An accounting riddle – sales down, profits up...

WHSmith has reported a slightly better than expected 8% increased in first half pre-tax profit and said that despite a tough trading climate it is confident about its full year prospects. “The economic environment remains uncertain and, whilst we continue to be cautious, we are confident in the outcome for the full year,” said Chief Executive Kate Swann.

For the six months to 29 February 2008 the newspapers, books and stationery retailer made a pre-tax profit of £64m. However, “like-for-like” sales in the High Street operation continued to fall, down 3% over the period.

How can this be possible?

The first answer is that the firm is successfully cutting its costs. They can therefore grow profit, without growing sales. The other interesting point is the concept of “like-for-like” figures. They seem a fair way of comparing the results over a couple of trading years in which something significant changed: the number of stores increased, perhaps. “Like-for-like” figures try to remove this bias.

But they also conceal the fact that the business itself is changing. Overall sales were actually up a bit. The new strategy of the firm is based on re-balancing the mix of the business towards its ‘core’ categories of stationery, books, newspapers and magazines, and away from lower margin entertainment products - CDs, DVDs, computer games and consoles. The business is also moving away from the high street and into hospitals and motorway service areas.