WH Smith has acknowledged a significant overstatement of profits in its North American division, attributing it largely to the premature recognition of income from suppliers. This mirrors similar financial missteps in the retail sector, including a noteworthy incident involving Tesco a decade ago, highlighting the sensitivity and importance of accurate accounting practices in retail.
Retailers typically receive payments from suppliers based on the volume of goods sold or promotional activities. However, accounting regulations stipulate that these payments should be recognized as they are earned, not all at once, particularly in long-term agreements. In its last annual report, WH Smith stated that the accounting principles around this issue should be straightforward due to the low complexity involved in establishing the necessary financial entries.
Due to the accounting error, WH Smith has revised its estimate of headline trading profits in its North American division from £55 million to £25 million, resulting in a £30 million overstatement. Despite this setback, overall group profits are still projected to be £110 million this year, primarily due to the strength of the UK operations.
However, the company faced a drastic decline in its share price, falling by 42% and erasing nearly £600 million in market value. This downturn raises questions about the firm’s financial controls and how such a significant portion of profitability could be so inaccurately projected in one instance.
WH Smith’s North American segment was anticipated to be a key growth area, particularly following the divestiture of its UK high street stores. The company opened about 40 new stores in U.S. airports last year, aiming to enhance its position as a global travel retailer.
Moving forward, WH Smith has enlisted Deloitte to conduct a detailed review of its supplier contracts, with shareholders eager for clarity regarding the failed financial controls and the reliance of the U.S. operations on supplier payments. Stakeholders are awaiting a comprehensive report from the company in November, which is expected to address the current challenges and provide projections that investors can trust.
Source: https://www.theguardian.com/business/nils-pratley-on-finance/2025/aug/21/wh-smiths-us-adventure-is-now-stuck-in-an-accounting-hole