales were up 5 per cent, which is good: not many retailers in the UK are doing 5 per cent like-for-like.
“Then you’ve got a growing profit section from the travel business, which is now larger than your flat profit section from the high street. And from that moment onwards, it’s just a hell of a lot easier. A huge amount of work has got it to this point and we think the return on invested capital can really kick on from here.”
The managers said that the success of WH Smith shows the benefits of taking a micro rather than a macro view and refusing to discard an entire sector just because it is being disrupted at a headline level – Godber said even stocks that are harnessing new themes such as electric vehicle manufacturers are at risk of disruption, while the two physical retailers he owns – WH Smith and JD Sports – have been among his best performers over the past 10 years.
He pointed to British Airways-owner IAG as another example of this.
“It’s an industry that had huge ill-discipline for many, many years, but that actually started to change after the financial crisis,” Godber added. “What you’re seeing now is great discipline in the industry, which is why BA makes 15 per cent return on invested capital, which was unheard of in the early noughties.
“I always think it is funny if you try to overlay the macro on fund management. If I said to you in 1950, this sector will grow every single year for the next 50 years, which airlines did, you would have said, ‘what a great place to invest’. But if you invested in the airline sector over those 50 years, you would have made nought, because they all went bust.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Data from FE Analytics shows Polar Capital UK Value Opportunities has made 16.9 per cent since launch in January 2017, compared with gains of 16.73 per cent from the FTSE All Share and 14.69 per cent from its average IA UK All Companies peer.
The £1.1bn fund has ongoing charges of 0.86 per cent. It also has a 10 per cent fee of any outperformance of the FTSE All Share, with a high watermark.