WH Smith shares have plunged as it cut financial forecasts and launched an independent review after discovering an accounting blunder that led it to overstate profits by £30m.
Investors wiped nearly £500m off the retailer’s market value on Thursday morning as it reported the multimillion-pound accounting error, sending the stock price down as much as 36% to £7.06 a share.
The group said it discovered the mistake, which related to its North American business, while preparing its year-end results. The stationery to sweets retailer said it was “largely” because it had logged some of its income too early.
This is related to arrangements it has with suppliers, which offer rebates if the retailer hits sales targets on certain items. However, it is understood that those rebates should have been logged in accounts for the next financial year rather than for the 12 months to 31 August. The problem is believed to be contained to the North American business.
WH Smith said headline profits from its North American division – which serves the US and Canada – were now expected to come it at £25m, down from previous market expectations of £55m.
As a result, the company said, it expected the group’s pre-tax profits to be in the region of £110m. While WH Smith did not publish forecasts before the mistake was discovered, financial markets had been broadly expecting profits of £140m
“The board has instructed Deloitte to undertake an independent and comprehensive review,” WH Smith told investors on Thursday morning. “The group will provide a further update at its preliminary results announcement.”
The retail analyst Nick Bubb said the profit warning had “gone down like a lead balloon with investors”, adding that it was “reviving unhappy memories of the Tesco accounting scandal a few years back”.
In 2014, Tesco admitted it had overstated profits by £326m because it had incorrectly booked payments from suppliers relating to issues such as marketing costs or reaching sales targets. The UK’s biggest retailer took years to recover from the black hole in its accounts.
There is no suggestion WH Smith’s accounting mistake relates to the same issues that hit the supermarket chain.
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WH Smith’s profit warning comes a month after the 233-year-old British business announced it had cut the sale price of its high street business by £12m, after trading at the chain deteriorated in the lead up to the close of the sale.
WH Smith said at the end of July that it would receive gross cash proceeds of up to £40m, not the £52m expected in March when it agreed to sell the division, which had 480 high street stores, to Modella Capital, which also owns Hobbycraft.
The drop in WH Smith’s shares left its value below £900m on Thursday morning, down from £1.4bn at market close on Wednesday.
