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WHSmith’s board has decided to stand by chief executive Carl Cowling while it awaits the findings of a probe into a profit overstatement that blindsided investors and wiped more than £500mn off its market value.
WHSmith expects the probe, which is being conducted by Deloitte, to take between six and eight weeks, enabling it to present the outcome alongside its full-year results in November, according to three people familiar with the matter.
The travel retailer last week disclosed that a routine financial year-end review uncovered that it had been booking supplier income too early, resulting in an estimated profit overstatement of £30mn.
WHSmith estimates that the issues, which people close to the company believe are confined to its US travel business, will reduce group pre-tax profits to £110 million for the year ended August 31.
Deloitte is investigating whether the error relates only to last year’s accounts or whether profits in prior years may also have been inflated.
The revelation sparked a heavy sell-off in the FTSE 250 retailer’s shares, which plummeted by 42 per cent to a 12-year low.
One WHSmith investor said it was clear the board appreciated “heads may roll” but that it was “unclear who [it will be] at this point”.
Two people close to WHSmith said Cowling, who took over in 2019, retained the board’s backing for now, pointing out the retailer had a record of steady succession planning.
WHSmith’s largest investor, Los Angeles-based Causeway Capital, has been supportive of Cowling throughout his tenure. This week it increased its stake from 12 per cent to 15.7 per cent, according to stock exchange filings.
Nevertheless the accounting problems come at an awkward time for WHSmith’s chief, who has placed the US travel business division at the centre of his strategy for the group.
In June WHSmith sold off its 233-year-old high street business to investment firm Modella Capital, further increasing its dependence on travel.
“Let’s face it, it’s not a good look,” said Richard Marwood, head of UK equities at Royal London Asset Management, a top 10 WHSmith shareholder. “[The CEO] has doubled down on travel.”
WHSmith built up its US travel business with the acquisitions of electrical goods retailer InMotion, in 2018, and Marshall Retail Group, which operates a variety of travel stores, for $400mn the following year. The group now has stores in locations ranging from New York’s JFK airport to Caesars Palace in Las Vegas.
The root of its accounting problems is supplier income, which refers to payments received from suppliers in return for promoting certain products. The income should only be recognised when the related products are actually sold, but WHSmith appears to have been booking it early.
The problems were identified about two weeks ago by WHSmith’s US chief financial officer, Kevin Gotthard, who then alerted group CFO Max Izzard.
Izzard, who only joined the retailer in December, immediately flew to the US to better understand the situation and advise the board on next steps, three people close to the situation said.
Retail expert Richard Hyman said the accounting scandal was a “terrible start” for the travel business, adding that Cowling “has to take responsibility” as the chief executive.
“If Deloitte’s report suggests he was aware [of the issues] then it’s in black and white,” said Hyman. “If he was not aware then there have to be questions [about why he wasn’t].”
