WH Smith Group said sales deteriorated over Christmas, but the book, stationery and entertainment retailer managed to offset the impact by avoiding suicidal price discounts and widening profit margins.
The company's 542-strong high-street chain delivered a six per cent fall in like-for-like sales in the seven weeks and the 21 weeks to January 21, compared with analysts' forecasts of a four to five per cent decline, WH Smith said yesterday Gross margin improved by 250 basis points, better than expected.
Chief executive officer Kate Swann told reporters that in the last two weeks of December competition in books and entertainment products was particularly fierce.
"Some of the prices that competitors were selling at were below cost, and we don't do that," she said.
"It's not sensible business."
WH Smith is competing against online retailers such as Amazon.com, specialists like HMV and grocers like Tesco who are making big inroads into non-food areas.
HMV's Waterstones, which slashed prices of some bestsellers over Christmas, reported a 120-basis-point drop in its gross margins over Christmas and analysts downgraded profit forecasts.
Ms Swann, who joined WH Smith in November 2003, remains comfortable with current market estimates of £77 million to £82 million pretax profit for the year to end-August 2006. That is up from £73 million in 2005.
Shares in WH Smith eased 1.2 per cent to 397-1/2p by 10:17 a.m., after rising 10 per cent in the past three months and outperforming peers by three per cent in six months. The CEO set out her three-to-five-year recovery plan for the 200-year-old group in the summer of 2004. Profitability has improved as she has achieved cost cuts faster than predicted, increased sourcing from the Far East and concentrated on selling more higher-margin books and stationery.
"They have under-achieved on sales but over-achieved on gross margin gains," said Credit Suisse First Boston analyst Tony Shiret, who has a neutral rating on the stock.
"It's a very effective way of running the business given the current market conditions, but at some point they will need to stabilise sales."
Ms Swann said her strategy was working. She said cost savings were running ahead of schedule for the current financial year and that by changing the mix of products she can continue to improve margins over the next three years by downsizing lower-margin entertainment items like videos.
"I expect sales to return to historic market levels when consumer spending returns to more normal levels," she said, declining to predict when that might be.
"Looking ahead, we remain cautious about consumer spending, and our plans reflect this," she said.
Elsewhere in the group, overall like-for-like sales including travel shops fell five per cent in both the seven and 21-week periods.
The company's 200 travel retail outlets achieved like-for-like sales growth of three per cent with gross margin up 100 basis points and sales for WHSmith News down two per cent.