The accounting scandal that has engulfed WHSmith deepened this weekend after The Mail on Sunday revealed the retailer is relying heavily on promotional income from suppliers to hit sales targets.
The revelation highlights fears that issues with the firm’s books could be more entrenched than previously thought.
Shares in WHSmith plunged more than 40 per cent last month after the firm, which around 1,200 stores globally in airports, train stations and hospitals, warned that profits from its North American unit would be £30 million less than expected at about £25 million.
It was the second-worst one-day drop ever among large and medium-sized retailers currently listed on the stock market, according to broker AJ Bell.
Accountancy firm Deloitte is investigating the blunder, which WHSmith blamed on the ‘accelerated recognition of supplier income’ in its US arm.
When retailers such as WHSmith buy products to sell in stores, suppliers may agree to pay the firm a fee for their goods to be prominently displayed or discounted to boost sales. Such promotions can run for years. The payments are recorded as income for the retailer to correspond with when the products are sold.
Well paid: WH Smith boss Chris Cowling (pictured) and former finance director Robert Moorhead received £2.7 million and £1.9 million respectively last year
While these deals are not unusual, experts said in the case of WHSmith it appears this income was booked too early, leading to the overstated profits.
They added that relying too heavily on income from suppliers to meet profit targets was a potential red flag.
‘When sales are struggling, you bill everything for anything,’ said Ged Futter of consultancy The Retail Mind. ‘So if you’ve got a significant proportion of your profit coming [from supplier income] then you will look to book it as soon as possible. That’s when the alarm bells would ring.’
An analysis of WHSmith’s accounts, conducted by The Mail on Sunday, shows the level of supplier income more than tripled from £10 million in 2022 to £33 million in 2024. The £30 million profit overstatement in its US unit suggests the supplier income figure will be even greater this year.
Futter said that WHSmith’s accounting scandal had echoes of Tesco.
In 2014, Britain’s biggest supermarket was found to have delayed payments to suppliers to boost profits as it struggled to counter the rise of no-frills rivals Aldi and Lidl. Tesco was forced to pay £214 million in fines and compensation after an investigation found it had breached rules on how grocery suppliers are treated. WHSmith is not covered by these.
Despite being a staple of the British retail scene since 1792, WHSmith is now a travel retailer after selling its High Street stores, which have been renamed TG Jones by their new owner.
Retail analyst Jonathan de Mello said WHSmith had expanded fast in the US, which may account for its increased use of promotions to drive sales.
‘If so, it’s poor cost management if they over-ordered from suppliers and had to sell at lower prices,’ he said. ‘It doesn’t look like they’ve got a good handle on things out there.’
WH Smith boss Chris Cowling and former finance director Robert Moorhead were paid £2.7 million and £1.9 million respectively last year – mostly in performance-related bonuses.
A WHSmith insider said ‘it shouldn’t be a surprise’ that supplier income had increased as the company expanded. They pointed out that group sales have almost doubled since 2019, when supplier income was £10 million.
The findings of Deloitte’s investigation may be published when WHSmith releases its results in November. Profits for the year to August are now expected to be £110 million, the company said, down from previous estimates of £160 million.
WHSmith, its auditors PwC and Deloitte declined to comment.
DIY INVESTING PLATFORMS
AJ Bell
AJ Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing and investment ideas
interactive investor
interactive investor
Flat-fee investing from £4.99 per month
InvestEngine
InvestEngine
Account and trading fee-free ETF investing
Trading 212
Trading 212
Free share dealing and no account fee
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
