Almost £600m was wiped off the market value of WH Smith on Thursday after the retailer cut financial forecasts and launched an independent review when it discovered an accounting blunder at its North American arm.
Shares plunged 42% after investors took fright at the news that profits at the division had been overstated by £30m.
The group said it discovered the mistake while preparing its year-end results. The retailer said it was “largely” because it had logged some of its income too early.
The mistake relates to arrangements it has with suppliers, which offer rebates if the retailer hits sales targets on certain items and payments for marketing and promotions. It is understood, however, that income should have been logged in accounts for the next financial year rather than for the 12 months to 31 August.
WH Smith said headline profits from its North American business – 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 problem is believed to be contained within the North American business, which in recent months brought in a new chief executive, Huw Crwys-Williams, who was previously the strategy director for the whole group.
WH Smith operates more than 320 stores across the US, mostly in airports, under a variety of local brands and its InMotion chain. It also acts as a franchisee, running stores in resorts for brands including Lego and Harley-Davidson as well as local brands such as Paradiso and Havana Sundries via the MRG business.
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.
Both companies were audited by PwC, but there is no suggestion of wrongdoing by the advisory firm, which works with thousands of companies. There is no indication that WH Smith’s accounting mistake relates to the same issues as Tesco’s.
Dan Coatsworth at the broker AJ Bell said WH Smith’s accounting error was a “huge embarrassment to management”.
He said it had “tarnished what WH Smith would have hoped could be a fresh start for the business” after the sale of its ailing high street division to the private equity firm Modella Capital, which is renaming the chain TG Jones.
WH Smith’s profit warning comes a month after the 233-year-old British business announced it had cut the sale price of the high street business by £12m, after trading at the chain deteriorated in the lead-up to the close of the sale.
Coatsworth said: “The sale of the structurally declining UK high street division was supposed to free WH Smith to concentrate on its airport, train, hospital and service station outlets. These benefit from a captive audience, allowing the company to generate strong margins.”
The drop in WH Smith’s shares left its value below £900m on Thursday morning, down from £1.4bn at market close on Wednesday.
