Annual Report
and Accounts
2020
About us
• WHSmith High Street is present
on most of the significant
high streets and shopping
centres in the UK, mainly in
prime locations.
• WHSmith reaches customers
online via whsmith.co.uk,
its specialist personalised
greetings cards and gifts
website funkypigeon.com,
its specialist online pen shop
cultpens.com and through
its personalised stationery
websites treeofhearts.co.uk
and dottyaboutpaper.co.uk.
• WH Smith PLC is a global travel
retailer with a smaller business
located on the UK high street.
• WHSmith Travel is a world-
leading travel retailer with a
presence in over 30 countries
across the globe, mainly in
airports. The UK Travel business
is in a wide range of locations
including airports, hospitals,
railway stations and motorway
service areas. Outside of the
UK, our biggest market is in
North America.
• WHSmith employs approximately
14,000 colleagues.
• WH Smith PLC is listed on the
London Stock Exchange (SMWH)
and is included in the FTSE
250 Index.
• A commitment to the principles
of sustainability is a key focus for
WHSmith as it continues on its
journey to be a better business.
• Find out more about WHSmith at
whsmithplc.co.uk.
Contents
Strategic report
Group at a glance
Business model and strategy
Our markets
Chairman’s statement
Chief Executive’s review
– Review of operations: Travel
– Review of operations: High Street
– Financial review
Key performance indicators
Principal risks and uncertainties
– Brexit
– Viability statement
Non-financial information statement
– Our journey to a better business
Section 172(1) statement
Corporate governance
Corporate governance report
– Corporate governance statement
– Remuneration Committee
– Audit Committee
– Nominations Committee
Directors’ biographies
Directors’ remuneration report
Directors’ report
Statement of directors’ responsibilities
Financial statements
Independent auditors’ report
to the members of WH Smith PLC
Group income statement
Group statement of
comprehensive income
Group balance sheet
Group cash flow statement
Group statement of changes in equity
Notes to the financial statements
2
4
5
7
8
11
14
16
20
21
27
28
29
29
35
38
40
45
46
52
54
56
74
77
78
88
89
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92
93
Group at a glance
Page 2
Business model and strategy
Page 4
Chief Executive’s review
Page 8
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Principal risks
Page 21
Employees
Page 32
@whsmith
youtube.com/WHSmithDirect
Company balance sheet
143
@whsmithofficial
linkedin.com/company/whsmith
Company statement of changes in equity 143
Notes to the Company
financial statements
Additional information
Glossary
Information for shareholders
144
146
153
Find out more at whsmithplc.co.uk
Disclaimer
This Annual report has been prepared for, and only for, the members of the Company, as a body, and no other persons. The Company,
its directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this document is
shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. By their nature, the
statements concerning the risks and uncertainties facing the Group in this Annual report involve uncertainty since future events and
circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements
reflect knowledge and information available at the date of preparation of this Annual report and the Company undertakes no
obligation to update these forward-looking statements. Nothing in this Annual report should be construed as a profit forecast.
1
WH Smith PLC Annual Report and Accounts 2020Strategic report Our goal
to be the leading retailer
in news, books and
convenience for the world’s
travelling customer.
Highlights
Operating in
1,174 units
(2019: 1,019)
30 countries
Revenue
£553m
(2019: £817m)
Group at a glance
WH Smith PLC is made up of two core
businesses: Travel and High Street
Travel
WHSmith Travel is a global travel retailer with a strong presence in UK
travel locations and an increasing portfolio of stores around the world.
During the year, we acquired Marshall Retail Group (MRG), a leading and
fast-growing US travel retailer, further accelerating our international
reach in the world’s largest travel retail market.
WHSmith Travel sells a range of products serving customers in travel
locations or in need of a convenience offer.
Our goal is to be the leading retailer in news, books and convenience
for the world’s travelling customer.
As at 31 August 2020, the business operated from 1,174 units
(2019: 1,019 units), mainly in the UK, in airports, hospitals, railway
stations and motorway service areas. 584 of these units (2019: 433 units)
are outside the UK across 30 countries and mainly in airports.
Following a strong performance in the first half of the financial year,
the business was significantly impacted in the second half by Covid-19
with a large number of stores temporarily closed across the globe.
2
WH Smith PLC Annual Report and Accounts 2020
Strategic report High Street
High Street sells a wide range of Stationery, Books, Newspapers,
Magazines and Impulse products.
Our goal is to be Britain’s most popular high street stationer, bookseller
and newsagent.
As at 31 August 2020, the business operated from 568 WHSmith High
Street stores1 (2019: 576 stores1), located on most of the UK’s significant
high streets and shopping centres. We operate over 200 Post Offices
from within our High Street stores further cementing our position on
the high street and at the heart of the communities we serve.
Our online digital business operates through five websites:
whsmith.co.uk, funkypigeon.com, cultpens.com, treeofhearts.co.uk
and dottyaboutpaper.co.uk.
Like Travel, High Street was impacted by Covid-19 in the second half
of the financial year after a resilient first half performance.
Our goal
to be Britain’s most popular
high street stationer, bookseller
and newsagent.
Highlights
WHSmith Stores1
568
(2019: 576)
Revenue
£468m
(2019: £580m)
Our online digital business
operates through five websites:
• funkypigeon.com;
• whsmith.co.uk;
• cultpens.com;
• treeofhearts.co.uk; and
• dottyaboutpaper.co.uk.
1
Excludes 3 Cardmarket stores
(2019: 18 Cardmarket stores).
3
WH Smith PLC Annual Report and Accounts 2020Strategic report Our business model and strategy to create value
WHSmith is a global travel retailer with a smaller business
based on UK high streets. Our business model and strategy
seeks to create value for all stakeholders through improving
our profitability and cash flow to deliver sustainable returns.
Our business model
Travel UK
Travel International
High Street
Focused use of cash
To be the leading retailer in news, books and
convenience for the travelling customer
To be Britain’s most
popular stationer,
bookseller and newsagent
Disciplined approach
to cash generation
and capital allocation
Driving like-for-like sales
in existing stores through
improved execution and
service;
Investment in store
environments and layouts;
A forensic store by store
focus on space and category
management;
Winning new space and
retaining existing space; and
Developing new formats
Winning new tenders and
retaining existing space;
Expanding our North
American business;
Building critical mass
in our emerging hubs;
Driving like-for-like sales
in existing stores; and
Executing the same retail and
operational disciplines and
insights as we do in the UK
Adopting a forensic store
by store focus on space
management to optimise
the returns from our core
categories, particularly
Stationery, complemented by
our online propositions;
Investing in the business
where returns are greater than
our cost of capital;
Value accretive acquisitions in
attractive markets with good
growth prospects; and
Return surplus cash to
shareholders through a
progressive dividend policy
and share buybacks
Driving margin growth through
category mix management;
Reducing our cost base to
reflect our changing sales
profile and productivity
initiatives; and
Creating value from our
assets including third party
partnerships that enhance our
customer offer
Operating responsibly
You can read more about our approach
to Environmental, Social and Corporate
Governance (ESG) on pages 29 to 34.
Right people and skills
You can read more about our values,
employees and diversity on pages
32 and 33.
Our customers
You can read more about our
markets on pages 5 and 6.
4
WH Smith PLC Annual Report and Accounts 2020
Strategic report Our markets
Our markets
Travel
Travel sells a range of products serving customers
in travel locations and in need of a convenience offer.
Travel’s typical customer has less time to browse
and is more interested in purchasing convenience
and impulse products such as food, drink and
confectionery, travel and digital accessories and
souvenirs, as well as reading materials for a journey.
Travel units are typically located in high footfall locations with
higher operating and occupation costs and rents paid as a
percentage of sales (subject to minimum guarantees). Travel is
less affected by the Christmas trading period than high street
retailers. Increased passenger traffic during the summer holiday
season, particularly in airports, contributes to a summer peak
in sales.
Our main markets are in the UK (air, hospitals and rail) and in
North America (air and resorts in Las Vegas). All our markets
have been impacted by Covid-19. The rate at which passengers
return to travel locations will have the biggest impact on
our markets.
In the UK, air passenger numbers have been significantly
impacted. According to the Airport Council International (ACI),
UK passenger numbers were down 80 per cent in October 2020
compared to 2019. Rail passenger numbers have also been
significantly impacted by government restrictions and according
to concourse data from Network Rail, have been down 65 per
cent to 70 per cent in October 2020 compared to October 2019.
Hospitals are impacted by the fall in the number of visitors and
elective surgeries as well as the number of staff.
In North America, airport passenger numbers have slowly
recovered. Based on TSA data, passenger numbers had
recovered to c.35 per cent of 2019 by the end of October 2020.
In Las Vegas, visitor numbers have also slowly recovered with
occupancy levels 49 per cent of 2019 levels in September 2020.
Long term, Travel will be impacted by the speed by which a
vaccine or other mitigating medical solutions to Covid-19 are
widely available, macroeconomic trends (including any impact
arising from the process of exiting the European Union) and other
factors which influence the number and nationality of travelling
customers. These include levels of employment and investment,
the cost of travelling, as well as specific category trends such
as the growth of consumable products and digital accessories.
5
WH Smith PLC Annual Report and Accounts 2020Strategic report Our markets continued
High Street
High Street sells a wide range of products in the
following categories: Stationery (including greetings
cards, general stationery, art and craft, and gifting),
News and Impulse (including newspapers,
magazines, confectionery and drinks) and Books.
High Street’s trading is seasonal, peaking at
Christmas and in August/September for ‘Back
to School’.
High Street also includes our online businesses:
• whsmith.co.uk
which sells a range of Stationery, Books, Magazines and Gifts.
• funkypigeon.com
our online personalised greetings card site.
• cultpens.com our specialist pen site.
• treeofhearts.co.uk and dottyaboutpaper.co.uk our specialist
wedding stationery sites.
These websites complement our core in-store and stationery
offers and have been growing very fast and accelerating during
the Covid-19 pandemic.
High Street’s performance is dependent upon overall growth in
consumer spending (including any impact arising from the
process of exiting the European Union) and the levels of footfall
on the UK high street. Since Covid-19, we have seen further
declines in the level of footfall on UK high streets. Going forward,
national and local lockdowns will impact our High Street stores
depending on the severity of any lockdown and restrictions
imposed on retailing in any one lockdown. These restrictions are
likely to vary depending on the seriousness of infection rates.
To date, city centres and destination locations have been most
heavily impacted by Covid-19. The impact in smaller market
towns and affluent catchments has been less.
6
WH Smith PLC Annual Report and Accounts 2020
Strategic report Chairman’s statement
I am immensely proud
of how our colleagues
have responded to
this pandemic.”
Henry Staunton
Chairman
Our 2019/20 financial year has been a year of two
halves. The Group traded very well in the first six
months of the year prior to the outbreak of Covid-19,
delivering a strong performance. Within Travel, our
UK and international businesses delivered strong
like-for-like growth and we completed the acquisition
of MRG, a leading and fast-growing travel retailer in
North America, in December 2019. This acquisition
broadly doubles the size of our international business
and provides us with a platform to accelerate our
growth opportunities in North America, the world’s
largest travel retail market, as the market recovers.
Since March, the Group has been adversely impacted by
Covid-19. Across our Travel business, passenger numbers have
been significantly impacted and our High Street business has
been affected by reduced footfall. Despite these challenges,
the Group responded quickly and took decisive actions to protect
our colleagues, our customers and the business, including
strengthening the financial position of the Group.
I am immensely proud of how our colleagues have responded
to this pandemic. Across our Travel and High Street businesses,
we committed to playing our part in the communities we serve;
keeping over 200 High Street stores open with Post Offices
throughout the first lockdown period to ensure those high street
communities continued to have access to vital postal and banking
services. Similarly, we kept c.130 stores open in hospitals in order
to support frontline NHS workers.
We have an exceptionally strong team at WHSmith and the Group
has worked hard to implement a robust plan across the entire
business. This plan places greater focus on initiatives within our
control that support us in the immediate term and position us
well to emerge stronger when our markets recover. I am pleased
to report that we are seeing some encouraging results.
Looking ahead, value creation remains central to our plans
and we will continue to invest for the longer term where we
see attractive opportunities for profitable growth.
Corporate governance
Corporate governance remains an important area of focus for the
Board and underpins the sustainability of our business and the
achievement of our strategy. A more detailed explanation of our
approach to corporate governance can be found in our Corporate
governance report on pages 38 to 77.
Sustainability
This year we have completed progress against our 2020 goals
covering environmental stewardship, responsible trade, looking
after our workforce and our community donation programme.
We are now launching our new strategy for sustainability: Our
Journey to a Better Business which sets aims and objectives to
protect the planet, support our people and those working on our
behalf and caring for our communities. Our work is underpinned
by policies, programmes and governance for all areas of
environmental, social and corporate governance. We will be
focusing our activities on those areas where we believe we can
make the biggest difference to people’s lives and will build upon
our long-standing programme to help improve standards of
children’s literacy.
Further information on all aspects of our sustainability
programmes can be found on pages 29 to 37.
People
It has been an unprecedented year for all our colleagues and
I am sincerely proud of the way every one of them has responded
to the challenges we have faced across the Group. From our
colleagues across our stores to our teams in our distribution
centres and our head offices, I would like to take this opportunity
to thank each and every colleague. We have a very strong team
across the entire business and their contribution and support has
been remarkable throughout this challenging year.
Outlook
While we remain cautious in our approach, we are a resilient
and versatile business and we have positioned the Group well
to navigate our way through this period of continued uncertainty.
We are financially strong and we are well placed to benefit in
due course from further opportunities as our markets recover.
We remain very disciplined with our capital allocation and
going forward we remain committed to delivering value for
our shareholders.
Henry Staunton
Chairman
19 November 2020
7
WH Smith PLC Annual Report and Accounts 2020Strategic report Chief Executive’s review
Prior to the outbreak of
Covid-19, the Group
delivered a strong first
half performance.”
Carl Cowling
Group Chief Executive
Prior to the outbreak of Covid-19, the Group delivered
a strong first half performance with Headline Group
profit before tax1 of £80m*. Our Travel business was
trading very well having delivered its seventh year of
like-for-like sales growth and delivering Headline
trading profit1 of £49m*. The second half, however,
was significantly impacted by Covid-19 across our
UK and international markets, resulting in a Headline
Group loss before tax2 of £69m* in the year.
In December 2019, we completed the acquisition of MRG,
a leading and fast-growing travel retailer in the US.
The combination of WHSmith, MRG and InMotion now enables
the Group to participate in the entire North American airport
specialty retail market as the market recovers. We were also
successful in winning a number of significant tenders
internationally during the year.
As in Travel, we saw our High Street business significantly
impacted by Covid-19 following a resilient first half where
we delivered Headline trading profit1 of £44m.
I have enormous admiration for how all our colleagues across
WHSmith have responded to these unprecedented times.
From our colleagues across our stores, particularly those who
continued to serve their communities throughout the lockdown
periods, to our teams in our distribution centres and head offices.
Their support and commitment has been outstanding throughout
this challenging year, and I would like to thank each and every
one of them for their contribution.
Group overview
While the first half of the financial year was largely unaffected by
Covid-19, delivering a strong performance, we saw a significant
impact in the second half. The vast majority of our stores closed
across the world and we saw a sharp decline in passenger
numbers and customer footfall. Despite the many challenges
faced, the Group acted fast to take a number of actions to support
our colleagues, customers and our business.
Our number one priority is the health and wellbeing of our
colleagues and our customers. All stores, distribution centres
and head offices have effective safety measures in place,
including social distancing measures, PPE for colleagues’ use,
protective screens and guidelines to limit the number of
customers in-store. In addition, all head office staff have worked
from home throughout the lockdown periods.
We immediately focused on cost and cash management,
including the following activities:
• Reduced stock purchases to reflect ongoing demand, returning
sale or return stock and negotiating extended payment terms
• Reviewed all capital expenditure to focus on essential and
strategic projects
• Stopped all discretionary expenditure and reduced
corporate overheads
• Worked with landlords to significantly reduce or remove rent
payments and to link as far as possible with revenue
• Significant reduction in headcount across stores and head
offices through furlough arrangements; including participating
in the UK Government Job Retention Scheme, and
subsequently restructuring to ensure headcount is in line with
business requirements and reduced sales
• Deferred tax payments in line with UK Government
announcements
• The Board has decided not to recommend the payment of a
dividend in respect of the financial year ended 31 August 2020
• Focused on strengthening the balance sheet and the Group’s
liquidity position including bank covenant waivers for February
2021 and August 2021
Throughout the first lockdown period, and in line with
government guidance, we committed to keeping a number of
our stores open to serve those communities that most needed
our services. As a result, 203 High Street stores which host
Post Offices remained open and c.130 Travel stores located
within hospitals across the UK continued to serve NHS
frontline workers.
* The Group adopted IFRS 16 ‘Leases’ with effect from 1 September 2019 using the modified retrospective approach to transition, and has therefore not restated prior periods. The results for the
year ended 31 August 2020 are not directly comparable with those reported in prior periods under the previous applicable accounting standard, IAS 17 ‘Leases’. In order to aid comparability,
the results for the year ended 31 August 2020 have also been presented on a pre-IFRS 16 (IAS 17) basis and commentary throughout this report will refer to these pre-IFRS 16 numbers.
Measures presented under IAS 17 are identified with a ‘*’. All prior year measures are presented on an IAS 17 basis. Reconciliations from IAS 17 measures to IFRS 16 measures are provided in the
Glossary on page 146. Group revenue was not affected by the adoption of IFRS 16, and therefore all references to and discussion of revenue, and like-for-like revenue are based on
statutory measures.
1
8
Headline Group profit before tax, and Travel and High Street trading profit, as reported in the Interim results announcement on 14 May 2020. These are Alternative Performance Measures as defined
and explained in the Glossary on page 146.
WH Smith PLC Annual Report and Accounts 2020
Strategic report As lockdown restrictions were eased, we focused on the
re-opening of our store estate based on the safety of our
colleagues and customers, where we were able to make a cash
contribution from each individual unit and taking into account
passenger and customer traffic flows, and the opening of
transport infrastructure. We were able to open 570 High Street
stores by the end of June 2020, and at the end of August 2020,
we had 285 Travel stores open in the UK and 365 stores open
outside of the UK.
Following the announcement of a second lockdown in England,
we have 558 stores open in High Street and 243 stores open in
Travel, including 206 Post Offices and 135 hospital stores.
We were able to apply the learnings from the first lockdown to act
fast where necessary to return stock, furlough staff and manage
our supply chain. We also took measures to make sure our stores
can open swiftly as lockdown eases.
As we have re-opened our stores, we have focused on initiatives
within our control that support us in the immediate term and
position us well to emerge stronger as our markets recover.
These key areas of focus include:
• Driving average transaction value and sales per passenger
and we have seen increases across all our businesses
• Extending our categories and ranges to reflect the specific
needs of our customers in each location. For example, health
and beauty and hygiene and wellbeing products across our
Travel stores and working from home and electrical
accessories ranges across our High Street stores
• Forensic focus on costs; completing the previously announced
restructures in stores and head office and minimising
discretionary spend
• Working with landlords building on our strong relationships
to create opportunities for business development as the
recovery continues
• Investing capex in completing strategically important projects
which set us up well for the future. These deliver unique and
creative propositions for landlords and customers, such as our
new store at London Heathrow Airport Terminal 2 and Bowery
Bay at La Guardia Airport, New York
• Integrating our North American businesses into Las Vegas,
saving c.£5m of costs annually
• Building our internet proposition by extending our ranges,
increasing our distribution capacity and building customer
engagement through social media
As lockdown restrictions eased throughout the world we saw
a gradual recovery. Total Group revenue as a percentage of 2019
total revenue has been:
Percentage of 2019 Revenue
Travel
High Street
April 2020
May 2020
June 2020
July 2020
August 2020
September 2020
October 2020
8%
9%
16%
27%
37%
41%
39%
29%
35%
59%
75%
83%
89%
92%
Group
17%
18%
31%
43%
55%
59%
59%
As a result of the adverse impact from Covid-19, the Headline
Group loss from trading operations2 for the year was £43m*
(2019: profit of £177m) with Headline Group loss before tax2 at
£69m* (2019: profit of £155m). Including non-underlying items,
the Group loss before tax (on a pre-IFRS 16 basis) was £226m*
(2019: profit of £135m). The Group loss before tax, after non-
underlying items and including IFRS 16, was £280m.
Total Group revenue was down 27 per cent compared to last year
at £1,021m (2019: £1,397m) with Group like-for-like revenue3
down 33 per cent (down 64 per cent in the second half).
Following the significant disruption to the business, the Board
has announced that it will not be recommending the payment of
a dividend in respect of the financial year ended 31 August 2020.
As announced on 6 April 2020, we raised net proceeds of c.£160m
via a share placing and at the same time agreed a £120m
12-month (plus seven months at the option of the Group)
committed banking facility from BNP Paribas, HSBC Bank PLC
and Santander UK PLC. This was in addition to our existing
facilities. The Group has also agreed waivers for the bank
covenant tests at August 2020, February 2021 and August 2021.
As at 31 August, net debt2 was £301m* (2019: £180m). Group free
cash flow2 was an outflow of £41m* (2019: free cash flow
generated of £109m). At that point, the Group had cash of £108m
of which £82m was cash on deposit4 giving us access to £402m of
liquidity (undrawn revolving credit facility (RCF) of £200m, liquidity
loan of £120m and cash on deposit4 of £82m.)
2 Alternative Performance Measure defined and explained in the Glossary on page 146.
3
Like-for-like (‘LFL’) revenue is calculated on stores with a similar selling space that have been open for more than one year (constant currency basis). LFL revenue is an Alternative Performance
Measure defined and explained in the Glossary on page 146.
4 Cash and cash equivalents of £108m is £82m cash at bank plus £26m cash in transit/held at stores.
9
WH Smith PLC Annual Report and Accounts 2020Strategic report Chief Executive’s review continued
The Group had the following debt facilities as at
19 November 2020:
Amount drawn at
31 August 2020 and
19 November 2020
Maturity
Available facilities
£120m ’Liquidity’ Facility
£nil
November 20212
£200m Revolving Credit Facility £nil
December 2023
Existing debt
£200m Term Loan
£200m MRG Loan
£200m
£200m
October 2022
October 20222
As at 30 October 2020, the Group had cash on deposit of £83m
and access to £320m of committed facility through the RCF and
liquidity loan. At that point, the Group owed approximately £80m
primarily relating to rent, restructuring charges and outstanding
creditors as we entered the second lockdown. We anticipate
these payments will be made during the first half of the financial
year. Therefore, the Group had £323m of available cash and
facilities at the end of October 2020. We have worked hard to
reduce the cash outflow, managing costs, stock intake, capex
projects and negotiating rent reductions as well as improved
trading. The Group’s underlying monthly cash burn3 for
November is expected to be c.£20m including any furlough
mitigation. The improved trading and good cash management
resulted in our underlying cash burn in September and October
being £5m to £10m per month which was better than we had
originally expected.
In April, the Group secured eligibility to the Government’s Covid
Corporate Financing Facility (CCFF) for up to £300m. The Group
never utilised the facility. The CCFF is currently being reviewed
and like many companies, the Group is in dialogue with the
Bank of England concerning its eligibility.
Travel performance
Prior to Covid-19, our Travel business was trading very well
having delivered its seventh year of like-for-like sales growth.
The second half however was significantly impacted by Covid-19
across our UK and international markets resulting in a full year
trading loss1 of £33m* (2019: profit of £117m), of which £32m*
(2019: profit of £20m) relates to our international business
including MRG and InMotion. Total revenue was £553m
(2019: £817m), down 32 per cent compared to last year and down
43 per cent on a like-for-like basis.
We continue to invest in the business where we see attractive
opportunities for profitable growth. In addition, we completed the
acquisition of MRG, a leading and fast-growing US travel retailer
in December 2019. The combination of WH Smith, MRG and
InMotion now enables the Group to participate in the entire
North American airport specialty retail market.
High Street performance
High Street delivered a resilient performance despite a very
challenging second half with a full year trading loss1 of £10m*
(2019: profit of £60m). Total revenue was down 19 per cent with
like-for-like revenue down 19 per cent. Cost savings of £23m
were delivered in the year. An additional £34m of cost savings
have been identified over the next three years, of which £21m
are planned for 2020/21.
1
Alternative Performance Measure defined and explained in the Glossary on page 146.
2 The maturity dates include extension options at the Group’s control.
3 Monthly recurring cash burn before any cost deferrals or one-off savings/costs.
10
WH Smith PLC Annual Report and Accounts 2020
Strategic report Review of operations
Highlights
Revenue
£553m
(2019: £817m)
Trading loss¹
£(33)m*
(2019: profit £117m)
Total revenue
(32)%
Like-for-like revenue (43)%
Retail selling space (sq ft ‘000s)
and Number of units4
2020
2019
2018
2017
2016
Number
of units
Retail
selling
space
1,174
1,000
1,019
867
744
650
815
613
768
597
Travel
During the year, we completed the
acquisition of MRG, a leading and
fast-growing US travel retailer.”
Performance review 2019/20
Prior to Covid-19, our Travel business was trading very well
having delivered its seventh year of like-for-like sales growth.
The second half however was significantly impacted by Covid-19
across our UK and international markets resulting in a full year
trading loss1 of £33m* (2019: profit of £117m), of which £32m*
(2019: profit of £20m) relates to our international business
including MRG and InMotion. Total revenue was £553m
(2019: £817m), down 32 per cent compared to last year and
down 43 per cent on a like-for-like basis.
The table below shows the impact of Covid-19 in the second half
of our financial year:
Travel
H1
H2
Full Year
YOY movement in Revenue (%)
+19%
(73)%
(32)%
Trading profit/(loss)*1 (£m)
49m
(82)m
(33)m
We have worked hard across all our channels and territories to
implement a robust plan focusing on key priorities within our
control that support us in the immediate term and will enable us
to emerge stronger when our markets recover. Our key areas of
focus include: cost management, increasing customer
conversion and average transaction value, category development
and identifying opportunities for further growth.
UK Travel
In our UK Travel business, we saw a significant decline in
passenger numbers as a result of travel restrictions in the
second half of the financial year. Total revenue in the year was
£344m, (2019: £565m), down 39 per cent on the previous year.
In air, total revenue was down 48 per cent with like-for-like
revenue also down 48 per cent; in our hospital channel, total
revenue was down 15 per cent with like-for-like revenue down
20 per cent, and in rail, total revenue was down 42 per cent with
like-for-like revenue down 40 per cent. This resulted in a trading
loss¹ of £1m* (2019: profit of £97m).
Recent trading in UK Travel has been impacted by quarantine
measures and reduced passenger numbers on public transport.
Revenue in September and October 2020 was 32 per cent of 2019
sales. Hospital revenue continues to track at around 64 per cent
of 2019 sales. Following the announcement of the second
lockdown in England, we expect to be further impacted and for
the recovery not to begin until the second half of the current
financial year.
In air, whilst we saw some early signs of recovery from leisure
passengers in July as lockdown restrictions were eased,
passenger numbers stalled as quarantine requirements were
broadened. Despite the reduction in passenger numbers, we
have continued to build on our strong position in this channel by
focusing on increasing conversion and our average transaction
value. This has been achieved by further extending our categories
and existing ranges into new categories such as health and
beauty and hygiene and wellbeing products. We have seen some
positive results with scope to do more.
4
Travel units include motorway and international joint ventures and franchise units and exclude kiosks in China and India, and Wild Cards and Gifts franchisees in Australia.
11
WH Smith PLC Annual Report and Accounts 2020Strategic report Review of operations continued
During the second half, we opened a new flagship store at
London Heathrow Airport Terminal 2. This new format store
builds upon the success of our combined WHSmith and
pharmacy format store that opened at London Gatwick Airport
in the prior year. Our experience shows that we can deliver higher
sales per passenger from these large stores, through improved
layouts, increased capacity and by providing a one-stop-shop for
time pressed passengers. With over 5,000 square feet of selling
space, this flagship store features an extensive news, books and
convenience offer with the addition of a world class health and
wellbeing department with specialist staff. The health and
wellbeing department comprises a comprehensive range of over
3,000 products curated through our partnership with market
leading, global brands. In addition, the pharmacy counter offers
healthcare advice along with a wide selection of medicines.
We have received very positive feedback from both our customers
and landlords. While this format is not suitable for all locations,
we expect it to be of interest to landlords as they reconfigure their
space in the future.
Hospitals are an important channel for us and this is now our
second largest channel by sales in UK Travel. This channel is
a great example of how we continue to innovate to meet the
specific needs of each hospital. We have developed a strong
customer offer and aligned our ranges to the NHS strategy on
healthy eating. Our broad suite of brands, which include Costa
and M&S Simply Food, also ensure that we can tailor and adapt
our proposition to each hospital’s requirements. We believe there
are further opportunities to improve the hospital retail offer in
the UK and we are well positioned to grow this channel further.
Throughout the second half during the height of the pandemic,
and in the second lockdown, we committed to keeping our
stores open in c.130 hospitals across the UK in order to support
frontline NHS staff. We also extended our grocery ranges in these
stores to further support these staff, ensuring we continued to
play our part in the communities we serve.
Rail remains an important channel with significant long-term
investment in new lines and station redevelopments. During the
year, our performance was impacted by travel restrictions in
the second half. We saw some improvement in performance in
July, however this was stalled by further announcements in early
September. Similar to air, we have focused on extending our
ranges and increasing average transaction value.
We have focused on all areas of cost across our UK Travel
business. As a result of the significant decline in passenger
numbers, we took the difficult decision to review our store
operations in August 2020, reducing headcount across the
Travel business.
International Travel
Within our International Travel business, North America now
represents c.50 per cent of our stores outside of the UK and we
continue to see further opportunities to grow this business.
Outside of North America, we still have a relatively small market
share of the international news, books and convenience (NBC)
market and we believe there is good long-term potential for us
to continue to grow our space. During the first half of the financial
year, our strategy to grow our International Travel business
progressed well. In line with our UK Travel business, the second
half was adversely impacted by Covid-19.
Total revenue for the year, including MRG and InMotion, was
£209m (2019: £252m), down 17 per cent versus the previous year.
Like-for-like revenue, on a constant currency basis, was down
43 per cent. The trading loss1 for the year was £32m*
(2019: profit £20m).
North America
We completed the acquisition of MRG, a leading and fast-growing
US travel retailer in December 2019. The combination of
WHSmith, MRG and InMotion now enables the Group to
participate in the entire North American airport specialty retail
market. Differentiated from its competitors by its strategy of
developing highly customised retail experiences tailored to local
customers and landlords, MRG has a highly successful and
proven business model with a strong track record of concession
and tender wins. Although impacted by Covid-19 in the second
half, MRG won a further eight stores, including stores at San
Francisco, Denver and Newark airports, and, along with InMotion,
have a further 39 stores won but yet to open.
During the second half, MRG opened a new walk-through format
of stores at La Guardia Airport, New York. This format is a first in
North America. The Bowery Bay showcases around 15,000
square feet of selling space, curating a number of travel essential
and specialty international retailers and brands including Kate
Spade and Kiehl’s. All these stores are operated by MRG with the
digital accessories range provided by InMotion. This is the first
InMotion implant within MRG and we believe there is scope for
further opportunities for InMotion to be part of the MRG
assortment of products and brands and for InMotion to open
further stores in resorts.
InMotion has an excellent store portfolio with 116 stores across
43 airports in North America. During the year, InMotion opened
eight units, including units at San Francisco, Washington Dulles
and Salt Lake City international airports.
1
Alternative Performance Measure defined and explained in the Glossary on page 146.
12
WH Smith PLC Annual Report and Accounts 2020
Strategic report While Covid-19 has had a significant impact on our North
American business, approximately 85 per cent of passengers
in the US are domestic with leisure passengers an important
segment, and we therefore anticipate a faster recovery in this
market versus the rest of the world. TSA data continues to show
a consistent, gradual recovery in passenger numbers week on
week, with passenger numbers now at 35 per cent of 2019 levels.
In addition, the Las Vegas resorts business is proving resilient
with occupancy rates continuing to improve, particularly at the
weekend. Importantly, a significant number of visitors travel by
car to Las Vegas. Data from the Las Vegas Conventions and
Visitors Authority suggests that vehicle movements between
California and Nevada remain robust with volumes up 10 per cent
in September compared to 2019. Our sales performance has
reflected these trends with overall sales in North America at
44 per cent of 2019 levels. We currently have 224 stores open
(136 MRG and 88 InMotion).
During the second half, we accelerated the integration of
InMotion into the MRG head office in Las Vegas. Given the
exceptional circumstances, with the majority of stores closed,
we acted quickly to integrate the businesses much earlier than
we originally planned at acquisition. The integration is
progressing well, and we expect it to be complete by the end
of the calendar year. Going forward, we expect this to deliver
savings of c.£5m per annum.
Rest of the world
Outside of the UK and North America, our WHSmith International
business is seeing broadly similar trends with passenger
numbers significantly down year on year. Similar to the UK,
we remain focused on areas within our control, including
increasing average transaction value, renegotiating rents and
extending our leases. Of the 307 WHSmith stores outside the UK,
we have re-opened 159 stores to date. Recovery in these markets
is likely to take some time and we are planning accordingly.
We will temporarily close stores if they become uneconomic and
as airlines adjust volumes and schedules. Revenue in September
and October 2020 was at 18 per cent of 2019 levels.
Despite the disruption in the second half, outside of North
America we won 26 new WHSmith units internationally in the
year and opened 16 units, making a total of 307 WHSmith
international units as at 31 August 2020. Forty per cent are
directly run, 52 per cent are franchised with the balance being
joint ventures. We will continue to use these three economic
models flexibly in order to create value and win new business.
In total, across our global Travel business outside of the UK,
we are now present in over 100 airports and 30 countries with
277 units open in North America, 83 units open in Europe,
104 in the Middle East and India, and 120 in Asia Pacific.
As at 31 August 2020, our global Travel business including
MRG and InMotion operated from 1,174 units2 (2019: 1,019 units)
and, excluding franchises, operates from 1.0m square feet
(2019: 0.7m square feet).
2 Travel units include motorway and international joint ventures and franchise units and exclude kiosks in China and India, and Wild Cards and Gifts franchisees in Australia.
13
WH Smith PLC Annual Report and Accounts 2020Strategic report Review of operations continued
Highlights
Revenue
£468m
(2019: £580m)
Trading loss¹
£(10)m*
(2019: profit £60m)
Total revenue
(19)%
Like-for-like revenue (19)%
Retail selling space (sq ft ‘000s)
and Number of units2
2020
2019
2018
2017
2016
Number
of units
Retail
selling
space
568
2,682
576
2,740
607
2,764
611
2,799
612
2,827
High Street
High Street delivered a resilient
performance despite a very
challenging second half.”
Performance review 2019/20
High Street delivered a resilient performance despite a very
challenging second half with a full year trading loss1 of £10m*
(2019: profit of £60m). Total revenue was down 19 per cent with
like-for-like revenue down 19 per cent.
The table below shows the impact of Covid-19 on the second half
of our financial year:
Travel
YOY movement in Revenue (%)
Trading loss*1 (£m)
H1
(5)%
44m
H2
Full Year
(39)%
(19)%
(54)m
(10)m
Throughout the first lockdown period we kept 203 stores open to
ensure that those stores that include a Post Office could continue
to serve their local communities and provide access to vital postal
and banking services. Following the announcement of a second
lockdown in England, we kept open 558 stores on the basis that
our customers could continue to shop safely with us in a
Covid-secure environment and we had essential status.
We consider retail space as a strategic asset and we utilise our
space to maximise a return in the current year in ways that are
sustainable for future years. We have extensive and detailed
space and range elasticity data for every store, built up over many
years and we utilise our space to maximise the return on every
metre drop of display space in every store. This approach
remains as appropriate today as it has ever been.
As with our Travel business, we have focused on initiatives
within our control with a greater focus on: increasing average
transaction value, where we have seen some very positive
results; category development, introducing new ranges such
as health and hygiene, electrical accessories and working from
home ranges; and good cost control.
Driving efficiencies remains a core part of our strategy and
we continue to focus on all areas of cost in the business.
We achieved cost savings of £23m in the year. These savings
come from right across the business, including rent savings at
lease renewal (on average over 45 per cent) which continue to
be a significant proportion, government property rates holiday,
marketing efficiencies and productivity gains from our
distribution centres. An additional £34m of cost savings have
been identified over the next three years of which £21m are
planned for 2021.
1
2
Alternative Performance Measure defined and explained in the Glossary on page 146.
Excluding 3 Cardmarket stores that have not yet closed (2019: 18 Cardmarket stores) and including branches in Guernsey and Isle of Man.
14
WH Smith PLC Annual Report and Accounts 2020
Strategic report We have a resilient hospital channel and we are committed
to playing our part to support NHS staff on the frontline.
In air, we expect a gradual improvement in domestic passenger
numbers first, particularly in the US where c.85 per cent of
passengers are domestic, followed by international and
inter-continental passengers. In rail, as government restrictions
are lifted, and more people return to work, we expect to see a
gradual improvement in sales. Outside the UK, we will continue
to focus on our key initiatives and we expect to see a continued
improvement in passenger traffic in North America.
We are financially strong and we are an important retail partner
for our travel landlords. As a result, we are well positioned to
benefit from further opportunities, including extending our user
clauses to drive spend per passenger. We will continue to invest
in new stores and new store formats in the UK and North
America where we see attractive opportunities for
profitable growth.
In view of the continuing uncertainty from the impact of Covid-19,
we continue to plan cautiously for a wide range of outcomes.
As we have done since March, we will manage the business by
focusing on the short-term actions that manage cash and costs
along with ensuring we are well positioned for economic recovery,
particularly in our Travel business.
Carl Cowling
Group Chief Executive
19 November 2020
Over the years, we have actively looked to put as much flexibility
into our store leases as we can, and this leaves us well positioned
in the current environment. The average lease length in our
High Street business, including where we are currently holding
over at lease end is two and a half years. We only renew a lease
where we are confident of delivering economic value over the life
of that lease. We have c.420 leases due for renewal over the next
three years, including 120 where we are holding over and in
negotiation with the landlord. Depending on the negotiations with
our landlords and the government’s future approach to property
rates, we anticipate closing c.25 stores in the current financial
year as the leases on these stores expire. While this is not an
easy decision to make for our colleagues or the communities
we serve, it is vital we retain a strong and cash generative
high street portfolio going forward.
Our online businesses have delivered strong growth, particularly
in the second half.
i. Our online personalised greetings card business,
funkypigeon.com, has delivered high levels of growth with
record sales over key trading events and good profit growth.
ii. whsmith.co.uk provides customers with a comprehensive book
and stationery offer and, during the year we invested in a new
website. In addition, we have focused on extending our ranges
and building our customer base. In the second half,
we delivered growth of over 240 per cent.
iii. Our specialist pen website, cultpens.com, has continued
to perform well in the year. During the year, we have focused
on extending our luxury pen range which now includes a full
range of Montblanc pens and accessories.
As at 31 August 2020, the High Street business operated from
568 WHSmith stores2 (2019: 576) which occupy 2.7m square feet
(2019: 2.7m square feet). Eight WHSmith stores were closed in
the year.
Outlook
Despite the challenges and uncertainties faced in the second
half, the Group responded quickly to protect the business and we
are in a stronger position than forecast in August 2020. We had
reduced our cash burn to £5m - £10m per month in September
and October 2020, managed our cash position well and entered
November with access to £323m of liquidity. We expect cash burn
in November 2020 of approximately £20m. We have a robust plan
in place, and we expect to emerge stronger operationally as our
markets recover.
15
WH Smith PLC Annual Report and Accounts 2020Strategic report Financial review
Despite a strong first
half to the financial year,
the second half has
been significantly
impacted by Covid-19.”
Robert Moorhead
Chief Financial Officer and Chief Operating Officer
Group
Despite a strong first half to the financial year, the second half
has been significantly impacted by Covid-19. Total Group revenue
was down 27 per cent at £1,021m (2019: £1,397m) reflecting the
adverse impact in the second half. Total Travel revenue was
down 32 per cent at £553m of which MRG contributed £48m
(2019: £817m). Excluding MRG, total revenue in Travel was down
38 per cent. High Street generated revenue of £468m, 19 per cent
down on the prior year (2019: £580m).
As lockdown restrictions eased throughout the world, post the
first national lockdown, we saw some encouraging signs of
improvement in our sales performance. In October, our High
Street business had recovered to 92 per cent of 2019
performance. In Travel, we had also seen some signs
of improvement.
Throughout the first lockdown, we evaluated whether to open
an individual store based on cash generation and passenger
forecasts. Given the ongoing uncertainty and the second
lockdown in England, we plan to take this same approach.
We will continue to plan cautiously and throughout the second
lockdown in England we expect sales in UK Travel to revert to
similar levels seen in May 2020.
In North America, we are continuing to see encouraging signs
of improvement and we expect these trends to continue given
the high domestic passenger mix. In addition, we are also seeing
encouraging occupancy trends in Las Vegas.
Despite the adverse impact on the Group, and as a result of our
trading initiatives, we had consistently delivered an improved
sales performance, since April, prior to the second lockdown,
ahead of both passenger and footfall data.
The Group generated a Headline loss before tax1 of £69m*
(2019: Headline profit before tax £155m) and, after non-
underlying items and IFRS 16, a statutory loss before tax of
£280m (2019: profit before tax £135m). During the second half,
the Group received a total of £22m from the UK Government’s
Job Retention Scheme and similar schemes in other countries.
The Group also benefited from the business rates holiday
implemented by the UK Government which was worth £20m
in the year.
£m
Travel trading (loss)/profit¹
High Street trading (loss)/profit1
Group (loss)/profit from trading
operations1
Unallocated costs
Headline Group operating
(loss)/profit1
Net finance costs
Headline Group (loss)/profit
before tax1
Non-underlying items
Group (loss)/profit before tax
2020
(IFRS)
2020
(IAS 17)2
2019
(IAS 17)
(27)
(4)
(31)
(17)
(48)
(20)
(68)
(212)
(280)
(33)
(10)
(43)
(17)
(60)
(9)
(69)
(157)
(226)
117
60
177
(17)
160
(5)
155
(20)
135
Non-underlying items
Items which are not considered part of the normal operating
costs of the business, are non-recurring and are exceptional
because of their size, nature and incidence, are treated as
non-underlying items and disclosed separately. Non-underlying
items this year include items relating to the acquisition of MRG,
a pension past service charge and items specifically relating to
the impact of Covid-19 on the business. The majority of these
items are non-cash.
Non-underlying items included in the year ended 31 August 2020
(2019: £20m) are shown in the table below. The expected cash
impact in the year to 31 August 2021 relating to these items is £27m.
See reconciliation of net debt on page 18 for the cash spend in the
year ended 31 August 2020 in relation to non-underlying items.
Income statement
Ref.
£m
Costs directly attributable to Covid-19
Impairment
Onerous leases
Stock
Restructuring
Other property costs
Other
(1)
(2)
(3)
(4)
(5)
Other non-underlying costs
Transaction costs
Integration costs
Amortisation
Pensions past service cost
(6)
(6)
(7)
(8)
2020
IFRS
2020
IAS 172
(135)
n/a
(14)
(25)
n/a
(1)
(175)
(11)
(9)
(3)
(14)
(212)
(55)
(13)
(14)
(25)
(12)
(1)
(120)
(11)
(9)
(3)
(14)
(157)
Cash
Outflow
2021
–
–
–
24
3
–
27
–
–
–
–
27
* The Group adopted IFRS 16 ‘Leases’ with effect from 1 September 2019 using the modified retrospective approach to transition, and has therefore not restated prior periods. The results for the
year ended 31 August 2020 are not directly comparable with those reported in prior periods under the previous applicable accounting standard, IAS 17 ‘Leases’. In order to aid comparability,
the results for the year ended 31 August 2020 have also been presented on a pre-IFRS 16 (IAS 17) basis and commentary throughout this report will refer to these pre-IFRS 16 numbers.
Measures presented under IAS 17 are identified with a ‘*’. All prior year measures are presented on an IAS 17 basis. Reconciliations from IAS 17 measures to IFRS 16 measures are provided in
the Glossary on page 146. Group revenue was not affected by the adoption of IFRS 16, and therefore all references to and discussion of revenue, and like-for-like revenue are based on
statutory measures.
1 Alternative Performance Measure defined and explained in the Glossary on page 146.
16
WH Smith PLC Annual Report and Accounts 2020
Strategic report (7) Amortisation of acquired intangible assets
Amortisation of acquired intangible assets primarily relates to the
MRG and InMotion brands.
(8) Pension past service cost
Past service cost of £14m has been recognised in the year ended
31 August 2020. This relates to equalisation of pension benefits
between men and women between 1 April 1992 and 29 July 1993
(‘Barber equalisation’). The WHSmith Pension Trust has
historically been administered assuming gender equalisation
was achieved on 1 April 1992, and thus a Barber equalisation
window of 17 May 1990 to 1 April 1992 applied. A new Trust Deed
and Rules reflecting the equalisation of normal retirement ages
at 65 was executed on 29 July 1993. It has since been determined
that Barber equalisation was not effective until 29 July 1993.
Accordingly, this past service cost is the expected cost of
providing these benefits based on a normal retirement age of 60
rather than 65 for the period between 1 April 1992 and
29 July 1993.
A tax credit of £25m has been recognised in relation to these
items (£18m* under IAS 17).
Net finance costs
£m
Interest payable on bank
loans and overdrafts
Interest on lease liabilities
Net finance costs
2020
(IFRS)
2020
(IAS 17)¹
2019
(IAS 17)
9
11
20
9
–
9
5
–
5
Net finance costs relating to bank loans were £9m compared with
£5m last year. The non-cash pension interest charge was £nil
(2019: £nil). Lease interest of £11m in the current year arises on
lease liabilities recognised under IFRS 16.
Taxation
The effective tax rate1 was 23 per cent* (2019: 18 per cent),
with a tax credit being recognised on the loss made in the year.
The effective tax rate is higher than the prior year rate due to the
mix of losses in the UK and overseas and the different tax rates
that apply. The current year effective tax rate will depend on the
mix of results in the UK and overseas.
In August 2020 the Group received an early UK corporation tax
refund of £5m due the ability to offset 2020 losses against prior
year profits made in the UK. The Group does not expect to make
any corporation tax payments in the current year.
Items 1-5 in the table on page 16 have arisen as a direct
consequence of Covid-19, and reflect the impact of lost revenues
as a result of store closures, and downward revisions to
budgeted revenues following government interventions.
(1) Impairment of Property, plant and equipment and
Right-of-use assets
The impact on the Group’s operations of Covid-19 is expected to
continue during the next year and beyond. As a result, the Group
has carried out a review for potential impairment across the
entire store portfolio. The impairment review compared the
value-in-use of individual store cash-generating units, based
on management’s assumptions regarding likely future trading
performance taking into account the effect of Covid-19 to the
carrying values at 31 August 2020. Following this review, a charge
of £55m* was recorded for impairment of retail store assets on
an IAS 17 basis, and £135m on an IFRS 16 basis which includes
an impairment of the right-of-use assets of £95m.
(2) Onerous leases
As a result of the impact of Covid-19, the Group has carried out a
review of leases where the obligations of those leases exceed the
potential economic benefits expected to be received under them.
This resulted in a charge for the year of £13m*. This concept
relates to IAS 17 only and does not exist under IFRS 16.
(3) Stock provisions and write-offs
Provisions of £9m have been recorded against inventory mainly
relating to dated and perishable stock and stock subject to
obsolescence such as technology and apparel where the sell
through rate has significantly reduced due to store closures and
lower footfall as a consequence of Covid-19. In addition, since the
outbreak of Covid-19 the Group has incurred stock write-offs of
£5m mainly relating to perishable and dated product.
(4) Restructuring costs
As a result of the impact of Covid-19 on passenger numbers
and lower footfall on the UK high street, in August 2020 the Group
announced a review of store operations across both our Travel
and High Street businesses. The charge of £21m is principally
attributable to redundancies and restructuring costs relating to
that along with other corporate office restructuring undertaken
by the Group. In addition, the Group has incurred £4m relating to
costs of exiting WHSmith France and the Brazil joint venture both
of which were as a result of Covid-19.
(5) Other property costs
Property costs relate to reinstatement liabilities for stores
where the long-term viability has been impacted by Covid-19.
Under IFRS 16 these costs are included in right-of-use
assets and are therefore included within the impairment figure
of £135m.
(6) Costs relating to business combinations
During the year, the Group incurred transaction and integration
costs of £20m in relation to the acquisition of Marshall Retail
Group (‘MRG’), which completed on 20 December 2019.
Integration costs relate to the integration of MRG into the Group
and the merging of the InMotion and MRG corporate offices in
Las Vegas.
2
Calculated on a pre-IFRS 16 basis. See Glossary on page 146 for an explanation of the Group’s Alternative Performance Measures.
17
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Financial review continued
Fixed charges cover1
£m
Net finance charges (IAS 17)
Net operating lease rentals (IAS 17)
Total fixed charges
Headline (loss)/profit before tax1
Headline (loss)/profit before tax and
fixed charges1
Fixed charges cover – times
2020
9
210
219
(69)
150
2019
5
236
241
155
396
0.7x
1.6x
Fixed charges, comprising property operating lease rentals and
net finance charges, were covered 0.7 times* (2019: 1.6 times)
by Headline loss/profit before tax and fixed charges.
Cash flow
Free cash flow1 reconciliation
£m
Headline Group operating (loss)/profit*2
Depreciation, amortisation and
impairment*2
Non-cash items
Capital expenditure
Working capital*2
Net tax refunded/(paid)
Net interest paid*
Other
Free cash flow
2020
(60)
60
3
3
(79)
40
5
(7)
(3)
(41)
2019
160
49
5
214
(59)
(13)
(27)
(4)
(2)
109
The Group had a free cash outflow1 of £41m in the year, heavily
impacted by Covid-19 in the second half. The Group delivered
a net £3m* EBITDA and non-cash items compared to £214m in
2019. Capital expenditure was £79m, £20m higher than last year
reflecting new stores primarily in Travel and additional capex in
2020 relating to MRG. Following the outbreak of Covid-19 we
reviewed all our capital commitments and plans and saved
£24m compared to our expectations at the end of February 2020.
We continued to invest in strategically important projects such
as our new flagship store in London Heathrow Airport Terminal 2
and The Bowery Bay in La Guardia Airport, New York.
We expect capex spend for the current financial year to be around
£55m although we retain some discretion over part of this.
We worked hard to manage our working capital as lockdown fell,
managing our payment profile whilst continuing to pay our small
suppliers promptly. We utilised government schemes and
payment initiatives such as the UK Government’s moratorium
on rent payments for the UK High Street and the deferral of the
March quarter VAT payment. Overall for the year we saw a
working capital net inflow of £40m*.
Net corporation tax refunded in the year was £5m, compared
to a payment of £27m last year, as a result of the refund of
corporation tax payments on account due to Covid-19.
Reconciliation of net debt*
Net debt is presented on an IAS 17 basis. See Note 19 of the
financial statements for the impact of IFRS 16 on net debt,
and refer to the Glossary on page 146 for an explanation of the
Group’s alternative performance measures.
As at 31 August 2020 the Group had net debt1 of £301m*
comprising term loans of £400m relating to the acquisitions of
InMotion and MRG, £9m* of finance lease liabilities and net cash3
of £108m, of which £82m was on deposit (2019: net debt of
£180m, comprising term loan of £200m relating to the
acquisition of InMotion, £14m of finance lease liabilities and net
cash of £34m).
£m
Opening net debt*
Movement in year
Free cash flow
Dividends
Pensions
Non-underlying items
Net purchase of own shares for employee
share schemes
Purchase of own shares for cancellation
Acquisition of businesses, net of cash
acquired – MRG/InMotion
Proceeds from placings
Other
Closing net debt*
Cash3
Term loans
Finance leases4
2020
(180)
(41)
(47)
(3)
(20)
(2)
(–)
(316)
312
(4)
(301)
108
(400)
(9)
(301)
2019
(2)
109
(60)
(3)
(16)
(6)
(32)
(161)
–
(9)
(180)
34
(200)
(14)
(180)
£m
New stores and store development
Refurbished stores
Systems
Other
Total capital expenditure
2020
34
17
14
14
79
2019
31
16
11
1
59
The Group had a movement in net debt1 of £121m in the year.
In addition to the free cash outflow1, the Group paid, in January
2020, the final dividend relating to the 2019 financial year of
£47m; pension funding of £3m (see Note 5 on pensions);
and £20m of non-underlying items which mainly relate to the
acquisition and integration costs of MRG.
1 Alternative Performance Measure defined and explained in the Glossary on page 146.
2 Stated on an IAS 17 Headline basis, and excludes non-underlying items as described in Note 4 and the Glossary on page 146.
3 Net cash is Cash and cash equivalents (£108m; 2019: £49m) less bank overdrafts and other borrowings (£nil; 2019 £15m). See Group balance sheet on page 90.
4
Finance lease liabilities include those leases that were treated as finance leases under IAS 17.
18
WH Smith PLC Annual Report and Accounts 2020
Strategic report During the year, the Group raised £312m through two share
placings, firstly for the acquisition of MRG raising £152m, and
secondly raising £160m as part of the refinancing announced
on 6 April 2020 following the impact of Covid-19. We spent £316m
on the acquisition of MRG on 20 December 2019 funded through
the above placing and a £200m term loan. At the same point we
also extended our RCF from £140m to £200m.
Refinancing
The Group undertook an equity raise on 6 April 2020 which raised
net proceeds of c.£160m through a 13.7 per cent placing of new
shares. The Group also secured a new £120m 12-month (plus
seven months at the option of the Group) committed banking
facility from BNP Paribas, HSBC Bank PLC and Santander UK
PLC. In addition, the maturity on the Group’s two £200m term
loans was extended to October 2022.
£m
Net cash at bank5
Revolving Credit Facility6
Further Liquidity Facility6
InMotion – Term Loan
MRG – Term Loan
Balance sheet
£m
Goodwill and other
intangible assets
Property, plant and equipment
Right-of-use assets
Investments in joint ventures
Inventories
Payables less receivables
Working capital
Derivative financial asset
Net current and deferred tax
asset/(liability)
Provisions
Operating assets employed
Net debt
Net assets excluding
pension liability
Pension liability
Deferred tax asset on
pension liability
Total net assets
31 Aug 2020
108
200
120
200
200
31 Aug 2019
34
140
200
2020
(IFRS)
2020
(IAS 17)1
2019
(IAS 17)
493
192
413
2
1,100
150
(183)
(33)
–
28
(14)
1,081
(851)
230
(4)
1
227
495
190
–
2
687
150
(226)
(76)
–
17
(27)
601
(301)
300
(4)
1
297
225
201
–
4
430
174
(178)
(4)
2
(3)
(5)
420
(180)
240
(4)
1
237
The Group had net assets of £300m* before pension liabilities
and associated deferred tax assets, £60m higher than last year
end, reflecting the acquisition of MRG along with share
placements in October 2019 and April 2020. Net assets after the
pension liability and associated deferred tax asset were £297m*
compared to £237m at 31 August 2019. Under IFRS the Group
had net assets of £227m.
5 Net cash at bank includes cash at bank and, for 2019, drawdown on the revolving credit facility.
6 Undrawn as at 19 November 2020.
Pensions
The latest actuarial revaluation of the main defined benefit
pension scheme, the WHSmith Pension Trust, was at 31 March
2020 at which point the deficit was £9m (31 March 2017 actuarial
revaluation deficit of £11m). The Group has agreed a continuation
of the annual funding schedule with the Trustees from March
2020 for the next five years, which includes the deficit recovery
contributions and other running costs just under £3m per
annum. During the year ended 31 August 2020, the Group made
a contribution of £3m to the scheme.
The scheme has been closed to new members since 1996 and
closed to defined benefit service accrual since 2007. The Liability
Driven Investment (LDI) policy adopted by the scheme continues
to perform well with around 94 per cent of the inflation and
interest rate risks hedged.
As at 31 August 2020, the Group has an IFRIC 14 minimum
funding requirement in respect of the WHSmith Pension Trust
of £3m (2019: £3m) and an associated deferred tax asset of £1m
(2019: £1m) based on the latest schedule of contributions agreed
with the Trustees. As at 31 August 2020, the scheme had an IAS
19 surplus of £268m (2019: surplus of £354m) which the Group
has continued not to recognise. There is an actuarial deficit due
to the different assumptions and calculation methodologies used
compared to those under IAS 19.
The IAS 19 pension deficit on the relatively small UNS defined
benefit pension scheme was £1m (2019: £1m).
IFRS 16
The Group has adopted IFRS 16 ‘Leases’ with effect from
1 September 2019 using the modified retrospective approach to
transition, and has accordingly not restated prior periods. IFRS 16
superseded the lease accounting requirements of IAS 17, and
requires lessees to account for all leases under a single on-
balance sheet model as the distinction between operating and
finance leases is removed.
The adoption of IFRS 16 resulted in the recognition of right-of-
use assets of £457m, and lease liabilities of £493m as at
1 September 2019.
During the year ended 31 August 2020, the Group recognised
£105m of additional depreciation charges on right-of-use
assets, £11m of additional interest costs and a gain of £15m
due to Covid-19 related rent reductions in respect of IFRS 16
leases compared to recognising the IAS 17 rent expense of
£102m, resulting in a net impact on profit of £1m (before
non-underlying items).
The full impact of adoption of IFRS 16 is described in Note 29.
There is no impact on cash flow.
Robert Moorhead
Chief Financial Officer and Chief Operating Officer
19 November 2020
19
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Our performance
Key performance indicators
Revenue (£m)
Total revenue including retail sales,
wholesale sales to franchisees,
and commission and fee income on
concession and franchise arrangements.
Gross margin¹ (Basis points)
Gross profit divided by revenue.
Year-on-year (decrease)/increase
expressed in basis points.
Headline (loss)/profit¹ (£m)
The below profit/(loss) measures are
stated on a pre-IFRS 16 basis.
Travel
£553m
(2019: £817m)
High Street
£468m
(2019: £580m)
Group
£1,021m
(2019: £1,397m)
Travel
(480) bps
(2019: 100 bps)
High Street
(280) bps
(2019: 70 bps)
Group
(370) bps
(2019: 70 bps)
Travel trading (loss)/profit1
£(33)m
(2019: £117m)
High Street trading (loss)/profit1
£(10)m
(2019: £60m)
Headline Group (loss)/profit
before tax1
£(69)m*(2019: £155m)
Headline (loss)/earnings
per share1 (p)
Headline earnings per share is the
Headline diluted earnings per share
in pence per share, stated on a
pre-IFRS 16 basis.
Dividend per share
(p)
Total dividend per share.
Return of cash to
shareholders (£m)
Total cash returned to shareholders
through dividends and buybacks.
(44.2)p*
(2019: 114.7p)
Nil
(2019: 58.2p)
£47m
(2019: £91m)
Free cash flow1 (£m)
Free cash flow is defined as net cash
inflow from operating activities before
the cash flow effect of non-underlying
items and pension funding, less
capital expenditure. See reconciliation
of free cash flow on page 18.
£(41)m*
(2019: £109m)
1 Alternative Performance Measure defined and explained in the Glossary on page 146.
20
WH Smith PLC Annual Report and Accounts 2020
Strategic report Principal risks and uncertainties
Risk management framework
Our risk management framework is designed so that material
business risks throughout the Group can be identified, assessed
and effectively managed. This framework incorporates the
following core elements:
r
n it o
o
M
I
d
e
n
t
i
f
y
M
i
t
i
g
a
t
e
e s s
s
A s
Identify – Risk mapping to identify emerging issues:
– Risk registers are compiled by each
business function;
Assess
– Evaluating the potential impact and determining
the likelihood of risk occurrence;
Mitigate – Agreeing actions to manage the identified risks
and ensuring appropriate controls are in place;
Monitor – Maintaining continued oversight and tracking
the effectiveness of the controls.
All principal business functions compile risk registers and
summary risk maps to identify key risks, assess them in terms
of their likelihood and potential impact, and determine
appropriate control strategies to mitigate the impact of these
risks, taking account of risk appetite. The ongoing monitoring
of this framework is overseen by the respective Business Risk
Committees and the Group Audit Committee.
During the year, the Board reviewed the effectiveness of the
Group’s risk management and internal controls systems.
This review included the discussion and review of the risk
registers and the internal controls across all business functions,
as part of an annual exercise facilitated by the Internal Audit
team. During the year, the Board also received presentations
from management on specific risk areas such as the impact and
actions taken in relation to Covid-19, cyber risk, international
expansion, the ongoing risk monitoring processes and
appropriate mitigating controls.
Board review of principal risks and uncertainties
The Board has undertaken a robust assessment of the emerging
and principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity. Those emerging and principal risks are described on
the following pages, along with explanations of how they are
managed and mitigated. The Group recognises that the profile
of risks constantly changes and additional risks not presently
known, or that may be currently deemed immaterial, may also
impact the Group’s business objectives and performance.
Our risk management framework is therefore designed to
manage rather than eliminate the risk of failure to achieve
business objectives, and, as such, can only provide reasonable
and not absolute assurance against these principal uncertainties
impacting on business performance.
Changes in principal risks compared to last year
The following section summarises the emerging and principal
risks and uncertainties agreed by the Board. These incorporate
further information relating to the movement in the level of these
risk exposures during the year, to highlight whether, in our view,
exposure to each of the principal risks is increasing, decreasing
or remains broadly the same.
Where the consequences of the Covid-19 pandemic may impact
the business, we have incorporated these considerations into our
assessment in relation to each of these principal risk headings,
in addition to the specific commentary provided on page 22.
21
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Principal risks and uncertainties
Overriding risk impact from Covid-19
Impact on Principal risks and uncertainties
How the Group has responded
Covid-19 is the most significant risk currently facing the Group,
impacting all aspects of the business, our customers, colleagues,
stores, supply chain and offices, and across all of the markets in
which we operate. Areas of uncertainty include: the extent and
timing of lifting of international and local travel restrictions and the
re-opening of our stores; the speed and extent of recovery in the
travel industry more widely and the resulting impact on passenger
numbers and sales; and the speed and confidence of customers
in restoring previous shopping habits across all of the channels
in which we operate.
To the extent that the pandemic may have a longer and more
prolonged impact on global economic conditions, this may have a
further negative impact on consumer spending, customer footfall
and sales, and therefore create further potential disruption to all
of our areas of operation.
During the course of the pandemic, the safety of our customers
and colleagues has been at the forefront of our response and has
shaped all of the measures we have taken across the business.
In order to limit the impact of the pandemic on the Group we have
pursued a series of mitigating actions to protect our customers,
colleagues and our financial position. These have included:
• Maintaining regular communications across the Executive team to
monitor all aspects of our response;
• Operating some of our stores through the lockdown serving those
communities which most need our services, including stores in
hospitals supporting NHS key workers, and Post Offices providing
vital postal and banking services in the communities where
we operate;
• We have undertaken a phased re-opening across the rest of our
global store estate, ensuring the same effective safety measures
are in place, including social distancing, hand sanitiser stations,
controlled numbers on site via customer marshalling, providing
PPE for colleagues, protective screens at till points, and enhanced
cleaning regimes;
• Working with our suppliers to adjust our sourcing and supply
chains to reflect the reduced volumes of demand, and process
increased levels of returns;
• Ensuring our offices and distribution centres are Covid-secure
with reduced capacity reflecting social distancing, controlled
access and exit, freely available hand sanitiser and a rigorously
maintained cleaning regime;
• Reducing the Group’s cost base, capex and discretionary
expenditure and managing our cash flow and ongoing
commitments wherever possible;
• Restructuring our corporate offices and stores to increase
efficiency, speed of decision-making and reflecting lower levels
of sales;
• Engaging with landlords to manage rental obligations and property
costs, and agree amended lease terms where possible;
• Successfully implementing our existing business continuity plans,
to facilitate a transition to more agile working, with remote access
to core systems and use of technology to manage ongoing
communications;
• Entering into new funding arrangements with our relationship
banks, utilising the various government support schemes
including the Job Retention Scheme and other similar schemes
in other countries in which we operate; and
• Continuing to adapt our Covid-19 response measures to comply
with developing Government and regulatory guidance.
22
WH Smith PLC Annual Report and Accounts 2020
Strategic report Changes to the risk profile due to Covid-19
The table below explains where the potential risk implications of the pandemic link with, and impact upon, our other emerging and
principal risks that are further summarised on the pages that follow.
Relevant principal risk
Covid-19 impact
Economic, political,
competitive and market risks
The Group may fail to effectively respond to the pressures of an increasingly changing retail
environment, where Covid-19 materially changes consumer spending patterns and habits, such as
shifting from physical to online shopping, and from any longer-term damage to the travel industry
and reductions in the level of international travel.
Brand and reputation
The reputation of the brand may be impacted in the event that customers were to perceive that our
store environments are insufficiently safe and secure in response to the continuing experience of
the virus.
Key suppliers and supply chain
management
Given that large elements of our sourcing rely on factories and shipment from the Far East, these
supply chains and principal product flows could be negatively impacted by any interruptions due to any
further shutdown of factories and supply routes or growing international outbreaks.
Store portfolio
Business interruption
The Group’s performance is reliant upon trading from our wide portfolio of prime shopping locations,
where our performance may be negatively impacted in the event of further store closures, constraints
on trading and travel restrictions, or further extensions in the scale and nature of local lockdowns.
The business could be negatively impacted by any concentration of illness in a particular location such
as head office, distribution centres or particular stores, should these need to close temporarily and
large numbers staff were required to self-isolate.
Reliance on key personnel
The business could be negatively impacted in the event that any of the senior leadership team were
to fall ill or be personally impacted by the virus.
International expansion
The ongoing growth of the business has been generated through continued international expansion.
Such ongoing growth could therefore be negatively impacted from further enforced store closures,
constraints on trading and the longer-term continuation of international travel restrictions or
curtailment in passenger numbers.
Treasury, financial and credit
risk management
Significantly reduced trading over an extended period from further outbreaks of Covid strains and the
the lack of an effective vaccine could cause further negative impact on the Group’s financial position
in the longer term.
Cyber risk, data security and
GDPR compliance
Further risks from significant increases in industry-wide phishing activity and cyber threats could pose
further risks of potential systems interruption.
23
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Principal risks and uncertainties continued
The table below summarises our other continuing Principal risks and uncertainties.
Key: Change in risk level
higher
no change
lower
Risk/description
Mitigation
Change in risk level
Economic, political, competitive and market risks
The Group operates in highly competitive markets and
in the event of failing to compete effectively with travel,
convenience and other similar product category
retailers, this may affect revenues obtained through our
stores. Failure to keep abreast of market developments,
including the use of new technology, could threaten our
competitive position.
Factors such as the economic climate, levels of
household disposable income, seasonality of sales,
changing demographics and customer shopping
patterns, and raw material costs could impact on profit
performance. Consumer shopping habits, confidence
and spending will also continue to be significantly
impacted by the ongoing impact of the pandemic.
The Group may also be impacted by political
developments both in the UK and internationally such
as exiting the European Union (for example the removal
of Extra Statutory Concession 9.1 which provides export
VAT relief to airport customers travelling outside the
EU), regulatory and tax changes, increasing scrutiny by
competition authorities and other changes in the
general condition of retail and travel markets.
Brand and reputation
The WHSmith brand is an important asset and failure to
protect it from unfavourable publicity could materially
damage its standing and the wider reputation of the
business, adversely affecting revenues.
As the Group continues to develop its convenience food
offer in travel locations, associated risks include
compliance with food hygiene and health and safety
procedures, product and service quality, environmental
or ethical sourcing, and associated legislative and
regulatory requirements.
Key suppliers and supply chain management
The Group has agreements with key suppliers in the
UK, Europe and the Far East and other countries in
which it operates. The interruption or loss of supply of
core category products from these suppliers to our
stores may affect our ability to trade.
Quality of supply issues may also impact the Group’s
reputation and impact our ability to trade.
The Group may be impacted by: increased cost prices
arising from a ‘no deal’ Brexit; the application of the
UK Global Tariff to imports from the EU, as well as the
need to implement new business procedures in relation
to new import/export documentation requirements;
and the potential for inventory supply issues from
1 January 2021.
24
WH Smith PLC Annual Report and Accounts 2020
The Group’s performance is dependent on the levels of
consumer confidence and the Group’s performance is
dependent upon effectively predicting and quickly responding
to changing consumer demands, both in the UK and
internationally. The Group conducts customer research to
understand current demands and preferences in order to
help translate market trends into saleable merchandise and
store formats. Significant efforts have been applied to
implement the necessary Covid-19 protective measures in
all stores, including social distancing, sanitiser stations,
and the provision of protective screens and PPE for staff.
The Group continues to monitor the implications arising from
the process of exiting the European Union and is a member
of a number of key industry bodies which provide insight and
updates on this process. The Group works in conjunction
with trade bodies, other airport retailers and landlords to
understand the impact and implementation requirements of
the removal of Extra Statutory Concession 9.1.
Uncertainties
relating to the
ongoing
effects of
Covid-19, on
store trading,
footfall, travel
restrictions,
and customer
confidence
and shopping
habits as well
as the impact
of the UK’s exit
from the EU.
The Group monitors the Company’s reputation, brand
standards and key service and compliance measures to
ensure the maintenance of operating standards and
regulatory compliance across all our operations. We
undertake regular customer engagement to understand and
adapt our product, offer and store environment.
We operate a framework for monitoring compliance with all
regulatory, hygiene and safety standards, encompassing
supplier and store audits and clearly defined sourcing
policies and procedures. This includes all of the measures
put in place to remain Covid-secure.
Our sustainability programme monitors our performance in
respect of our key themes of the Environment, People and
our Communities.
The Group conducts risk assessments of all its key suppliers
to identify alternatives and develop contingency plans in the
event that any of these key suppliers fail.
Suppliers are required to comply with the conditions laid out
in our Supplier Code of Conduct which covers areas such as
production methods, employee working conditions, and
quality control.
The Group has contractual and other arrangements
with numerous third parties in support of its business
activities. None of these arrangements alone are individually
considered to be essential to the business of the Group.
The Group is liaising directly with suppliers to understand and
mitigate the potential impact of Brexit on product cost and
supply risks. In addition the Group has implemented new
systems to facilitate the correct compliance with import/
export documentation requirements.
Strategic report Risk/description
Store portfolio
The quality and location of the Group’s store portfolio
are key contributors to the Group’s strategy. Retailing
from a portfolio of good quality real estate in prime
retail areas and key travel hubs at commercially
reasonable rates remains critical to the performance of
the Group. During the year, a large proportion of our
global store estate has been subject to temporary
closure due to the lockdowns and travel restrictions
from the pandemic, where some stores still remain
closed at the current time.
All of High Street’s stores are held under operating
leases, and consequently the Group is exposed, to the
extent that any store becomes unviable as a result of
rental costs. Most Travel stores are held under
concession agreements on average for five to ten years,
although there is no guarantee that concessions will be
renewed or that Travel will be able to bid successfully
for new contracts.
Business interruption
Acts of terrorism, war, or other global incidents could
reduce the number of customers visiting WHSmith
outlets, causing a decline in revenue and profit.
Our Travel business has previously been impacted by
geopolitical events such as major terrorist attacks, and
the closure of travel routes from natural disasters or
weather-related events. The Group operates from three
distribution centres and the closure of any one of them
may cause disruption to the business.
In common with most retail businesses, the Group
also relies on a number of important IT systems,
where any system performance problems, cyber risks
or other breaches in data security could affect our
ability to trade.
Our global business has been negatively impacted this
year from the pandemic causing the temporary closure
of a large part of our store estate and head offices and
extended working from home. The longevity of the
pandemic until effective vaccinations become available
may continue to impact the business through extended
travel restrictions and public lockdowns.
Reliance on key personnel
Mitigation
Change in risk level
The Group undertakes research of key markets and
demographics to ensure that we continue to occupy prime
sites and identify appropriate locations to acquire new space.
We maintain regular dialogue and good relationships with
all our key landlords. The Group also conducts extensive
customer research and analysis to gather feedback on
changing consumer requirements, which is shared
with landlords as part of this ongoing relationship
management programme.
The Group has a framework of operational procedures and
business continuity plans that are regularly reviewed,
updated and tested. The Group also has a comprehensive
insurance programme covering our global assets, providing
cover ranging from property damage and product and public
liability, to business interruption and terrorism. Back-up
facilities and contingency plans are in place and are reviewed
and tested regularly to ensure that business interruptions
are minimised. Various elements of these plans have been
applied in response to the challenges of the pandemic, such
as extending the number of head office staff who continue
remote working from home.
The Group’s IT systems receive ongoing investment to
ensure that they are able to respond to the needs of the
business. Back-up facilities and contingency plans are in
place and are tested regularly to ensure that data is
protected from corruption or unauthorised use. Effective
application and testing of these previous plans enabled us
to respond swiftly and effectively to large numbers of staff
continuing to work from home.
Interruptions
occurring this
year due to the
effect of
Covid-19,
causing
temporary
closures of
offices and
stores.
The performance of the Group depends on its ability to
continue to attract, motivate and retain key head office
and store staff. The retail sector is very competitive and
the Group’s personnel are frequently targeted by other
companies for recruitment.
The Group reviews key roles and succession plans. The
Remuneration Committee monitors the levels and structure
of remuneration for directors and senior management and
seeks to ensure that they are designed to attract, retain and
motivate the key personnel to run the Group successfully.
International expansion
The Group continues to expand internationally. In each
country in which the Group operates, the Group may be
impacted by political or regulatory developments, or
changes in the economic climate or the general
condition of the travel market.
In December 2019 we acquired Marshall Retail Group,
a leading and fast-growing US travel retailer, operating
from 160 stores across 16 states, that together with our
previous acquisition of InMotion enables us to
consolidate our presence in the US.
The Group utilises three business models to manage risk
in our overseas locations: directly run, joint venture
and franchise.
The Group uses external consultants to advise on
compliance with international legislative and regulatory
requirements, to monitor developments that may impact our
operations in overseas territories and to conduct
reputational due diligence on potential new business
partners. Our geographical spread of activity mitigates
against the material concentration of risk in any one area.
MRG
acquisition
and continued
growth of
international
operations.
25
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Principal risks and uncertainties continued
Risk/description
Mitigation
Change in risk level
Treasury, financial and credit risk management
The Group’s exposure to and management of capital,
liquidity, credit, interest rate and foreign currency risk
are analysed further in Note 22 on page 124 of the
financial statements.
The Group also has credit risk in relation to its
trade, other receivables and sale or return contracts
with suppliers.
Change in
historic
gearing from
new loan
funding to
finance MRG
acquisition
and in
response to
the Covid-19
pandemic.
The Group’s Treasury function seeks to reduce exposures to
interest rates, foreign exchange and other financial risks,
to ensure sufficient liquidity is available to meet foreseeable
needs and to invest cash assets safely and profitably.
The Group does not engage in speculative trading in financial
instruments and transacts only in relation to underlying
business requirements. The value of any deposit that can
be placed with any approved counterparty is based on
short-term and long-term credit ratings.
The Group’s Treasury policies and procedures are
periodically reviewed and approved by the Audit Committee
and are subject to Group Internal Audit review.
The Group has a five-year committed multi-currency
revolving credit facility of £200m due to mature in December
2023. In addition, the Group has two loans; a syndicated
£200m term loan to fund the previous acquisition of InMotion
and a £200m term loan to fund the acquisition of MRG,
both bearing interest at LIBOR plus margin.
In April, in response to Covid-19, we raised net funding of
£160m via a share placing and we secured a new £120m
12-month (plus seven months at the option of the Group)
committed banking facility. In addition, the maturity of the
two existing term loans has been extended to October 2022.
A waiver has been secured on the existing bank covenants at
August 2020, February 2021 and August 2021.
Cyber risk and data security
The Group is subject to the risk of systems breach or
data loss from various sources including external
hackers or the infiltration of computer viruses. Theft or
loss of Company or customer data or potential damage
to any systems from viruses, ransomware or other
malware, or non-compliance with data protection
legislation, could result in fines and reputational
damage to the business that could negatively impact
our sales.
The Group employs a framework of IT controls to protect
against unauthorised access to our systems and data,
including monitoring developments in cyber security.
This control framework encompasses the maintenance of
firewalls and intruder detection, encryption of data, regular
penetration testing conducted by our appointed external
quality assurance providers and engagement with third party
specialists, where appropriate.
We have a Steering Group overseeing our approach and
response to cyber risk, and monitoring our programme.
Continuing
increase in
number of
externally
reported
cyber attacks.
26
WH Smith PLC Annual Report and Accounts 2020
Strategic report Assessing the impact of our principal risks on our strategic priorities
The table below maps our strategic priorities with our principal risks, to demonstrate where these risks may impact the ongoing
achievement of these strategic priorities.
Covid-19
pandemic
Brand and
reputation
Economic,
political,
competitive
and market
risks
Key
suppliers
and supply
chain
management
Store
portfolio
Business
interruption
Reliance
on key
personnel
International
expansion
Treasury,
financial and
credit risk
management
Cyber risk
and data
security
1. Travel
i. Winning
new space/
developing
new formats
in UK and
internationally
ii. Managing our
space to meet
the changing
needs of our
customers
iii. Improved
execution and
service
2. High Street
i. Optimise
returns on
space
ii. Margin growth
from mix
management
iii. Cost efficiency
iv. Utilising our
assets and
third party
partnerships
3. Focused use
of cash
Brexit
Following the UK’s withdrawal from the EU, there remains a
period of further uncertainty until a trading agreement has been
agreed between the UK and the EU. In these circumstances, the
extent to which our operations and financial performance are
affected both in the longer term and at the end of the current
transition period up to 31 December 2020, will only become clear
as details of any agreement are clarified. We have continued to
review the possible consequences that Brexit could have upon
our business and have concluded that it does not raise any
principal new risks, although it does have the potential to impact
a number of our existing risks, for example, regulatory changes
and economic uncertainty, including impacts from changes in
foreign exchange rates. We will continue to monitor the risks and
uncertainties arising from Brexit as part of the Company’s risk
management and control processes, as set out more fully on page
21 of the Annual report and accounts. Where the consequences of
Brexit may impact the business we have incorporated these
considerations in relation to each of the principal risk headings
listed on page 27.
27
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Principal risks and uncertainties continued
Viability statement
In accordance with the UK Corporate Governance Code 2018,
the directors are required to issue a ‘viability statement’ declaring
whether we believe the Company is able to continue to operate
and meet its liabilities over a period greater than 12 months,
taking into account its current position and principal risks.
We have included certain additional mitigating actions, mainly
in the form of deferred capital expenditure. The Group will also
continue to avail of government support schemes, such as
furlough, to the extent that such schemes are available and
required by the Group. The benefit of recently announced
extension to these schemes has not been included in the
scenarios modelled.
The Group’s strategy is highlighted on page 4.
The key factors are:
• In Travel: driving like-for-like sales, profit growth and cash
generation; better understanding of space and category
returns to meet changing consumer needs; winning new
space; and developing new formats both in the UK
and internationally.
• In High Street: optimising returns from a forensic focus on
space; margin growth from category mix management; and
a continuous focus on efficiency and hence cost reduction.
The Strategic report incorporates plans at both the Group and
operating division level. The plans consider the Group’s cash
flows, committed funding liquidity positions, forecast future
funding and key financial metrics.
A three-year period is considered the appropriate timeframe to
assess the Group’s prospects as it will cover the impact of the
current Covid-19 pandemic and it is consistent with the Group’s
strategic planning and review period.
The directors have assessed the prospects of the Group over this
period, taking into account its recent historical performance,
forecasts, a robust assessment of the emerging and principal
risks facing the Group and mitigating factors, all of which
consider the impact of Covid-19 given its impact on the Group’s
trading. In assessing viability, the directors considered the
position presented in the Budget and three year plan recently
approved by the Board (the ‘Base Case’).
These plans include management’s forecast of the financial
impact of the current pandemic over the next three years.
The Base Case has been further adjusted for the lockdown
across England announced by the UK Government on 31 October
2020. The Base Case has also been used in the Group’s
assessment of going concern.
In the context of the current challenging environment, a severe
but plausible downside scenario was applied to the Base Case
in a manner consistent with our assessment of going concern.
A summary of the key assumptions included in the severe but
plausible scenario is shown on page 93 in the context of going
concern. The additional period from 1 March 2022 to 31 August
2023 assumes a return to three year plan results. These results
are still substantially below pre-Covid levels.
As announced on 6 April 2020, the Group agreed a £120m
12-month (plus seven months at the option of the Group)
multi-currency revolving credit facility. This facility is due to expire
in November 2021. The viability assessment assumes that this
facility expires and is not renewed. The Group has not drawn
down on this facility, and no drawdown is assumed during the
viability assessment under either the Base Case or the Severe
but Plausible scenario.
The Group’s term loans of £400m mature in October 2022,
which is within the timeframe under review. The assessment
assumes that these facilities will be refinanced on similar terms,
and therefore the repayment of these loans has not been
included in the viability assessment.
In both the Base Case and the Severe but Plausible scenarios,
the Group would continue to have sufficient liquidity headroom on
its existing facilities.
The covenants on the above facilities, tested half-yearly,
are based on fixed charges cover and net borrowings. In response
to the impact of the Covid-19 pandemic on the Group’s
operations, the Group has secured waivers on the existing bank
covenants at 31 August 2020, 28 February 2021 and
31 August 2021.
The Group will next be tested on its covenants at 28 February
2022, over 15 months from the date of signing these financial
statements. Under current conditions, it is likely that the Group
would require a further waiver or amendment to its February
2022 covenant tests. If this situation prevailed, the Group would
engage its lending banks in advance of this date to secure a
further covenant waiver. Throughout the pandemic we have
received excellent support from our banks who have granted
covenant waivers for February 2021 and August 2021.
The Strategic report also sets out the Group’s business activities
together with the factors that are likely to affect its future
developments, performance and position.
As disclosed in the Strategic report, the Board has undertaken
a robust assessment of the emerging and principal risks facing
the Group, including those that would threaten its business
model, future performance, solvency or liquidity. The process
of mitigating and managing these risks is described on pages
21 to 28 of the Strategic report.
Taking account of the above matters, and the Group’s current
position and principal risks, the directors have a reasonable
expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due over the three-year period
ending 31 August 2023.
28
WH Smith PLC Annual Report and Accounts 2020
Strategic report Non-financial information statement – our journey to a
better business
Our approach
Our customers and wider stakeholders expect us
to be a responsible, sustainable business and we
believe we can make a significant contribution to
a better society and a cleaner environment. We have
been serving customers for nearly 230 years and to
maintain their trust, we need to adapt to shifting
patterns in sustainable production and consumption
and to changes in the global environment in which
we operate.
WHSmith has a long-standing commitment to high standards
of environmental, social and corporate governance. Our approach
has played an important role in risk management, business
development and delivering the expectations of our stakeholders.
Our new strategic plan for sustainability concentrates on those
areas that our stakeholders have told us are important and
where we believe we can make a meaningful difference.
The three areas of planet, people and communities will provide
a framework for our activities and reporting, underpinned by
a strong foundation of responsible business principles and
practices. We have defined a series of objectives for each of these
areas that will drive our activities for at least the next five years.
Our Journey to a Better Business
People
Planet
Communities
Diversity and
inclusion
Human rights in
our supply chain
Safety and
wellbeing
Climate change
Packaging
and waste
Forests
Education
and literacy
Supporting
local causes
Principles and responsible practice
Our Environmental, Social and Corporate Governance (ESG)
Committee, chaired by our Group Chief Executive, meets monthly
to monitor progress of our sustainability activities. More detailed
information, including governance, performance data and future
targets, is available on our website and in our full Sustainability
Report at whsmithplc.co.uk/sustainability/.
Environment
Our main environmental impacts relate to:
• Our impact on climate change from Scope 1 and 2 greenhouse
gas (GHG) emissions from the energy used to power our
offices, stores and distribution centres; and from wider value
chain Scope 3 emissions including the fuel used for transport
and distribution of products to store and business travel.
• The treatment and disposal of waste materials from our
operations, from the packaging used to protect our products
and from the products themselves when they come to their
end of life.
• Ensuring that any timber-based materials used in our
own-brand products come from recycled sources or have
been certified as originating from sustainable forests.
Our environmental policy commits us to minimising the impact
on the environment from our operations and the products that
we sell. We regularly review progress against our objectives and
targets, aiming for continual improvement year on year. A copy
of our Environmental Policy is available at whsmithplc.co.uk/
sites/whsmith-corp/files/CompanyPolicies/EnvironmentalPolicy_
Jul20.pdf.
Climate change
Climate change remains one of the most pressing, challenging
issues facing our world and we acknowledge we need to play our
part. We have a long-standing commitment to reducing carbon
emissions from our operations and have been improving energy
efficiency and minimising fuel use for over a decade.
We are committed to implementing the recommendations of
the Task Force on Climate-related Financial Disclosures (TCFD)
and continue to integrate them into our reporting. The following
section also fulfils our obligations under The Companies
(Directors’ Report) and Limited Liability Partnerships (Energy
and Carbon Report) Regulations 2018 which implement the
government’s policy on Streamlined Energy and Carbon
Reporting (SECR).
Strategy and risk management
In line with TCFD’s recommendations, we have assessed the risk
and opportunities that our business may face in 2030 using two
climate scenarios: a scenario where the world introduces the
changes that are needed to limit global warming to two degrees;
and a scenario where policy and regulatory interventions are
limited, and global warming exceeds four degrees.
Under the two-degree scenario, there would be widespread
interventions to limit global warming, including the
implementation of a global carbon price at a level which results
in universal change, a rapid shift in energy sector mix from fossil
fuels to renewables and a reversal of global deforestation.
Afforestation and a rapid growth in biofuels may lead to pressure
on land for other uses. In the transport sector, electric vehicles
would be widely adopted, there would be systemic improvements
in operations and logistics and international fiscal and regulatory
support would be increased for the use of alternative fuels for
road freight and aviation.
29
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Non-financial information statement continued
The main potential risks to WHSmith under a two-degree
scenario include increased operational costs from higher
electricity and fuel prices caused by a higher carbon price;
higher trading costs for certain products because of more
expensive raw materials caused by land use pressures and policy
disincentives for carbon-intensive or unsustainable materials
such as single-use plastics; and changes in consumer behaviour
such as reductions in business travel leading to lower footfall in
some of our stores, or a switch to lower-carbon products leading
to reduced sales of some of our current lines.
Under the four-degree scenario, the world fails to address
climate change, leading to global temperatures continuing to rise
to four degrees or more by the end of the century. There would
be no new policy or regulatory interventions and the physical
impacts of climate change would be much greater in this
scenario. Winters would generally be warmer and wetter in the
Northern Hemisphere and there would be more frequent
extreme weather events such as heavy rainfall and heatwaves.
Water scarcity would be exacerbated in many regions and many
coastal cities would be inundated because of rising sea levels.
Under a four-degree scenario, incidences of major flooding or
extreme heat could have a significant impact on our warehouses,
stores or distribution networks. Changes in precipitation patterns
could exacerbate water scarcity, leading to shortages in key raw
materials for products such as bottled drinks or paper, leading to
supply disruption and the potential for higher costs. There could
also be higher costs to pay for renewable energy if demand
outstrips supply.
Our analysis shows that both scenarios present potential
financial and operational risks to WHSmith by 2030,
predominantly due to increased costs. However, while these risks
would need to be managed, we would not have to materially
change our business model. We are taking action to manage
climate-related risk by:
• Investing in energy efficiency to reduce consumption, and
switching to renewable sources of electricity;
• Optimising route planning and logistics operations to minimise
fuel consumption;
Energy efficiency measures
We have taken a number of measures to improve energy
efficiency in our buildings. We continue to install building
management systems across our estate to monitor energy
consumption and to optimise energy settings for lighting, heating
and air conditioning to reduce consumption, whilst maintaining
a welcoming and comfortable environment for all. We are
replacing our current LED lights which are coming to the end
of their life with new equipment which provides a wider beam of
light for wall displays and till points, reducing the need for more
energy-intensive perimeter lighting in-store. We have also
introduced aerofoils to the front of our refrigeration units to
minimise additional energy consumption to deal with cold
air losses.
Climate change governance
Climate change is an important component of WHSmith’s
sustainability programme which includes carbon emission
reduction targets for our own operations and our wider value
chain. Our ESG Committee is responsible for climate change
related issues and for monitoring performance against objectives
and targets. Climate change forms part of a bi-annual update
report to the Board on our sustainability activities. In addition,
climate-related risks and opportunities are integrated into the
management processes and reporting frameworks for the Group
Risk report to the Audit Committee as described on page 46.
Management of climate-related risks
Identification, assessment and management of the risks from
climate change follow our established risk management process,
as described on page 21. Emerging climate change risks are part
of the Brand and reputation principal risk on page 24
and the Business interruption principal risk on page 25.
These principal risks are monitored by the Audit Committee to
ensure effective management and risk mitigation through
appropriate policies, processes and performance improvements.
Metrics and targets
As part of our roadmap to 2020, we set two climate-related
targets for our business:
• Reviewing our risk management processes to ensure they
include the climate-risks identified in our scenario analysis;
• Ensuring business continuity plans include for any disruption
from major weather events, such as flooding and extreme heat;
• to reduce carbon emissions from stores and distribution
centres by 45 per cent per square foot by 2020 (from a 2007
baseline); and
• to reduce carbon emissions per pallet by 20 per cent by 2020
• Factoring the impact of higher carbon prices into
(from a 2007 baseline).
decision-making for long-term projects; and
• Continuing to diversify products and packaging away from
carbon-intensive single-use and hard to recycle
plastic materials.
Earlier this year we met both targets, achieving a 66 per cent
reduction in carbon emissions per square foot and a 24 per cent
reduction in carbon emissions per pallet. Since the outbreak of
Covid-19, our logistics operations have been disrupted with a
greater number of non-routine deliveries and a resulting
increase in the rate of carbon emissions per pallet. This should
be a temporary setback and we anticipate that carbon emissions
per pallet will improve again soon.
30
WH Smith PLC Annual Report and Accounts 2020
Strategic report We have set ourselves new carbon-reduction targets for our
own operations and our supply chain. We are aiming to achieve
net zero emissions for our own operations (Scope 1 and 2) by
2025 through greater energy efficiency and use of renewable
electricity. This target is science-based and aligned with the
Paris Agreement’s aspiration to limit global warming to
1.5 degrees centigrade.
In order to lower our supply chain emissions, we will be working
with key suppliers responsible for 50 per cent of our supply chain
emissions to ensure that by 2025 they have plans in place to
reach net zero by 2040.
Further information on climate change metrics and our approach
is available in our Sustainability Report 2020.
Global greenhouse gas emissions (tonnes of CO2e)
Scope 1 emissions
Combustion of gas to heat and
cool WHSmith stores, offices
and distribution centres.
Percentage of emissions from
UK-based operations.
Scope 2 emissions
Electricity purchased to power
WHSmith stores, offices and
distribution centres.
Percentage of emissions from
UK-based operations.
Total Scope 1 and 2 emissions
Percentage of emissions from
UK-based operations.
Carbon intensity metric
(tonnes CO2e per £m revenue)
Scope 3 emissions
Indirect emissions from the
combustion of fuel for the
transport of products from
distribution centres to stores
and from business travel.
Percentage of emissions from
UK-based operations.
Total
2020
2019
2018
6,025
2,653
2,659
100%
100%
100%
21,005
22,192
21,724
4,696
6,940
6,430
100%
100%
100%
31,726
31,785
30,813
Carbon emissions are reported for our operations in the UK
and our directly-run international businesses where we have
operational control in accordance with GHG Reporting Protocol
standards. Scope 2 emissions are quoted using the location-
based method. Further data and full details of the scope and
methodology for reporting carbon emissions are available in our
Sustainability Report 2020. Assurance for Scope 1 and 2 carbon
emissions has been provided by Corporate Citizenship.
Energy consumption (MWH)
UK
Non-UK
Total
2020
86,782
17,301
104,083
2019
77,619
12,695
90,314
2018
80,396
6,406
86,802
Waste management
Waste is not only damaging to the environment but adds
additional cost to our business, so we are focused on reducing
excess materials and maximising recycling wherever we can.
In our High Street stores, we operate a recycling system which
enables us to recycle most forms of waste, including cardboard,
paper, plastics and metals. Waste is also segregated in our
distribution centres and offices. Overall, 88 per cent of our waste
was recycled during 2020.
The number of food lines that we sell is growing, and we are
working hard to eliminate food waste. One of the main sources of
food waste is from unsold sandwiches which have reached their
use-by date. We have implemented a number of initiatives,
including stock control systems to improve forecasting of chilled
food sales, so that we only stock food that we expect to sell,
reducing waste volumes. We operate a discounting strategy in all
our stores; engaging store colleagues to reduce the price of any
sandwiches that are approaching but have not yet exceeded their
use-by date.
We regularly review the type and quantities of packaging we use,
including primary packaging of our own-brand products and the
secondary packaging used to protect goods during transit and
distribution. We seek to identify opportunities to minimise
packaging where possible and use more environmentally-
sustainable solutions such as cardboard for products and
reusable skips for internal transfer of stock.
This year, we analysed the primary and secondary packaging for
our 200 best-selling own-brand lines and identified a number of
opportunities for reducing the amount of packaging used and for
switching from hard-to-recycle materials to materials that can
be more easily recycled. We have already redesigned the
packaging for many of our Christmas lines, removing surplus
plastic and switching to card where packaging is needed. We are
continuing discussions with our suppliers to look for further
opportunities to reduce the materials we use.
We have now switched our best-selling line of bottled water to
a product contained in 100 per cent recycled plastic and have
introduced a much wider range of refillable water bottles into our
stores. Our new London Heathrow Airport Terminal 2 store hosts
our first water refilling station, where customers can refill their
reusable water bottles free of charge.
31
60%
73%
86%
27,030
69%
24,845
76%
24,383
87%
26.4
17.8
19.3
Packaging materials are designed to protect items to maintain
quality and enhance product shelf life. However, excessive
packaging can negatively impact the environment, because
energy and raw materials such as forestry products or oil are
used in the manufacturing process. Inappropriate disposal of
packaging can also impact the air, land and marine environments
when it is no longer needed.
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Non-financial information statement continued
Sustainable forestry
Paper-based products are a core part of WHSmith’s business
and we are committed to minimising the environmental impacts
from paper sourcing for our own-brand products. We will only
use recycled material or virgin (i.e. non-recycled) material from
known, legal, well-managed and credibly-certified forests.
As part of our work towards this objective, and in line with the
requirements of national and international timber regulations,
we carry out an in-depth and rigorous assessment of supplier
timber-sourcing systems. We have set recycled or certified
timber materials as a minimum standard, which gives additional
assurance that materials originate from low risk sources.
A copy of our Sustainable Forests Policy is available at
whsmithplc.co.uk/sites/whsmith-corp/files/CompanyPolicies/
SustainableForestsPolicy_Jul20.pdf.
Our sourcing teams work with our suppliers to help them
understand our requirements and how the data they provide is
needed to demonstrate that any paper, card or wood used in a
WHSmith product is sourced from a certified or recycled source.
We can now demonstrate through certification that 99 per cent of
our stationery products contain materials originating from
certified and recycled material.
Employees
Our employees and those who work for us in our supply chain
and for our business partners are vital to our success. They make
our business and are critical to our customers’ experiences and
perceptions of WHSmith. We want to attract, motivate and retain
the best people to deliver great customer service and help our
business to grow.
The Group employs approximately 14,000 people, primarily in the
UK, and is proud of its long history of being regarded as a
responsible and respected employer. We have a full suite of
employee policies and further information is produced below
and in our Code of Business Conduct available at
whsmithplc.co.uk/sites/whsmith-corp/files/CompanyPolicies/
CodeofBusinessConductPolicy_Jul20.pdf.
Diversity and inclusion
WHSmith recognises that talented people are core to the success
of our business, whatever their age, race, religion, gender, sexual
orientation or physical ability. We are committed to promoting a
culture of equality and diversity through our policies, procedures
and working practices. We want to ensure that all our employees
receive equal and fair treatment, and this applies to recruitment
and selection, terms and conditions of employment, promotion,
training, development opportunities and employment benefits.
We believe in creating a culture throughout the Company that
is free from discrimination and harassment and will not permit
or tolerate discrimination in any form.
We have a range of activities designed to promote more women
into senior positions, including developing our succession
pipeline to ensure we have sufficient women ready for promotion.
Mentoring plays a critical role in the development of our talent
pipeline at all levels, providing targeted one-to-one support
from a more senior role model. We continue to work with
‘Everywoman’ who provide a host of personal development tools
32
WH Smith PLC Annual Report and Accounts 2020
aimed at women, including monthly webinars, workbooks and
relevant career development articles. The partnership also
provides our employees with links to an external network of
professional women in other organisations so that contact,
connections and relationships can be made easily.
We are continuing to build our understanding of diversity and
inclusion and to look at ways to increase ethnic diversity at senior
levels in our organisation. We have signed the Race at Work
Charter and have established a Diversity Forum, chaired by our
Group Chief Executive, where employees are encouraged to
provide feedback, commentary and suggestions for improving
diversity and inclusion in WHSmith.
We benchmark our diversity profile versus our peers and the
national average to ensure that our employee profile and that
of our management team reflect our commitment to diversity.
Our latest gender pay gap report can be found on our website.
In terms of equal opportunities, the Company gives full and fair
consideration to applications for employment when these are
received from disabled people. Should an employee become
disabled when working for the Company, we will endeavour to
adapt the work environment and provide retraining if necessary
so that they may continue their employment. Training, career
development and promotion opportunities are equally applied
for all our employees, regardless of disability.
Learning and development
Our learning and development programmes are designed to
support our employees as they develop their careers. We provide
a range of learning opportunities and initiatives that are designed
to help our employees develop their skills and experience.
These include online courses, workshops, mentoring and
coaching. We review and develop these activities to ensure that
they continue to meet the requirements of our business and the
learning and development needs for our employees.
Individuals have regular career conversations with their
managers during the year, with more formal performance
reviews taking place annually. In addition to monitoring
performance, we also use a model of employee potential to help
us to identify, develop and retain our talent within the business.
To ensure the safety of all employees and customers during the
Covid-19 outbreak, we rolled out online training for all store
colleagues to ensure they were fully aware of the operational
changes and health and safety precautions introduced in
response to the pandemic. All employees in store-based roles
were required to complete and pass the training course prior
to returning to work.
Employee involvement
Employee engagement is supported through clear
communication of the Group’s performance and objectives.
This information is cascaded via team briefings, employee events,
intranet sites and e-newsletters. We rapidly adapted our usual
methods for employee engagement this year to use channels
that could be accessed remotely by colleagues working from
home, and for many of our colleagues, video and tele-
conferencing replaced face-to-face engagement.
Strategic report We conduct regular employee engagement surveys. The results
are shared with all staff and actions are agreed to respond to
specific points of feedback, with employee focus groups used
to help understand the staff feedback in more depth.
focus on key issues such as fire safety, manual handling and
slips, trips and falls. A copy of our Health and Safety at Work
Policy is available at whsmithplc.co.uk/sites/whsmith-corp/files/
CompanyPolicies/HealthSafetyPolicy_Mar19.pdf.
Employee share ownership
The Company operates an HM Revenue & Customs Approved
Save-As-You-Earn share option scheme (‘Sharesave Scheme’)
which provides employees with the opportunity to acquire shares
in the Company. Approximately 875 employees participate in
the scheme.
Our employees: key information
The table below shows a breakdown of the composition of the
Board as at year end.
Tenure
0–1 year
1–3 years
3–6 years
6–9 years
10+ years
0
3
0
3
1
Male/Female
Male
Female
Executive/non-executive
Executive
Non-executive
5
2
2
5
71%
29%
29%
71%
The tables below show the number and percentage of women
and men in the Group Executive Team and their direct reports,
the senior management team, the management team and the
mix of UK-based employees across the Group as at year end.
Group Executive Team and direct reports1
Women
Men
17
32
35%
65%
1
This group comprises employees who are members of the Group Executive Committees
(who are not also members of the Board) and their direct reports.
Senior management team2
Women
Men
8
17
32%
68%
2
This group comprises employees who are members of the executive committees (who are not
also members of the Board).
Management team3 (UK based)
Women
Men
542
500
52%
48%
3
This wider group includes store leaders and senior head office staff (who are not also
members of the senior management team).
All employees (UK)
Women
Men
7,217
4,003
64%
36%
Safety and wellbeing
We are committed to maintaining high standards of health and
safety. The management team monitors key safety performance
indicators and an annual report detailing trends, performance
and recommendations is presented to the Board. The business
has a Health and Safety Committee that comprises employee
representatives and professional health and safety advisers.
We provide an ongoing programme for staff in stores, consisting
of safety training tailored to specific roles within store and that
We believe that it is just as important to support our colleagues’
mental wellbeing as it is to look after their physical wellbeing.
Our strategy to promote mental wellbeing has three main
objectives: to improve awareness and reduce stigma; to raise the
level of mental health support across the business; and develop
a culture which promotes good mental health.
We work in partnership with accredited organisations, such as
Time to Change, and mental health charities including MQ, the
mental health research charity; Place2Be, the leading national
children’s mental health charity; and CALM, a movement against
male suicide.
We worked closely with Mental Health First Aid (MHFA) England
to create a tailored approach to training and over 1,100 line
managers have received a half-day MHFA awareness course.
We have an equal number of mental and physical health
first aiders.
Social matters
Sourcing responsibly
One of our key social risks is the need for us to source products
sustainably, ensuring that workers in our supply chain are treated
well, and that their human rights are respected. WHSmith is a
member of the Ethical Trading Initiative, an alliance of
companies, trade unions and NGOs that promotes respect for
workers’ rights around the globe. Our Responsible Sourcing
Standards (whsmithplc.co.uk/sites/whsmith-corp/files/
CompanyPolicies/ResponsibleSourcingPolicy_Jul20.pdf)
are based on the ETI Base Code and underpin our strategy and
sustainable sourcing activities. We will only place orders with
suppliers who are committed to working towards compliance
with these standards, and we endeavour to bring about continual
improvement through a programme of factory audits and
ongoing engagement.
Our in-house audit and engagement team conducts audits of
our own-brand suppliers at least every two years, assessing
compliance with our Code of Conduct and grading suppliers
Gold, Silver, Bronze and Unacceptable. We use a mix of
announced and unannounced audits and a factory must be
graded Bronze or above if we are to work with them. The Board
reviews our responsible sourcing strategy annually, looking in
detail at our audit and engagement programmes, emerging
trends and risks, targets and performance.
To supplement the information we gain from supplier audits,
our team also spends a significant part of its time engaging with
suppliers on an ongoing basis to build stronger and more
transparent relationships. The team’s engagement focuses on
resolving specific issues identified during audits and on delivering
wider projects to help suppliers deliver on key areas such as
worker representation or health and safety. We have an
independent hotline for workers to report issues they are
concerned about, which we then investigate and follow-up with
suppliers to ensure they are addressed.
33
Strategic reportWH Smith PLC Annual Report and Accounts 2020
Non-financial information statement continued
Anti-bribery and anti-corruption
WHSmith prides itself on its values and commitment to acting
with integrity throughout the organisation and we will not tolerate
bribery, corruption or extortion in any form, either within our own
business or in those working on our behalf. Our Code of Business
Conduct sets out in detail how those working for us should
behave and what they should do if they are confronted with
bribery or corruption. We require all employees and anyone
working for us in any capacity to comply with the UK Bribery Act,
in addition to any local anti-bribery and anti-corruption laws.
Our Code states that employees or others working on our behalf
must never offer or accept any kind of bribe, and that our
subcontractors, consultants, agents and others we work with
must have similar anti-bribery and corruption measures in place.
All employees are required to confirm that they have read and
accept our Code of Business Conduct on an annual basis and
are encouraged to report any suspected breaches using our
confidential Speak Up helpline. Further details of our policy
on anti-bribery and anti-corruption are provided at
whsmithplc.co.uk/sites/whsmith-corp/files/CompanyPolicies/
CodeofBusinessConductPolicy_Jul20.pdf.
Communities
WHSmith is at the heart of communities across the UK and we
are committed to making a positive impact wherever we operate.
As a major retailer of books and stationery, we are particularly
passionate about literacy and life-long learning. We are a
long-term advocate for the development of literacy skills and we
have provided help over many years to children and young people
who need additional support.
This year marked the 15th anniversary of our partnership with
the National Literacy Trust, and we supported their Young
Readers’ Programme with books and other materials for schools
in socio-economically disadvantaged areas of the country.
In addition, the WHSmith Charitable Trust provided financial
support for the programme, supported by donations from
WHSmith customers and employees. Over the past decade we
have directly helped over 76,000 children to develop their reading
and writing skills.
The outbreak of Covid-19 presented an unprecedented challenge
and we were inundated with requests for donations and support.
We donated notepads and pens to support frontline NHS workers
and stationery packs to support disadvantaged children with their
home-learning. We also donated a large quantity of confectionery,
Easter eggs and other food items to the charity FareShare and
community hubs, ambulance stations and hospitals across
the country.
Over the year we invested nearly £1.2m into local communities,
including cash donations, staff time and gifts in kind. The full
extent of our community investment activity, measured according
to the London Benchmarking Group model, is outlined in our
Sustainability Report 2020.
Respect for human rights
We are committed to ensuring full respect for the human rights
of anyone working for us in any capacity and we take a
zero-tolerance approach to modern slavery. We have developed
a due diligence process to make sure we are identifying and
assessing any potential and actual risks, and that we are
providing appropriate risk control, mitigation and remedy where
needed. Our approach to human rights is laid out in our Human
Rights Policy (available at: whsmithplc.co.uk/sites/whsmith-corp/
files/CompanyPolicies/HumanRightsPolicy_Jul20.pdf) which
provides further information on our due diligence processes
and the minimum requirements that everyone working for
and on behalf of WHSmith must meet.
Our Modern Slavery Statement (available at: whsmithplc.co.uk/
investors/results-reports-and-presentations/modern-slavery-
statement) sets out the steps we have taken to prevent modern
slavery in our own operations and supply chain.
34
WH Smith PLC Annual Report and Accounts 2020
Strategic report Section 172(1) statement
This statement describes how the directors have had regard to
the matters set out in Section 172 of the Companies Act 2006
(the ‘Act’) in exercising their duty to promote the success of the
Company for the benefit of its members as a whole.
Section 172 of the Act requires a director of a company to act
in the way he or she considers, in good faith, would most likely
promote the success of the company for the benefit of its
members as a whole. In doing this, Section 172 requires a
director to have regard amongst other matters to the:
a) Likely consequences of any decisions in the long-term.
b) Interests of the company’s employees.
c)
d)
e)
Need to foster the company’s business relationships with
suppliers, customers and others.
Impact of the company’s operations on the community
and environment.
Desirability of the company maintaining a reputation for high
standards on business conduct.
f)
Need to act fairly as between members of the company.
Information on how the Board operates can be found in the
Corporate governance report on pages 38 to 45.
Examples of how the directors have had regard to the matters set
out in Section 172 when discharging their duties are set out in the
following pages.
Key stakeholder groups can be impacted in different ways by
decisions which are taken by the Board. The directors consider
that the groups listed below are the Company’s key stakeholders.
They are identified as those most likely to be affected by the
principal decisions of the Board:
• Employees: the people at WH Smith are its greatest resource
and the strength of the business depends on their commitment
and hard work. They depend on the Company for stable
employment and expect to be treated with respect and dignity
and to be given opportunities to reach their potential.
• Customers: customers are why we exist. They expect that the
Company offers a wide range of products at an accessible
price, are responsive to their needs and trades fairly
and responsibly.
• Shareholders: the Company relies on its shareholders for
investment and capital. They rely on the Company to generate
value for their investments in a responsible and
sustainable way.
• Suppliers: mutually trusted partnerships with suppliers and
landlords are vital in enabling the Company to offer a wide
range of quality products at affordable prices. They look to the
Company for a productive business relationship.
• Communities and the environment: the Company is committed
to operating responsibly, to helping local communities and
good causes where it can add the most value and to
minimising its impact on the environment.
• Pensioners: the Company is committed to ensuring that it
meets its obligations to past employees who rely upon it to
fund their pensions.
The Company engages with these stakeholder groups regularly
to ensure that the Board is aware of their views and interests.
These stakeholder views and concerns are integral to ensuring
a considered and balanced approach to the Board’s decision-
making processes.
The Board accesses information from stakeholders through
a number of methods including direct engagement by Board
members, for example, through store visits and meetings with
employees across the businesses, and the review of reports
and updates from senior executives who meet regularly with
stakeholder groups.
Employees
The Board engages with employees through a number of
different methods:
• the Group Chief Executive and other senior executives hold
regular face-to-face updates with employees on matters
including the Group’s strategy and business performance;
• senior executives attend regular business meetings during the
year, including individual business executive meetings, trading
meetings and risk committee meetings;
• employee engagement surveys are held regularly to gather
staff views on working for WH Smith. In the Company’s head
offices, the businesses run quarterly employee forums where
team representatives are encouraged to raise any issues or
concerns. The Company has extensive programmes to
promote employee wellbeing, for example, through our
mental health first aider programme and annual
Wellbeing at Work week. More detailed information on
how we promote awareness of mental health issues is
available in our full Sustainability Report, available at
whsmithplc.co.uk/sustainability;
• Simon Emeny is the designated non-executive director for
workforce engagement and leads on ensuring effective
engagement with the workforce. Simon Emeny has, during
the year, joined senior executives on calls with their teams;
for example, he joined Heidi Reynolds, Retail Director,
High Street, on her regular ‘Ask Heidi’ call with her team;
• during the Covid-19 pandemic, the Group Chief Executive and
other senior executives held weekly briefings via webinars for
all employees. At the briefings, employees were given the
opportunity to ask questions on any issues relating to the
operation of the Company; and
• employees are given regular written updates and reminders
on operational issues. This year, this included more regular
communications on the Company’s wide-ranging support
programmes, such as our Employee Assistance Programme
to support with counselling services, the WHSmith Benevolent
Fund to support employees and their families with financial
hardship and access to trained Mental Health First Aiders.
35
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Section 172(1) statement continued
The Group HR Director provides regular updates to the Board
on employee-related matters, including staff retention rates,
learning and development, gender pay gap, diversity, staff surveys
and workforce remuneration. The Group HR Director also
provided updates to the Board on the redundancies which were
made during the year as a result of the impact of Covid-19 on the
Company. The Audit Committee has oversight of the Company’s
whistleblowing policy on behalf of the Board. The Company’s
whistleblowing helpline allows employees to raise concerns
regarding misconduct and breach of the Company’s policies.
The Audit Committee receives reports on any matters of concern
raised by employees.
The key topics and feedback that the Board obtained from our
engagement with our employees included questions on some of
the principal decisions of the Board made during the year such
as those relating to furlough and Company restructuring and
redundancies which regrettably the Board considered to be
necessary to safeguard the long-term sustainability of the Group.
In conjunction with HR, employees have been provided with
information and guidance on these matters in order to help
provide clarity in an uncertain and worrying time. In addition,
there were also questions from employees on safety at work,
working from home arrangements and holiday entitlement.
Employees also raised the importance of diversity in the
workplace during the weekly briefings. The Board continues to
be highly supportive of the initiatives the Company has in place
to promote diversity throughout the business and has set up a
Diversity and Inclusion committee, comprising employees from
across the Group together with the Group Chief Executive and
HR Director. Further information can be found in the
Nominations Committee report on pages 52 and 53.
The safety and wellbeing of our staff has been a priority
throughout the pandemic. The Board is very proud of our store
colleagues who have done an outstanding job in serving
customers. The Board oversaw the adoption of safety measures
for employees in line with Government guidelines and advice,
and include social distancing measures, PPE for colleague use,
hygiene stations, protective screens at till points, enhanced
cleaning and encouraged use of self-checkout or contactless
payment. The Company’s distribution centres remain operational
with effective social distancing measures in place and head office
staff working from home, where possible.
As a result of the impact of Covid-19, the Company commenced
a collective consultation on a restructuring of the Travel and
High Street businesses which resulted in approximately 1,500
employees being made redundant. This was a very difficult
decision and the Board took steps to ensure that all colleagues
were supported throughout this process and ensured that it was
conducted fairly. The Board also took the decision to continue the
Company’s policy of paying enhanced redundancy. The Company
has also set up an alumni programme to keep in touch with
those employees that have been made redundant so that they
can be kept informed of job vacancies when the Company starts
to recover from the impact of Covid-19.
Customers
The Company regularly listens to its customers and responds
to their feedback. The Company’s store teams and dedicated
customer service team are in constant dialogue with customers,
and ensure that customer feedback is communicated to the
relevant parts of the business and taken into account as the
business develops and implements its policies, operational
activities and product ranges.
The Board receives regular updates on customer feedback and
service standards across the stores and has put systems in place
to ensure that it complies with all relevant product safety
legislation. During the Covid-19 crisis, the Board took all
necessary steps to help ensure the safety of customers whilst
visiting the stores by ensuring that the Company complied with
all relevant social distancing measures. The Board took the
decision to keep the stores open in the specific communities that
most needed the Company’s services. These included the stores
in hospitals, where the Company supported NHS staff by giving
them a 20 per cent discount on all purchases from hospital
stores during the Covid-19 crisis and, in collaboration with
Sainsbury’s, increased the grocery range in these stores enabling
NHS staff to obtain the items they needed with greater ease.
In addition, the stores on the high street that host Post Offices
continue to provide the communities they serve with access to
vital banking and postal facilities.
Customers who may not be able to visit our stores can shop
online with us at whsmith.co.uk.
Other key feedback that the Board obtained from engagement
with customers related to the nature of store environments, the
availability of products, value for money, online offerings,
customer service and ethical trading. As a result of this feedback,
we sought to invest in store environments and layouts and have
sought to develop new store formats. The Company aims to offer
customers a choice of products at competitive prices across all
store formats. The Board took the decision to invest in the
Company’s online businesses this year, offering a wider range of
products and an enhanced customer experience. The Board has
also approved a new package of environmental and ethical trade
activities and further details are provided in the Non-financial
information statement on pages 29 to 34.
Shareholders
The Board recognises the importance of communicating with
its shareholders to ensure that its strategy and performance are
understood. The Group Chief Executive and CFO/COO update the
Board following meetings with major shareholders, and when
requested to do so, the Chairman and non-executive directors
attend meetings with major shareholders.
During the Covid-19 pandemic the Company provided updates
on developments in trading in the form of stock market
announcements to ensure that all shareholders were informed
about the impact of the pandemic on the business.
The Company engages with investors in one-to-one meetings to
discuss specific elements of the business. We communicate with
shareholders through our results presentation, AGM, investor
roadshows, and our investor relations department.
36
WH Smith PLC Annual Report and Accounts 2020
Strategic report The Board receives reports and updates on shareholder relations
at each meeting to ensure that the Board and its Committees are
kept informed of investors’ and advisers’ views on strategy and
corporate governance.
A key issue for the Board during the year was the approach that it
took to improve the Company’s liquidity position as a result of the
impact of Covid-19 on its trading and financial position, and when
taking decisions, carefully considered the interests of its
employees, customers, shareholders and suppliers. In April 2020
the Company consulted with shareholders and banks in order to
secure new financing arrangements to strengthen its balance
sheet, working capital and liquidity position. Following this
consultation, the Board approved a placing of 15,802,768 new
ordinary shares raising gross proceeds of approximately £165.9m
and the package of new bank financing arrangements, including
a new £120m committed banking facility in addition to its existing
facilities. You can read more about the Company’s finances on
pages 16 to 19.
More information on how the Board engages with its shareholders
can be found in the Corporate governance report on page 44.
Suppliers/landlords
The Board is provided with information about key suppliers as
and when relevant to Board discussions, including when approval
of material contracts/leases is required. The Company aims to be
a trusted partner for suppliers and landlords, with established
policies covering the way in which we transact with them.
The Company engages with its suppliers and landlords in a
number of ways including:
• direct engagement via individual supplier and landlord meetings;
• supplier conferences for major groups of suppliers such as
trade suppliers for individual businesses or geographies, or
suppliers of Goods Not for Resale; and
• supplier feedback surveys.
The Company has a well-established ethical trade programme
aimed at improving labour standards for workers in our supply
chain and to ensure that our products are sourced responsibly.
The Board receives an annual update from the Company’s Head of
Sustainability on how the Company is meeting its obligations and
to ensure the Board is kept informed of developing best practice.
The Board has ensured that, during the Covid-19 pandemic, the
Company has maintained a dialogue with suppliers and landlords
to mitigate disruption and understand their concerns. The Board
will also ensure that the Company will continue to work closely
with our suppliers to manage any changes in the supply chain
as a result of Brexit.
Community and environment
The Board places great importance on ensuring that the
Company helps community groups and good causes that are
closely aligned with the business, and that it operates in a way
which minimises the impact on the environment.
Engagement with community groups and others includes:
• regular meetings with key charity partners, including the
National Literacy Trust, mental health charity partners and
other charities benefiting from the sale of products such as
Christmas cards;
• engagement through meetings, correspondence and survey
responses with non-governmental organisations, trade bodies
and others with an interest in community and environmental
activities, including the Ethical Trade Initiative, WWF and CDP;
and
• questions, views and concerns through the
corporate.responsibility@whsmith.co.uk inbox which is
available for anyone to make contact with the Company on any
issues relating to community or the environment.
The Board receives an update twice a year on the Company’s
key community and environment activities from the Head of
Sustainability. This year, the Board signed off a new set of
sustainability objectives relating to the most important
environmental and social issues for the business. These include
a new target to minimise the impact on climate change by
reaching net zero emissions for the Company’s UK operations by
2021 and for the international operations by 2025. The Board also
decided to continue with the long-term focus on children’s
literacy and to work in partnership with others to tackle
inequalities in the ability of children to read and write.
Further details are provided in our 2020 Sustainability Report
available at whsmithplc.co.uk/investors/results-reports-and-
presentations/corporate-responsibility-reports.
Feedback from some stakeholders this year indicated that a
number of the Company’s policies required an update to ensure
that they were in line with best practice. The Board signed off
amendments to the Company’s policies this year, including the
Code of Business Conduct, Responsible Sourcing Requirements,
and policy statements on Human Rights, Environment and
Sustainable Forests.
During the initial months of the Covid-19 pandemic the Company
received an unprecedented number of requests for support from
charities, community groups and others seeking donations of
products or money to support their particular cause. The Board
agreed, in line with the corporate giving strategy, to make a
number of charitable donations. Further details are provided
in the Strategic report on pages 29 to 34.
Defined benefit pension fund
During the year the Board engaged with the Trustees of the
WHSmith Pension Trust, who have a fiduciary duty to the
members and beneficiaries of the Company’s defined benefit
pension scheme, to ensure that the scheme is sufficiently
funded. The CFO/COO and the Finance Director – Group regularly
meet with the Chair of the Trustees and attend the Trustee
meetings to report on annual and interim results. The Board
agreed with the Trustees the latest triennial valuation and
funding plan to ensure that the Company’s defined benefit
pension scheme remains well positioned to meet its liabilities.
On behalf of the Board
Carl Cowling
Group Chief Executive
19 November 2020
37
Strategic reportWH Smith PLC Annual Report and Accounts 2020 Corporate governance report
The Board is committed
to achieving the highest
standards of corporate
governance.”
Henry Staunton
Chairman
Board role and effectiveness
The Board is committed to achieving the highest
standards of corporate governance. This is our first
report discussing how the revised UK Corporate
Governance Code (the ‘Code’), which was published
in 2018, applied to the Company. You can read about
how we complied with the Code in this report.
As Chairman, my role is to run the Board to ensure that the
Company operates effectively and ensure that the Board works
collaboratively and has the right balance of skills, knowledge,
independence and experience to assess, manage and
mitigate risks.
Culture
We have been serving customers through our presence in town
centres, travel hubs and hospitals for 228 years, providing a retail
destination of choice and a sense of community for thousands
of customers every day. We have a presence in 30 countries,
employ 14,000 employees, source products from thousands
of suppliers and play an important part in creating vibrant and
sustainable local economies.
We recognise we have an obligation to grow our business
sustainably, providing financial returns for our shareholders,
whilst maintaining high standards of environmental stewardship
and social equity. In delivering these obligations, it is important
that our colleagues, business partners and suppliers are able
to make the right decisions. We support them with a strong
values-based culture, ongoing training and development, and a
solid foundation of responsible business governance, policies and
programmes. You can read more about our culture on page 43.
Stakeholder engagement
As a Company, we have a long-standing commitment to high
standards of corporate responsibility, which includes considering
the interests of a broad stakeholder group in making business
decisions. The Board remains focused on all our stakeholders,
including our workforce, customers, shareholders and the
communities we are part of. You can read about our engagement
with shareholders on page 44, our commitments to customers,
workforce and community matters on pages 29 to 37 and our
approach to rewarding our workforce in the Remuneration report
on page 59.
There are already a number of effective employee engagement
processes in place across the Group, including the employee
satisfaction survey and employee forums. Simon Emeny is the
designated non-executive director for workforce engagement
and leads on ensuring effective engagement with the workforce.
Feedback relating to workforce engagement has been reported
to the Board and Committees. The plan is for Simon to have
regular meetings with employee representatives in order to gain
a better understanding of their views and concerns. The intention
was to hold a number of meetings during the first half of 2020,
however these were put on hold as a result of Covid-19.
When normal business activity resumes, the meetings will be
rescheduled and the results of those meetings reported back
to the Board and Committees. Section 172 of the Companies Act
2006 (the ‘Act’) sets out that a director should have regard to
stakeholder interests when discharging their duty to promote
the success of the Company. You can read how the Board has
had regard to Section 172 of the Act on pages 35 to 37.
38
WH Smith PLC Annual Report and Accounts 2020
Corporate governance Acquisition of MRG
As part of the Company’s goal to be the leading retailer in news,
books and convenience for the world’s travelling customer,
the Board considered and approved the acquisition of the
Marshall Retail Group (MRG) in December 2019, a fast-growing
independent travel retailer operating in high footfall airport,
hotel resort and tourist locations in the United States, for a
consideration of $402m. The Board believes that the acquisition
will accelerate the growth of WH Smith’s International Travel
business in the $3.2 billion US airport travel retail market.
The combination of MRG with WH Smith’s existing operations,
including InMotion, will strengthen the Group’s International
Travel offering. The Board believes that this acquisition will
ultimately benefit the Company’s customers, employees and
shareholders. The Board took care to consider all the risks
associated with the acquisition. Considerable due diligence
was carried out, particularly in the area of change of control
in respect of MRG’s concession agreements.
Henry Staunton
Chairman
19 November 2020
Board changes
The Board has during the year given extensive thought to the
rotation of long-serving directors given the ongoing impact of
Covid-19 on the Company. As part of the succession plan,
Suzanne Baxter, who is the Chair of the Audit Committee and
has served on the Board for eight years, agreed to step down
from the Board at the Company’s forthcoming Annual General
Meeting (‘AGM’) in order that the Company can take orderly steps
to continue to refresh itself over the next few years. Accordingly,
the Board commenced a search for a new non-executive director
to replace Suzanne Baxter. A number of candidates were
shortlisted and, following meetings, Nicky Dulieu was appointed
as a non-executive director and will be appointed as the Chair of
the Audit Committee with effect from the end of the forthcoming
AGM. As part of the Company’s ongoing succession plan,
Annemarie Durbin, Chair of the Remuneration Committee,
who will have served on the Board for nine years, will step down
from the Board at the Company’s AGM in 2022 and, at the request
of the Board, I have agreed to stay on as Chairman until 2022.
Accordingly, the Company will initiate a search for my
replacement following the AGM in January 2022. The Board
believes that this staggered approach to replacing long-standing
directors is in the best interests of the Company and its
shareholders as it will allow the Board to refresh itself whilst
at the same time retaining valuable expertise and knowledge as
the Company looks to recover from the impact of Covid-19.
I would like to thank Suzanne for her valuable contribution
and strong commitment to the Company.
Covid-19 response
Unfortunately, as with the wider economy and society more
generally, the Company has been severely impacted by Covid-19.
The Board has, throughout this crisis, taken decisive action
in order to mitigate the impact of Covid-19 on the Company.
You can read more about the action the Board took as a result
of Covid-19 on page 42 and the impact that Covid-19 has had
on the Company in the Strategic report on pages 8 to 37.
39
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Corporate governance report continued
The information that is required by Disclosure Guidance and
Transparency Rules (‘DTR’) 7.2 to be contained in the Company’s
Corporate governance statement is included in this Corporate
governance report, in the Directors’ remuneration report on
pages 56 to 73 and in the Directors’ report on pages 74 to 76.
Operation of the Board
As at the date of this report, the Board comprised the Chairman,
two executive directors and five independent non-executive
directors. Short biographies of each of these directors, which
illustrate their range of experience, are set out on pages 54 and
55. There is a clear division of responsibility at the head of the
Company: Henry Staunton (Chairman) being responsible for
running the Board and Carl Cowling (Group Chief Executive)
being responsible for implementing strategy, leadership of the
Company and managing it within the authorities delegated by
the Board. Simon Emeny is the Senior Independent Director.
The Board structure ensures that no individual or group
dominates the decision-making process.
All the directors, whose biographies are on pages 54 and 55,
served throughout the financial year ended 31 August 2020
and up to the date of this report with the exception of Nicky
Dulieu who was appointed as a non-executive director on
9 September 2020.
All of the non-executive directors who served during the year
and up to the date of this report are considered by the Board
to be independent.
All directors have access to the advice and services of the
Company Secretary and may take independent professional
advice at the Company’s expense in the furtherance of their
duties. The Board receives appropriate and timely information,
with Board and Committee papers normally being sent out a
week before meetings take place. The need for director training
is regularly assessed by the Board.
The interests of the directors and their immediate families in
the share capital of the Company, along with details of directors’
share awards, are contained in the Directors’ remuneration
report on pages 56 to 73.
At no time during the year did any of the directors have a material
interest in any significant contract with the Company or any of
its subsidiaries.
Corporate governance statement
This report, which forms part of the Directors’ report, together
with the Strategic report and Directors’ remuneration report
provides details of how the Company has applied the principles
of the Code. A copy of the Code is available publicly from
frc.org.uk.
Throughout the year ended 31 August 2020 and up to the date
of this report, the Board considers that it has complied with the
provisions of the Code except as follows:
1. Chairman: Henry Staunton’s tenure of appointment as
Chairman of the Company. The Board has during the year
given extensive thought to the rotation of long-serving directors
given the ongoing impact of Covid-19 on the Company.
Henry Staunton was appointed to the Board in September 2010
and became Chairman in September 2013. The Board believes
that it is important to the future success of the Company that
Henry Staunton remains as Chairman during the next critical
period as the Company looks to recover from the impact of
Covid-19. Henry Staunton provides invaluable help and support
to Carl Cowling, who was appointed as Group Chief Executive
in November 2019. He will help lead the recovery of the
Company following the impact of Covid-19 and will also help
oversee the integration of the Company’s new US businesses
into the Group. The Board believes that Henry Staunton
continues to act and perform effectively as Chairman.
For these reasons, while mindful of the 2018 Code provision
that requires that the Chairman should not remain in post
beyond nine years from the date of their first appointment
to the Board, the Board believes that it is in the best interests
of the Company and its shareholders that Henry remains as
Chairman of the Board for an extended period with a view
that he will step down in 2022.
2. External Board Evaluation: The Board recognises the
importance of having a regular externally facilitated Board
evaluation in accordance with provision 21 of the Code.
The Company was due to undertake an external evaluation
in accordance with the Code this year and had appointed Equity
Communications to carry out this evaluation. However, after
careful consideration, the Board decided to defer this external
evaluation given that the impact of Covid-19 would have
severely limited the value of an external evaluation this year.
An internal evaluation was carried out instead and the Board
intends for Equity Communications to carry out a Board
evaluation in 2021.
3. Pension Alignment: The pension contributions for Carl Cowling
and Robert Moorhead reflect the historical retirement benefits
available to employees that joined WH Smith at similar times.
The Board recognises that the contribution rates under these
arrangements are higher than the majority of the current
workforce and, as such, the pension contribution for any new
executive director is now aligned with the majority of the
workforce which is approximately 3.5 per cent. The pension
contributions for Carl Cowling and Robert Moorhead will be
reduced to align with the wider workforce rate from
1 January 2023.
40
WH Smith PLC Annual Report and Accounts 2020
Corporate governance Matters Reserved for the Board
The Board manages the Company through a formal schedule
of matters reserved for its decision, with its key focus being on
creating long-term sustainable shareholder value. The significant
matters reserved for its decision include: the overall
management of the Company; approval of the business model
and strategic plans including acquisitions and disposals; approval
of the Company’s commercial strategy and operating and capital
expenditure budgets; approval of the Annual report and financial
statements, material agreements and non-recurring projects;
treasury and dividend policy; control, audit and risk management;
executive remuneration; and environmental, social and corporate
governance matters.
The Board has a forward timetable to ensure that it allocates
sufficient time to key areas of the business. The timetable is
flexible enough for items to be added to any agenda as necessary.
The Board’s annual business includes Chief Executive’s reports,
including business reports; financial results; strategy and
strategy updates, including in-depth sessions on specific areas
of the business and strategic initiatives; consideration of potential
acquisitions and meeting with new management teams; risk
management; dividend policy; investor relations; health and
safety; whistleblowing; Board evaluation; governance and
compliance; communications and the Annual report.
During the year, the Board assessed the basis on which the
Company generates and preserves value over the long-term
and considered the opportunities and risks to the ongoing future
success of the business, the sustainability of the Company’s
business model and how its governance contributes to the
delivery of its strategy. Further information on the risks and
opportunities to the future success of the Company can be found
in the Strategic report on pages 21 to 28.
Attendance at Board meetings
The Board met 16 times during the year. The number of Board
meetings significantly increased this year as a result of the
impact of Covid-19 on the Company. It is expected that all
directors attend Board meetings and Committee meetings
unless they are prevented from doing so by prior commitments.
The minimum time commitment expected from the
non-executive directors is one day per month attendance at
meetings, together with attendance at the AGM, Board away
days and site visits, plus adequate preparation time.
Where directors are unable to attend meetings, they receive the
papers for that meeting giving them the opportunity to raise any
issues and give any comments to the Chairman in advance of the
meeting. Following the meeting, the Chairman briefs any director
not present on the discussions and any decisions taken at
the meeting.
The following table shows the number of Board and Committee
meetings held during the year ended 31 August 2020 and the
attendance record of individual directors:
Directors and role
Henry Staunton
Chairman
Suzanne Baxter
Non-executive director
Carl Cowling
Group Chief Executive
Annemarie Durbin
Non-executive director
Simon Emeny
Non-executive director
Robert Moorhead
CFO/COO
Maurice Thompson
Non-executive director
Number of meetings attended
Board
16
16 of 16
Audit
5
–
Nominations
3
3 of 3
Remuneration
6
6 of 6
16 of 16
5 of 5
3 of 3
6 of 6
16 of 16
–
3 of 3
–
16 of 16
5 of 5
2 of 3
6 of 6
16 of 16
5 of 5
3 of 3
6 of 6
16 of 16
–
–
–
16 of 16
5 of 5
3 of 3
6 of 6
a) Nicky Dulieu was appointed as a director of the Company on 9 September 2020.
b) Annemarie Durbin was unable to attend one meeting of the Nominations Committee due to
a prior commitment which had been arranged before the meeting was convened. She received
the papers in advance of the meeting and gave her comments to the Chairman.
c) Henry Staunton, Carl Cowling and Robert Moorhead were invited to and attended all five
meetings of the Audit Committee.
d) Robert Moorhead was invited to and attended all three meetings of the
Nominations Committee.
e) Carl Cowling was invited to and attended all six meetings of the Remuneration Committee.
f)
Stephen Clarke left the Company on 31 October 2019. Prior to leaving the Company he
attended three meetings of the Board.
The Board and the Remuneration Committee have met three
times and the Audit Committee has met twice since 31 August
2020. All the directors attended the meetings.
41
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Corporate governance report continued
Covid-19
Unfortunately, as with the wider economy and society more
generally, this year’s results have been severely impacted by
Covid-19 and, as a result of which, the Company made a
Headline loss before tax1 of £69m* in the financial year ended
31 August 2020. The Board has also taken the difficult decision
to restructure the Company’s businesses around the world which
resulted in a significant reduction in headcount. You can read
more about the actions the Company has undertaken on pages
8 to 19. The Company will also not pay any dividends in respect of
the financial year ended 31 August 2020.
The Board took the following steps in response to the
Covid-19 pandemic:
Board actions: During the lockdown period and up until
31 August 2020, the Board increased the frequency of its
meetings and met at least weekly during the initial crisis and
then every two weeks, by phone or online in order to ensure it
was kept fully informed of the impact of the pandemic upon the
Company’s operations. The Board was provided with regular
updates from senior executives on all aspects of the pandemic,
including the safety of our employees and customers,
Government advice, lockdowns, financing, supplier and landlord
impacts, consumer behaviour and scenario planning.
The Board also received regular information on the Company’s
liquidity position, trading and financial data. In April 2020 the
Company consulted with shareholders and banks in order to
secure new financing arrangements to strengthen its balance
sheet, working capital and liquidity position. A placing of
15,802,768 new ordinary shares was completed in April, raising
gross proceeds of approximately £165.9m (net of issue costs
£160m) at a placing price of 1050 pence per placing share,
representing approximately 13.7 per cent of the issued ordinary
share capital. The Company also secured a package of new bank
financing arrangements, including a new £120m committed
banking facility in addition to its existing facilities. In addition,
the maturity on the Group’s two £200m term loans was extended
to October 2022. The Company also secured eligibility for the
Government’s Covid Corporate Financing Facility (‘CCFF’).
You can read more about the Company’s finances on pages
16 to 19.
Community support: During the Covid-19 pandemic, the Board
took the decision to keep the Company’s Post Office and hospital
stores open so that we could continue to serve the communities
in which we operate. The Board also took all necessary steps
to help ensure the safety of customers whilst visiting our stores
by ensuring that we complied with all relevant social
distancing measures.
NHS support: In addition, the Company took the decision to
support all NHS staff by giving them a 20 per cent discount on all
purchases from our hospital stores during lockdown and,
in collaboration with Sainsbury’s, increased the grocery range in
these stores enabling NHS staff to obtain the items they needed
with greater ease. We donated 14,000 notepads and pens to
support frontline healthcare workers at the NHS Nightingale
Hospital in London and our hospital stores offered free essentials
to NHS staff, including bottled water, donated by our suppliers.
Protecting our employees: The safety and wellbeing of our staff
has been a priority throughout the pandemic. We are very proud
of our store colleagues who have done an outstanding job in
serving our customers. Safety measures are in place across our
stores in line with Government guidelines and advice, and include
social distancing measures, PPE for colleague use, hygiene
stations, protective screens at till points, enhanced cleaning and
encouraged use of self-checkout or contactless payment.
Our distribution centres remain operational with effective social
distancing measures in place and head office staff may work
from home, where possible. Since the start of lockdown,
Carl Cowling and other senior management held weekly online
briefings for all employees. At the briefings, employees were
given the opportunity to ask questions on any issues relating to
the operation of the Company. Additionally, we have provided
regular reminders to staff on our wide-ranging support plan,
which includes access to trained Mental Health First Aiders
across our business in the UK and our Employee Assistance
Programme which offers all employees access to free,
24/7 confidential telephone, online and face-to-face advice for
problems they may be experiencing at home or work.
Employees also have access to the Company’s Benevolent Fund
charity, which can provide financial assistance in cases of
significant hardship and provide recuperative holidays and
care breaks.
Board evaluation
The performance of the Board, its Committees and its individual
directors is a fundamental component of the Company’s success.
The Board regularly reviews its own performance. The Board had,
in accordance with the Code, appointed an external evaluator,
Equity Communications, to carry out the Board evaluation this
year. However, in the light of the Covid-19 pandemic, the Board
made the decision to defer the external evaluation until 2021.
The Board recognises the importance of having a regular
externally facilitated Board evaluation in accordance with
provision 21 of the Code but believes the impact of Covid-19
would have severely limited the value of an external evaluation
this year. It is the Board’s intention that Equity Communications
will carry out the external evaluation of the Board in 2021. In the
circumstances, an internally facilitated evaluation was carried
out in August 2020. The evaluation was co-ordinated and directed
by the Chairman with the support of the Company Secretary.
A questionnaire was prepared by the Chairman and the Company
Secretary and formed the basis of discussions with each director.
The main areas considered during the evaluation were strategy,
operations and risk; succession planning; Board composition;
culture and Board Committees.
The findings were presented to the Board in October 2020.
The results of the assessment were considered by the Board and
confirmed the strength of the management of the Company,
a shared focus and deep understanding of the business, a sound
governance framework and practices compliant with the Code.
Additionally, the culture of the Board remains very good, being
open and frank, whilst also supportive and collaborative. As a
result of the review, the Board agreed an action plan that will be
implemented in the financial year ending 31 August 2021 and will
include continued focus on executive and non-executive
1
Headline loss before tax is on a pre-IFRS 16 basis, and excludes non-underlying items. This is an Alternative Performance Measure defined and explained in the Glossary on page 146.
42
WH Smith PLC Annual Report and Accounts 2020
Corporate governance succession planning and the overall composition of the Board,
keeping the strategy under review in light of Covid-19 and
focusing on the priorities of each business to deliver shareholder
returns and holding detailed discussions on the drivers of trading
performance and value creation; and steps to improve the
Board’s procedures and effectiveness. The Board reviewed the
agreed actions following the evaluation carried out in 2019 and
agreed that good progress had been made in respect of these
actions, including in respect of the Company’s Board succession
plan and improvements in the Board’s procedures. In addition to
the Board and Committee evaluation process, the Group Chief
Executive reviews the performance of the Chief Financial Officer/
Chief Operating Officer (‘CFO/COO’) and other senior executives.
The Chairman reviews the performance of the Group
Chief Executive.
The Chairman also undertook a rigorous review with each of
the non-executive directors to assess their effectiveness and
commitment to the role. During the year, the Chairman had
regular meetings with the non-executive directors, without the
executive directors present, to discuss Board issues and how to
maintain the best possible team. The Board is satisfied that each
of the non-executive directors dedicates sufficient time to the
business of the Company and contributes to its governance and
operations. The Senior Independent Director met the other
non-executive directors to undertake a rigorous assessment
of Henry Staunton’s performance given that he has served as
Chairman for seven years and has been on the Board for
ten years. The non-executive directors confirmed that there are
no relationships or circumstances which are likely to affect, or
could appear to affect, his judgement. The non-executive
directors, taking into account the views of the executive directors,
concluded that Henry Staunton continues to act and perform
effectively as Chairman and demonstrates his commitment
to the role.
Succession planning and culture
Under the Company’s Articles of Association, directors are
required to retire and submit themselves for re-election every
three years and new directors appointed by the Board offer
themselves for election at the next AGM following their
appointment. However, in accordance with the Code, the Board
has agreed that all directors wishing to be appointed will stand
for election or re-election at the forthcoming AGM. At the last
AGM on 22 January 2020, all the directors stood for re-election
and were duly elected with a range of 96.48 per cent to 99.49 per
cent of votes cast by shareholders.
The Company’s Articles of Association give a power to the Board
to appoint directors and, where notice is given and signed by all
the other directors, to remove a director from office.
During the year ahead, the Board will continue to focus on
succession planning to ensure the readiness of internal
candidates for all key roles across the business. The Board is
committed to good governance, culture and leadership,
recognising that these are key considerations for a strong,
sustainable business and that the tone comes from the top.
Our business model on page 4 outlines the importance of having
the right people and skills; and operating responsibly.
The Company’s values, behaviours and culture will continue
to form an important part of the Board’s discussions.
The Nominations Committee will continue to support the Board
by ensuring that culture is built into recruitment and
succession considerations.
The Board monitors the culture of the business in a number of
ways, including: through interaction with executives, members
of the senior management team, and other employees in Board
meetings and on visits to stores and other Company locations;
through regular Board agenda items and supporting papers,
covering risk management, internal audit reports and follow-up
actions, customer engagement, health and safety, employee
engagement and retention, whistleblowing and regulatory
breaches; reviewing the results of staff surveys, looking at a
range of employee indicators, including engagement, retention,
absence, learning and development, gender pay, diversity,
workforce composition and demographics; and engaging with
other stakeholders, as described in the Corporate governance
report. During the year, the Board was satisfied that the policy,
practices and behaviour of the Board and employees were
aligned with the Company’s purpose, values and strategy.
The Board recognises the importance of being visible and
accessible to customers and employees. During the year the
non-executive directors accompanied management on site visits
to the High Street and Travel stores. The Board believes that site
visits provide directors with valuable insights into the business,
helping to deepen their knowledge and understanding of the
Company. When joining the Board, a new non-executive director
typically meets individually with each Board member and senior
management to give them insight into all aspects of the
business, including our strategy, culture, values, sustainability,
governance, and the opportunities and challenges facing the
business. The Company Secretary briefs them on policies,
Board and Committee procedures, and core governance practice.
They visit a number of business locations and meet key advisers.
They also receive induction materials including recent Board and
Committee papers and minutes, strategy papers, investor
presentations, Matters Reserved for the Board and the Board
Committees’ Terms of Reference.
The Board considered and approved that Annemarie Durbin
could be appointed as a non-executive director of Persimmon
PLC, with effect from 1 July 2020. The Board concluded that there
was no conflict in Annemarie Durbin being appointed as a
non-executive director of Persimmon PLC and that it would not
affect her commitment to the Company.
43
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Corporate governance report continued
Diversity policy
The Board values diversity in all its forms, both within its own
membership and at all levels of the Group. The Board is highly
supportive of the initiatives the Company has in place to promote
diversity throughout the business. The Board believes that
diversity in its widest sense is a key component to the success of
the Company and receives reports on the Company’s diversity
profile to ensure that our workforce reflects our commitment to
diversity. The Board aims to ensure its membership, and that of
the wider Group, reflects diversity in its broadest sense so that it
has a combination of demographics, skills, experience, race, age,
gender, education and professional background thereby providing
a wide range of perspectives, insights and challenge needed to
support good decision-making. The Board’s diversity policy aims
to ensure that the Board nominations/appointments process is
based on fairness, respect and inclusion, and that the search for
candidates will be conducted with due regard to the benefits of
diversity. It is the Company’s aim to achieve a minimum of 30 per
cent of women at Board and senior levels. In order to improve the
diversity of the Company’s senior management team, the
Company has introduced a new recruitment policy requiring that
there is a shortlist of a minimum of six candidates for each
vacancy of which 50 per cent must be female and at least one
must be from a BAME background.
Further information on diversity can be found in the Nominations
Committee section on pages 52 and 53 and is set out in the
Employees section of the Strategic report on pages 32 and 33.
Risk management
The Board has overall responsibility for the Group’s system
of risk management and internal control (including financial
controls, controls in respect of the financial reporting process
and operational and compliance controls) and has conducted a
detailed review of its effectiveness during the year to ensure that
management has implemented its policies on risk and control.
This review included receiving reports from management,
discussion, challenge, and assessment of the principal risks.
No significant failings or weaknesses were identified from this
review. In addition, the Board also received presentations from
management on higher risk areas, for example, the impact of
Covid-19, cyber risk, risks arising from the process of exiting the
European Union and growing international expansion. The Board
has established an organisational structure with clearly defined
lines of responsibility which identify matters requiring approval
by the Board. Steps continue to be taken to embed internal
control and risk management further into the operations of the
business and to deal with areas that require improvement which
come to the attention of management and the Board. Such a
system is, however, designed to manage rather than eliminate
the risk of failure to achieve business objectives, and can only
provide reasonable and not absolute assurance against material
misstatement or loss.
The Board confirms that there is an ongoing process for
identifying, evaluating and managing emerging and principal
risks faced by the Group, including those risks relating to social,
environmental and ethical matters. The Board undertakes a
robust assessment of the emerging and principal risks.
The Board confirms that the processes have been in place for the
year under review and up to the date of this report and that they
accord with the Financial Reporting Council (‘FRC’) Guidance on
Risk Management, Internal Control and Related Financial and
Business Reporting (the ‘Risk Management and Internal Control
Guidance’). The processes are regularly reviewed by the Board.
The principal risks and uncertainties facing the Group together
with the procedures and processes for identifying, managing and
the steps taken to mitigate principal and emerging risks can be
found in the Strategic report on pages 21 to 28.
Further information on internal controls and risk management
can be found in the Audit Committee report on pages 46 to 51.
Engagement with shareholders
The Board’s primary role is to promote the success of the
Company and the interests of shareholders. The Board is
accountable to shareholders for the performance and activities
of the Group. The Company recognises the importance of
communicating with its shareholders to ensure that its strategy
and performance are understood. This is achieved principally
through the Annual report and accounts and the AGM. In addition,
a range of corporate information, including all Company
announcements and presentations, is available to investors on
the Company’s website whsmithplc.co.uk.
Formal presentations are made to institutional shareholders
following the announcement of the Company’s full year and
interim results. The Board recognises that the AGM is the
principal forum for dialogue with private shareholders.
All directors normally attend the AGM and are available to
answer questions that shareholders may wish to raise.
As explained in the Notice of AGM, in light of the ongoing
Covid-19 pandemic we strongly encourage shareholders not to
attend the AGM in person and to appoint the Chair of the meeting
as their proxy to ensure that their vote is counted.
The Board as a whole is kept fully informed of the views and
concerns of major shareholders. The Group Chief Executive and
CFO/COO update the Board following meetings with major
shareholders and analysts’ briefings are circulated to the Board.
The Head of Investor Relations also carries out a regular
programme of work and reports to the Board the views and
information needs of institutional and major investors. This is
part of the regular contact that the Group maintains with its
institutional shareholders. When requested to do so, the
Chairman and non-executive directors attend meetings with
major shareholders. The Chair of the Remuneration Committee
sought the views of the Company’s largest shareholders and
shareholder representatives in respect of the Company’s
remuneration policy.
44
WH Smith PLC Annual Report and Accounts 2020
Corporate governance Anti-corruption
The Company has continued to enhance its policies and
procedures in order to meet the requirements of the Bribery Act
2010. These policies and procedures include training for
individuals to ensure awareness of acts that might be construed
as contravening the Bribery Act. The Group’s policy on anti-
bribery and corruption is included in the Company’s Code of
Business Conduct at whsmithplc.co.uk/corporate_responsibility/
our_policies/.
Fair, balanced and understandable
The Board confirms that it considers the 2020 Annual report and
accounts, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to
assess the Company’s position and performance, business
model and strategy.
Discussion of the Board’s assessment of the Annual report
and accounts is described in the Audit Committee report on
page 49.
Board Committees
The Board delegates specific responsibilities to the Board
Committees, being the Audit, Nominations and Remuneration
Committees. Details of the role and responsibilities of the
Audit Committee can be found on pages 46 to 51, the
Nominations Committee on pages 52 and 53 and the
Remuneration Committee on pages 56 to 73. The role and
responsibilities of each Committee are set out in formal terms
of reference which are available on the Company’s website
whsmithplc.co.uk.
Approvals Committee
The Approvals Committee facilitates the internal approvals
process by approving matters as delegated by the Board.
The Approvals Committee comprises the Group Chief Executive
and the CFO/COO.
Disclosure Committee
The Disclosure Committee is responsible for ensuring
compliance with the Company’s obligations under MAR and
the maintenance of disclosure controls and procedures.
The Disclosure Committee comprises all of the directors of the
Company and the Company Secretary.
Remuneration Committee
Information on the composition and activities of the
Remuneration Committee can be found in the Directors’
remuneration report on pages 56 to 73.
45
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Corporate governance report continued
Audit Committee report
I am pleased to present
my report on the activities
of the Audit Committee
for the financial year
ended 31 August 2020.”
Suzanne Baxter
Chair of the Audit Committee
Audit Committee report
Dear Shareholder
As Chair of the Audit Committee, I am pleased to present my
report on the activities of the Audit Committee for the financial
year ended 31 August 2020. Our principal objectives are to
oversee and assist the Board in its responsibility to produce a set
of Annual report and accounts which are fair, balanced and
understandable and to provide effective financial governance in
respect of the Group’s financial results, the performance of both
the internal audit function and the external auditors, and the
management of the Group’s systems of internal control, business
risks and related compliance activities.
The other members of the Committee are Nicky Dulieu,
Annemarie Durbin, Simon Emeny and Maurice Thompson, who
are all independent non-executive directors. The Board considers
that I have recent and relevant financial experience, as required
by the Code and that the Committee, as a whole, has competence
relevant to the sector in which the Company operates. The Board
also considers that Nicky Dulieu, who will replace me as the
Audit Committee Chair at the end of the forthcoming AGM, has
recent and relevant financial experience. At the invitation of the
Committee, the Chairman of the Board, the Group Chief
Executive, the CFO/COO, the Director of Audit and Risk,
representatives of the Group’s senior management team and of
the external auditors attend meetings. The Committee has
regular private meetings with the external and internal auditors
during the year.
A summary of the activities undertaken by the Committee during
the year is as follows:
• reviewing the effectiveness of the Group’s financial reporting,
internal control policies and procedures for the identification,
assessment and reporting of risk, including cyber security
and tax;
• monitoring the integrity of the Group’s financial statements
and trading statements;
• assessing and recommending to the Board that the Annual
report is fair, balanced and understandable;
• reviewing the Interim report and the Annual report and
accounts, including, where relevant, compliance with the
Listing Rules, Code and statutory reporting requirements
and recommending those documents for Board approval;
• considering the Company’s emerging and principal risks
and uncertainties and reviewing the mitigating actions that
management has taken to ensure that these risks are
appropriately monitored and controlled;
• considering the Company’s systems and framework of controls
designed to detect and report fraud and money laundering;
• the Committee received reports from Internal Audit in respect
of calls to the Company’s confidential Speak Up helpline;
• receiving reports and presentations from members of the
Company’s senior management and its business risk
committees on areas of the Company’s control and risk
management processes, with detailed presentations including
a post-acquisition controls and systems assessment in the
Marshall Retail Group, updates on systems change
programmes, Post Office operating procedures and the
development of the operating and control environments in the
International Travel business;
• receiving and reviewing reports from the Internal Audit and
Risk teams and reviewing and agreeing their annual plans;
• holding private meetings with the external and
internal auditors;
• considering the potential impact of Brexit on the Company;
• agreeing the scope of PricewaterhouseCoopers LLP’s (‘PwC’)
annual audit plans, assessing the effectiveness of the external
audit process and considering the accounting, financial control
and audit issues reported by PwC that flowed from their work;
• reviewing external Auditor independence and approving the
policy on the engagement of PwC to supply non-audit services;
• negotiating and agreeing the audit fee;
• undertaking a performance review of Internal Audit and the
external auditors;
• considering the impact of Covid-19 on the Company and its
• reviewing the Company’s treasury policy;
financial results, including the asset impairment charges that
have been recognised at the year end;
• considering papers from management on the key financial
reporting judgements made in the preparation of the Interim
report and the Annual report and accounts;
• considering the Company’s going concern statement and
papers from management which consider the liquidity of
the Group;
• considering the Company’s viability statement and papers
from management, which considers the long-term viability
of the Group;
46
WH Smith PLC Annual Report and Accounts 2020
• approval of the Group Tax Strategy;
• receiving updates on the policies and procedures for the
General Data Protection Regulations (GDPR);
• considering and approving the report on the Company’s
payment practices;
• assessing new accounting standards, in particular, the impact
of IFRS16 (Leases) on the Company; and
• reviewing the Committee’s terms of reference.
Corporate governance FRC Corporate Reporting Review
The Company received a letter on 1 June 2020 from the Financial
Reporting Council (FRC) noting that it had carried out a limited
review of the Annual report and accounts for the year ended
31 August 2019. The letter indicated that the FRC had not
identified any matters on which it wished to raise specific
questions but made some observations relating to certain
disclosures included in the Annual report. As a result, the
Company has sought to improve its disclosures in the Annual
report this year.
The FRC’s letter points out that its review was solely based on
a review of the Company’s Annual report and accounts for the
year ended 31 August 2019. It states that the review did not
benefit from a detailed knowledge of the Company’s business
or an understanding of the underlying transactions entered into
and that the FRC’s role is not to verify the information provided
but to consider compliance with reporting requirements and,
as a result, the review provides no assurance that the Company’s
Annual report and accounts are correct in all material respects.
Significant financial reporting issues and areas
of judgement
In preparing the financial statements, there are a number of
areas requiring the exercise by management of particular
judgement. The Committee’s role is to assess whether the
judgements made by management are reasonable and
appropriate. In order to assist in this evaluation, the CFO/COO
presents an accounting paper to the Committee twice a year,
setting out the key financial reporting judgements, and other
papers as required. The main areas of judgement that have been
considered by the Committee in the preparation of the financial
statements are as follows:
Going concern
The Committee reviewed papers from management on the
adoption of the going concern basis of preparation of the financial
statements. The business plan and cash flows that had been
reviewed and approved by the Board as part of the Group’s
three-year plan and budget, adjusted for the estimated impact of
the lockdowns enacted in the UK in November 2020, formed the
Base Case for the going concern assessment along with
consideration of the Group’s financing facilities and future
funding plans.
In reviewing going concern, the Committee considered the
Group’s plans and related cash flows for the period to
28 February 2022, a 15-month period from the date of this report,
along with analyses to illustrate the sensitivity of those plans to
trading variances, and to the potential impact of uncertainties
including the Covid-19 pandemic and Brexit.
The Committee also considered the Group’s financing facilities
and its future funding plans, including the Group’s ability to
comply with, or if necessary, obtain a waiver or adjustment to its
financial covenants, recognising that covenants had been waived
within the forthcoming 12-month period and that the first point at
which the Company will be subjected to a test of its covenants is
February 2022.
The Committee challenged management on the assumptions
made to derive its Base Case cash flow models and those used
to derive the sensitivity tests applied in a severe but plausible
stress test, reflecting a heightened risk scenario principally
caused by further disruption from the Covid-19 pandemic; and
a reverse stress test that sought to identify the changes in
assumptions that would be required to result in the full use
of the Group’s financing facilities.
The Committee received a report from PwC on the work
undertaken to assess going concern and specifically discussed
the content of the disclosures made in the going concern
statement in the Annual report and the basis of preparation
within Note 1 of the financial statements.
Based on this, and after consideration of the disclosures made
in the Annual report and accounts, the Committee confirmed that
the application of the going concern basis for the preparation of
the financial statements and the related going concern
disclosures were appropriate.
The going concern statement is set out in the Directors’ report
on page 76.
Impairment review of store assets
The Committee received and considered a paper from
management covering the judgements made in respect of the
impairment testing of the Group’s property, plant and equipment
and right-of-use store assets. The paper recognised that there
was an increased risk of asset impairment at 31 August 2020
given that sales and cost pressures and the resultant forecast
reduction of future profitability in some stores caused by Covid-19
or otherwise may adversely impact the recoverable value of
assets used within the store portfolio. The Committee noted that
management had considered the trading results of each store for
the year and noted that where a store is loss making and is not
expected to return to profitability in the near future, an
impairment charge is recognised over the assets that cannot be
recycled and their value recovered through the generation of
future trading profits within the store portfolio. Given that
management has continued to report on the performance of the
business on a pre-IFRS 16 (IAS 17) basis within its Alternative
Performance Measures alongside the statutory measures
derived under IFRS 16, the paper and discussions considered
impairment assessment of store assets on both bases.
47
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Corporate governance report continued
The Committee challenged management on the assumptions
used within the impairment models and received and discussed
a paper from PwC on their work in this area, which specifically
considered and reported on their challenge and assessment of
the key assumptions used and that the resultant charges were
allocated appropriately and classified as non-underlying charges
where they were caused by the Covid-19 pandemic.
The Committee was satisfied that the approach adopted by
management was sufficiently robust to identify when an
impairment charge of store assets needs to be recognised and
how it should be assessed and reported.
Goodwill
The Committee considered a paper from management on
goodwill. This set out the determination of the cash-generating
units (‘CGUs’) to which goodwill has been allocated across the
Group, the carrying value of goodwill, the results of the value-in-
use calculations and the outcomes from impairment testing.
The Committee noted the increase in goodwill in the current
year as the result of the Marshall Retail Group acquisition.
It discussed the Company’s approach to allocating individual
store CGUs to two CGU groups of Travel (incorporating UK Travel,
International Travel and US Travel) and High Street, reflecting the
operating segments of the Company and the lowest level at
which goodwill is monitored for internal management purposes.
The disclosures in respect of goodwill were also reviewed.
The Committee discussed PwC’s paper to the Committee which
set out their work done in respect of goodwill and considered the
approach to the accounting, CGU determination, impairment
testing and disclosure used by the Company.
Inventory valuation
The Committee received a paper from management on
accounting for and valuation of inventory, noting in particular the
impact of Covid-19 on trading. It discussed the judgements made
by management, with specific consideration given to inventory
provisioning, including provision for out of date, slow moving or
obsolete stock and the classification and disclosure of related
charges in the income statement and financial statements.
The Committee also received a paper from PwC regarding the
audit work they performed over the valuation of inventory and
the classification of inventory provision charges in the income
statement. The Committee is satisfied that the process and
judgement adopted by management for the valuation of inventory
is sufficiently robust to establish the value of inventory held and is
satisfied as to the appropriateness of the Company’s
provisioning policy.
Recognition of supplier income
The Committee considered, and reviewed in detail,
management’s paper which set out the nature and value of these
arrangements and the policy for recognition in the financial
statements. The Committee is satisfied with management’s
conclusion that the level of complexity and judgement is low in
relation to establishing the accounting entries and estimates,
and the timing of recognition. The Committee also considered
the disclosure included by management in the Annual report
and accounts.
IFRS 16 Leases
IFRS 16 Leases is effective for periods beginning on or after
1 January 2019. The Group has adopted the new financial
reporting standard from 1 September 2019 and the financial
statements for the financial year ended 31 August 2020 are
prepared under the new standard. The Group adopted IFRS 16
using the modified retrospective approach. As a lessee, IFRS 16
removes distinctions between operating and finance leases and
requires the recognition of a right-of-use asset and
corresponding liability for future lease payables. The Committee
has received regular updates from management outlining the
impact of the new accounting standard and the judgements and
key assumptions used in the estimation of the impact of the new
standard, including the approach to the transition from IAS 17,
the previous accounting standard for leases. The Committee has
reviewed these with management and discussed them with PwC
and is satisfied that the approach taken in the Group
is appropriate.
One-off transactions
The Committee considered the presentation of the financial
statements and, in particular, the use of alternative performance
measures and the presentation of non-underlying items in
accordance with the Group accounting policy. This policy states
that adjustments are only made to reported profit before tax in
determining an alternative performance measure where charges
are not considered part of the normal operating costs of the
business, are non-recurring and considered exceptional because
of their size, nature or incidence. The Committee received
detailed reports from management outlining the judgements
applied in relation to the non-underlying costs incurred during
the year. These costs were attributable to the costs of acquiring
and integrating the Marshall Retail Group acquisition, the
amortisation of acquisition related intangible assets relating
to Marshall Retail Group, past service costs identified in respect
of a closed defined benefit pension scheme and costs arising as
a result of the impact of Covid-19 on the Group including
restructuring costs, asset impairment charges and the cost of
writing down slow moving or obsolete inventory. This was an area
of major focus for the Committee which was cognisant of the
need to ensure that costs were appropriately classified and that
48
WH Smith PLC Annual Report and Accounts 2020
Corporate governance the disclosure of the non-underlying items was sufficient for
users of the financial statements to understand the nature and
reason for the costs. The Committee challenged management
on the nature of costs classified as non-underlying, particularly
discussing the factors underpinning the Covid-19 related costs
and seeking specific input from PwC. PwC outlined the details
and nature of the audit work carried out by them in this area,
along with their consideration of the disclosures presented by
management and the appropriateness of the cost
classifications adopted.
Acquisition accounting for Marshall Retail Group
The Committee received a paper on the accounting treatment
and related disclosures adopted by management in respect of
the acquisition of Marshall Retail Group in December 2019.
The Committee reviewed the outcome from the assessment of
asset fair values (including consideration of accounting policy
alignment) at the acquisition date, the determination of the
carrying value of goodwill for the Marshall Retail Group and the
establishment of the valuation of acquired intangible assets.
The Committee considered the CGU to which the goodwill arising
on the acquisition of Marshall Retail Group was allocated, along
with the assumptions used in, and results of, the sensitivity
testing undertaken by management in their asset impairment
assessments. The Committee also considered the assumptions
used in the acquired intangibles valuation model, primarily the
budgets and forecasts, discount rates and royalty rates used,
along with the conclusions of the advice taken by management
in determining the valuation of the acquired intangible asset.
PwC provided the Committee with a detailed explanation of their
review of all aspects of the Marshall Retail Group acquisition
accounting and related disclosures, including their challenge of
management’s key assumptions.
Pensions
The Committee assessed the accounting treatment adopted by
management and the application of IAS 19 in relation to the
WH Smith defined benefit pension scheme. The Committee
considered the current guidance and requirements in respect of
pensions accounting, reviewed the judgements made in respect
of the assumptions used in the valuation of the Company’s
obligations under the scheme and the recognition of future
liabilities in respect of committed scheme contributions on the
balance sheet. The Committee also considered the nature and
disclosure of a charge in respect of past service costs relating to
this scheme which is included within non-underlying items in the
income statement. A detailed report on pensions accounting and
related disclosures was provided by the auditor which set out the
work performed including their challenge and assessment of key
scheme valuation assumptions compared to their independently
observed ranges.
Viability statement
The Committee reviewed the process and assessment of the
Company’s prospects made by management in support of its
longer-term viability statement, including:
• the review period and alignment with the Company’s internal
plans and forecasts and with its work to support the going
concern basis of presentation for the financial statements;
• the assessment of the capacity of the Company to remain
viable after consideration of future cash flows, borrowings
and mitigating factors; and
• the modelling of the potential financial impact of certain of
the Company’s principal risks materialising using severe but
plausible scenarios, including the impact of Covid-19, on the
Company’s financial performance.
The Committee considered the viability statement and related
analyses alongside its work on going concern, as set out in this
report on page 47. It also discussed the clarity and
appropriateness of the disclosures made within the viability
statement and discussed these with PwC.
The viability statement is set out in the Strategic report on
page 28.
Fair, balanced and understandable assessment
At the request of the Board, the Committee has considered
whether, in its opinion, the 2020 Annual report and accounts,
taken as a whole, is fair, balanced and understandable and that it
provides the information necessary for shareholders to assess
the Company’s position and performance, business model and
strategy. The Committee was assisted in its review by a number
of processes, including the following:
• the Annual report and accounts is drafted by senior
management with overall co-ordination by a member of the
Group Finance team to ensure consistency across the
relevant sections;
• an internal verification process is undertaken to ensure
factual accuracy;
• an independent review is undertaken by the Director of Audit
and Risk to assess whether the Annual report and accounts is
fair, balanced and understandable using a set of pre-defined
indicators (such as consistency with internally reported
information and investor communications);
• comprehensive reviews of drafts of the Annual report and
accounts are undertaken by the executive directors and other
senior management;
• an advanced draft is reviewed by the Board and the Company’s
Legal Director and, in relation to certain sections, by external
legal advisers; and
• the final draft of the Annual report and accounts was reviewed
by the Committee prior to consideration by the Board.
49
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Corporate governance report continued
In the current year, the Committee specifically considered the
disclosures made in respect of the impact on the business of the
Covid-19 pandemic and the presentation and explanation of the
statutory and alternative performance measures. This included
consideration of the use of measures derived consistently with
IFRS 16 (Leases) and APMs derived on a pre-IFRS 16 basis
(IAS 17). These pre-IFRS 16 APMs have been adopted to help to
demonstrate the underlying, year-on-year performance of the
business following the introduction of IFRS 16 during the
financial year and its material impact on the Group’s results.
Following its review, the Committee advised the Board that the
Annual report and accounts, taken as a whole, was considered to
be fair, balanced and understandable and that it provided the
information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.
Risk management and internal controls
The Committee monitors and regularly reviews the effectiveness
of the Group’s risk management processes and internal financial
and non-financial controls. The key features of the risk
management process that were in place during the year are
as follows:
• each business conducts risk assessments based on identified
business objectives, which are reviewed and agreed annually
by the executive management of each business. Risks are
considered in respect of strategy, reputation, operations,
financial and compliance and are evaluated in respect of their
potential impact and likelihood. These risk assessments are
updated and reviewed quarterly and are reported to
the Committee;
• a Group risk assessment is also undertaken by the Internal
Audit team, which considers all areas of potential risk across
all systems, functions and key business processes. This risk
assessment, together with the business risk assessments,
forms the basis for determining the Internal Audit Plan.
Audit reports in relation to areas reviewed are discussed and
agreed with the Committee;
• the Internal Audit team meets annually with all senior
executives, to undertake a formal review and certification
process in assessing the effectiveness of the internal controls
across the Group. The results of this review are reported to
the Committee;
• the Committee confirmed to the Board that it has reviewed
the effectiveness of the systems of internal control, including
financial, operational, and compliance controls and risk
management for the period of this report, in accordance with
the Code and the Risk Management and Internal
Control Guidance;
• the Board is responsible for approving the annual budget
and the three-year plan, for approving major acquisitions
and disposals and for determining the financial structure of
the Company, including treasury and dividend policy.
Monthly results, variances from plan and forecasts are
reported to the Board;
50
WH Smith PLC Annual Report and Accounts 2020
• the Committee assists the Board in the discharge of its duties
regarding the Group’s financial statements, accounting policies
and the maintenance of proper internal business, operational
and financial controls. The Committee invites input and
attendance from members of the senior management team of
the Group at its meetings to discuss the design and operation
of key business and internal controls and the assessment of
risks that affect the Group. The Committee provides a link
between the Board and PwC through regular meetings;
• the Company has established internal control and risk
management systems in relation to the process for preparing
consolidated financial statements. The key features of these
systems are that management regularly monitors and
considers developments in accounting regulations and best
practice in financial reporting and, where appropriate, reflects
developments in the consolidated financial statements.
PwC also keeps the Committee appraised of these
developments; the Committee and the Board review the draft
consolidated financial statements. The Committee receives
reports from management and PwC on significant judgements,
changes in accounting policies, changes in accounting
estimates and other pertinent matters relating to the
consolidated financial statements, and provides robust and
independent challenge to management where appropriate; and
the full year financial statements are subject to external audit
and the half year financial statements are reviewed by the
external auditor.
• the Internal Audit team advises and assists management in the
establishment and maintenance of adequate internal controls
and reports to the Committee on the effectiveness of
those controls;
• there is a comprehensive system for budgeting and planning
and for monitoring and reporting the performance of the
Company’s business to the Board. Monthly results are reported
against budget and prior year, and forecasts for the current
financial year are regularly revised in light of actual
performance. These results and forecasts cover profits,
cash flows, capital expenditure and balance sheets;
• routine reports are prepared to cover treasury activities and
risks, for review by senior executives, and annual reports are
prepared for the Board and Committee covering tax, treasury
policies, insurance and pensions;
• a new sustainability strategy was approved by the Board,
including objectives and targets to address the impact that our
activities have on people, the planet and communities.
More detailed information is available in our full Sustainability
Report, available at whsmithplc.co.uk/sustainability; and
• the Board is committed to maintaining high standards of health
and safety in all its business activities. These standards are
set out in the Company’s Health and Safety Policy, which is
regularly reviewed by the Board. A copy of our Health and Safety
Policy is available at whsmithplc.co.uk/investors/results-
reports-and-presentations/whsmith-company-policies.
The Risk Management team works with the business to assess
health and safety risks and introduce systems to mitigate
them. All reportable accidents are investigated and targets
are set to reduce the level of incidence.
The Director of Audit and Risk attends the meetings of the
Committee to discuss the above matters.
Corporate governance External auditor
During the year PwC reported to the Committee on their
independence from the Company. The Committee and the Board
are satisfied that PwC has adequate policies and safeguards in
place to ensure that auditor objectivity and independence are
maintained. The Committee has recommended to the Board the
re-appointment of the external Auditors for the 2021 financial
year and the directors will be proposing the re-appointment of
PwC at the forthcoming AGM.
PwC were first appointed as external auditors at the 2015 AGM,
following a competitive tender process completed in 2014.
As PwC have audited the WH Smith Group of companies for six
years, in accordance with their rules on audit partner rotation and
to maintain auditor independence, Jonathan Lambert replaced
John Ellis as the PwC audit partner and Senior Statutory Auditor.
In line with the Company’s policy for the external audit contract
to be put out to tender at least every ten years, and in compliance
with the rules on mandatory audit rotation, the Committee
propose that a competitive tender process is likely to be held in
2024. The Committee will continue to monitor the appointment,
effectiveness and independence of PwC as external auditors,
as well as considering whether this proposed timing remains
appropriate in light of business developments, applicable law
and regulation. A competitive tender is in the best interests of
our shareholders.
In line with our terms of reference, the Committee undertook a
thorough assessment of the quality, effectiveness, value and
independence of the 2019 year end audit provided by PwC.
The Director of Audit and Risk prepared a questionnaire seeking
the views and feedback of the Board, together with those of
Group and divisional management, and it formed the basis of
further discussion with respondents. We sought input from
Committee members and from members of the management
team on areas including the auditor’s expertise, professionalism,
independence and challenge; their planning and audit approach;
the quality and content of reporting and the outputs from the
audit; and governance of the audit including assessment of
team members’ performance and independence. The findings
of the survey were considered by the Committee who specifically
recognised the importance of the handover of the Senior
Statutory Auditor responsibility during the year and concluded
that PwC continued to perform effectively and remains
independent. As a result, PwC’s re-appointment as external
auditors at the forthcoming AGM is recommended
to shareholders.
The Committee has a formal policy on the Company’s
relationship with its external auditors in respect of non-audit
work to ensure that auditor objectivity and independence are
maintained. The policy is reviewed annually by the Committee
and was updated this year following the introduction of the FRC
Revised Ethical Standard 2019. The majority of non-audit work
undertaken by PwC in the financial year ended 31 August 2020
related to work done in respect of the Class 1 Shareholder
Circular in relation to the acquisition of MRG and the interim
review. The Company decided to use PwC in respect of the Class
1 Shareholder Circular after considering alternative approaches
and taking into account their understanding of our business and
the tight timescales for publishing the Shareholder Circular.
PwC used a specialist team which was separate from the audit
team for this work. The auditors may only provide such services if
such advice does not conflict with their statutory responsibilities
and ethical guidance. The Committee made enquires of PwC and
management and were satisfied that no such conflict existed.
In future, and in keeping with developing best practice, the
Committee has approved that the Company will not use the
external auditors to undertake financial due diligence work.
On behalf of the Audit Committee, my approval is required before
the Company uses PwC for non-audit services as specifically set
out in the policy, or if the fees exceed £25,000 per matter.
The Committee is satisfied that the Company was compliant
during the year with both the Code and the FRC’s Ethical and
Auditing Standards in respect of the scope and maximum level of
permitted fees incurred for non-audit services provided by PwC.
For the financial year ended 31 August 2020 the non-audit fees
paid to PwC were £450,400, of which £366,400 related to
preparation of the Shareholder Circular in respect of the
acquisition of MRG, and the audit fees payable to PwC were
£1,225,000.
The Company has complied during the financial year under
review, and up to the date of this report, with the provisions of
the Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014.
Audit Committee Chair succession
This is my last letter to you as Chair of the Audit Committee.
I will be stepping down as Chair of the Committee at the
forthcoming AGM in line with our Board succession plan and
handing over to Nicky Dulieu, who will take up the position from
January 2021. Nicky has substantial finance and retail expertise
and will be an excellent Audit Committee Chair.
Suzanne Baxter
Chair of the Audit Committee
19 November 2020
51
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Corporate governance report continued
Nominations Committee report
The Committee will
continue to focus on
succession planning and
talent management
for key roles in the
business.”
Henry Staunton
Chairman
Nominations Committee
Dear Shareholder
As Chair of the Nominations Committee, I am pleased to present
my report on the activities of the Nominations Committee for the
financial year ended 31 August 2020. The Committee’s principal
responsibility is to ensure that the Board comprises individuals
with the requisite skills, knowledge, independence and
experience to ensure that it is effective in discharging its
responsibilities and ensure that appropriate procedures are in
place for the nomination, selection and succession of directors
and senior executives.
The Committee comprises a majority of independent non-
executive directors. The other members of the Committee are
Suzanne Baxter, Carl Cowling, Nicky Dulieu, Annemarie Durbin,
Simon Emeny and Maurice Thompson. In the event of any
matters arising concerning my membership of the Board, I would
absent myself from the meeting as required by the Code and the
Senior Independent Director would take the Chair.
The Committee met three times during the year. The principal
matters discussed at the meetings were succession planning for
Board and senior executives, the appointment of a new
non-executive director and Audit Committee Chair designate,
career planning and identifying talent across the businesses and
reviewing the work that has been undertaken in respect of
improving diversity in the Company’s senior executive group.
In accordance with the Board’s succession plan which aims to
broaden the diversity of candidates to join the Board, the
Committee appointed external recruitment consultants, Lygon
Group, to assist in the process of identification of potential
candidates to join the Board as a replacement for Suzanne
Baxter who will, after eight years, step down from the Board at
the forthcoming AGM. The Lygon Group initiated a search which
produced a longlist of candidates, which was then reduced to a
shortlist of candidates. These shortlisted candidates were
interviewed by members of the Committee, the Group Chief
Executive and other members of the Board, and feedback on
each candidate was compiled. As a result of this search, Nicky
Dulieu was appointed as a non-executive director on
9 September 2020. I confirm that Lygon have no other
relationship with the Company or individual directors and have
signed up to the voluntary Code of Conduct covering Board
appointments established following the Davies Review.
The Committee keeps itself updated on key developments
relevant to the Company, including on the subject of diversity.
Information on diversity, including gender, in respect of the
Board and the Company is set out in the Employees section of
the Strategic report on pages 32 and 33. The Board believes
in creating throughout the Company a culture free from
discrimination in any form and is proud of its long history of being
regarded as a responsible and respected employer. The Board
believes that the benefits of a diverse workforce will help the
Company achieve its strategic objectives.
The Board is a member of ‘the 30% Club’, which aims to achieve
a minimum of 30 per cent of women on FTSE 350 Boards and in
senior management within FTSE 100 companies by 2020.
The organisation runs targeted initiatives and campaigns to
improve diversity and accelerate the pace of change. The Board is
mindful of the recommendations of the Hampton-Alexander and
Parker Reviews on gender and ethnic diversity. During the year
under review, the Company had 29 per cent women on the Board,
35 per cent in the Group Executive Team and their direct reports
and 52 per cent in the management team. The Board is
committed to strengthening the pipeline of women in senior roles
across the business and continues to take steps to ensure there
are no barriers to women succeeding at the highest level of the
Company. An action plan has been agreed to take further steps to
improve workplace diversity. Actions include the provision of
mentoring, as well as focused initiatives to better understand the
challenges faced by under-represented groups employed within
the Company. During the year the Company set up a Diversity
and Inclusion committee consisting of employees from across
the Group together with the Group Chief Executive and the Group
HR Director. The committee has met three times and has made
recommendations on recruitment, and connecting with our
customers and employees on dates of significance.
These recommendations have been acted upon and adopted
by the Company.
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WH Smith PLC Annual Report and Accounts 2020
Corporate governance To ensure we attract more women at senior level, we have
introduced a requirement for gender balanced shortlists for
internal and external recruitment at a senior executive level.
Further information on the gender balance of those in senior
management and their direct reports is set out in the Strategic
report on page 33. The Company continues to work with
‘Everywoman’ who provide a host of personal development tools
aimed at women and also provide our employees with links to an
external network of professional women in other organisations.
The Board recognises that diversity is not limited to gender,
but includes skills, experience, ethnicity, disability and sexual
orientation. The Board is committed to having a diverse and
inclusive leadership team and will monitor ethnic diversity across
the Group. The Company has, during the year, introduced a new
recruitment policy requiring that there is a shortlist of a
minimum of six candidates for each vacancy of which 50 per cent
must be female and at least one must be from a BAME
background. We will continue to appoint on merit, whilst aiming
to broaden the diversity of the talent pipeline.
Further information on diversity is set out in the Employees
section of the Strategic report on pages 32 and 33.
The Committee will continue to focus on succession planning
and talent management for key roles across the business,
to ensure the Company develops a pipeline of high-quality
internal candidates for senior management roles. Work is being
undertaken to ensure succession arrangements are in place for
Board members and key management.
The latest Board evaluation confirmed that the culture of the
Board is excellent, being very open and collaborative. The Board
continues to have a broad mix of skills, diversity, experience and
talent, which enables the Board and the Committees to
work effectively.
Henry Staunton
Chair of the Nominations Committee
19 November 2020
53
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ biographies
Henry Staunton
Chairman
Carl Cowling
Group Chief Executive
Date of appointment: 1 September 2010. Henry was appointed as
Chairman on 1 September 2013.
Date of appointment: 26 February 2019. Carl was appointed as Group
Chief Executive on 1 November 2019.
Committee membership: Chair of the Nominations Committee and a
member of the Remuneration Committee.
Skills and experience: Henry brings a breadth of experience and
leadership in both executive and non-executive roles. He has extensive
finance, media and retail expertise and is Chairman of Capital and
Counties Properties plc. He was previously the Finance Director of
Granada and ITV, Chairman of Ashtead Group, Phoenix Group Holdings
and Vice Chairman of Legal and General PLC.
Committee membership: Nominations Committee
Skills and experience: Carl has considerable retail experience and has
been instrumental in the development and execution of the Company’s
strategy. His strong leadership and strategic expertise enable him to lead
the Group and create shareholder value. He joined WH Smith as
Managing Director, Travel in November 2014. In 2017, he was appointed
Managing Director, High Street. Prior to joining WH Smith,
Carl was Managing Director of Global partnerships at Carphone
Warehouse and previously spent over a decade at Dixons where he held
the roles of Ecommerce Director, Commercial Director and Managing
Director of the airport retailing business, Dixons Travel.
Robert Moorhead
Chief Financial Officer and Chief Operating Officer
Suzanne Baxter
Non-executive director
Date of appointment: 1 December 2008.
Skills and experience: Robert has over 25 years of retail and financial
management experience, which has proved invaluable in his role as Chief
Financial Officer and Chief Operating Officer. He has a deep
understanding of the Group’s businesses and strategy and has a strong
track record of creating shareholder value. He is a Chartered Accountant
and joined WH Smith in 2004 as Retail Finance Director. He is a non-
executive director and Chair of the Audit Committee of The Watches of
Switzerland Group PLC. Previously, he was Group Finance Director at
Specsavers Optical Group and Finance and IT Director of World Duty Free
Europe. He also held a number of roles at B&Q and Kingfisher Group.
He started his career at Price Waterhouse.
Date of appointment: 4 February 2013. Suzanne will step down as a
non-executive director following the Company’s forthcoming AGM.
Committee membership: Chair of the Audit Committee and a member of
the Nominations Committee and Remuneration Committee.
Skills and experience: Suzanne has extensive finance, commercial and
operational experience gained from working internationally with large
workforces and complex contracts across multi-site locations. She is a
Chartered Accountant having trained at Price Waterhouse, and is Chair of
the Audit Committee. She has extensive executive and non-executive
Board experience that enables her to provide substantial insight into the
Company’s reporting and risk management processes. She is a
non-executive Board member and Nominations Committee Chair for
Pinsent Masons International LLP, and a Commissioner on the Board of
the Equality and Human Rights Commission where she is also a member
of its Audit and Risk Assurance Committee and UN Treaty Monitoring
Group. She was formerly the Group Finance Director of Mitie Group Plc
and has 30 years of experience gained in the services industry. She was
also previously the Chair of the Business in the Community South West
Strategic Advisory Board, Deputy Chair of Opportunity Now and Chair of
the Business Services Association.
54
WH Smith PLC Annual Report and Accounts 2020
Corporate governance Annemarie Durbin
Non-executive director
Simon Emeny
Non-executive director
Date of appointment: 3 December 2012.
Date of appointment: 26 February 2019.
Committee membership: Chair of the Remuneration Committee and a
member of the Audit Committee and Nominations Committee.
Skills and experience: Annemarie’s international background and her
legal experience and knowledge of regulatory and compliance matters
provides a valuable contribution to the operation of WH Smith. She is a
non-executive director and Chair of the Remuneration Committee of both
Santander UK plc and Persimmon PLC, Chair of Cater Allen Limited and
Chair of Merryck & Co. Limited. Previously, she was a non-executive
director of Ladbrokes Coral Group plc and was Chair of the Listing
Authority Advisory Panel. She has 25 years’ international banking
experience, particularly across Asia, Africa and the Middle East, operating
at Board and Executive Committee level. In addition to her directorships,
Annemarie is an executive coach and a conflict mediator.
Committee membership: Audit Committee, Remuneration Committee
and Nominations Committee. Simon was appointed as the Senior
Independent Director following the Company’s AGM on 22 January 2020.
Skills and experience: Simon has a wealth of consumer facing
experience, including transport hub sites, and brings this broad range of
skills and commercial expertise to the Board and its Committees. He is
Group Chief Executive of Fuller, Smith & Turner PLC, a role he has held
since 2013. Simon was previously the Senior Independent Director of
Dunelm Group PLC.
Maurice Thompson
Non-executive director
Nicky Dulieu
Non-executive director
Date of appointment: 26 February 2019.
Date of appointment: 9 September 2020.
Committee membership: Audit Committee, Remuneration Committee
and Nominations Committee.
Skills and experience: Maurice has substantial Board and financial
expertise, with over 30 years of experience in the international banking
industry. He is able to draw upon his extensive knowledge of financial
and strategic experience to assist the Board and its Committees. He is
Chairman of Greensill Capital and previously held the position of Chief
Executive of Citibank in the UK.
Committee membership: Audit Committee, Remuneration Committee
and Nominations Committee. Nicky will become Chair of the Audit
Committee following the Company’s forthcoming AGM.
Skills and experience: Nicky has substantial financial and retail
expertise. She trained as an accountant and held various strategic and
financial roles within Marks & Spencer Group plc over a 23-year period.
In 2006, Nicky joined the Board of Hobbs Limited as Chief Operating
Officer and Finance Director and was Chief Executive from 2008 until
2014. With her finance and retail expertise, she will be a valuable member
of the Board and Chair of the Audit Committee. She is a non-executive
Director at Redrow Plc, Marshall Motor Holdings Plc and Adnams Plc.
Ian Houghton is Company Secretary and Legal Director and was
appointed in September 1998.
Previous directors who served during the financial year ended
31 August 2020:
Stephen Clarke stepped down as Group Chief Executive on
31 October 2019.
Drummond Hall stepped down as a director of the Company on
22 January 2020.
55
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report
The Company believes
that its approach to
total compensation
has served the
Company well.”
Annemarie Durbin
Chair of the Remuneration Committee
Annual statement from the
Remuneration Committee Chair
Dear Shareholder
On behalf of the Remuneration Committee (the ‘Committee’),
I am pleased to present the Directors’ remuneration report for
the financial year ended 31 August 2020 which is in line with the
Company’s approved remuneration policy. The Directors’
remuneration policy was supported by 98.78 per cent of our
shareholders at our AGM in 2019.
Our remuneration policy focuses on an approach to pay which we
believe is in our shareholders’ best interests and promotes the
long-term success of the Company. Whilst it provides executive
remuneration packages which are competitive, there is a very
clear bias to variable pay with stretching and rigorous
performance measures and conditions designed to deliver
superior returns for shareholders. Our remuneration policy has
worked well supporting the Company’s long-term strategy to
create shareholder value over the past ten years. You can see
how the Company has generated shareholder value over this
period in the TSR graph on page 63.
The Company’s remuneration policy can be summarised as
providing at or below the median of market levels of fixed pay but
with the opportunity to earn upper quartile levels of remuneration
if the executives deliver superior returns for shareholders.
Executive remuneration packages are structured so that they:
• are aligned to the Company’s strategy to deliver shareholder
returns and promote its long-term success;
• are aligned with the interests of shareholders;
• are competitive and provide a very clear bias to variable pay
with stretching and rigorous performance measures
and conditions;
• do not promote unacceptable behaviours or encourage
unacceptable risk taking;
• include robust malus/clawback provisions and holding periods
which permit the recoupment of variable pay if the pay-out was
based on misstated financial results, an error or incorrect
information, if the Committee concludes that circumstances
arose during the bonus year or vesting period which would
have warranted summary dismissal of the individual
concerned or if there is an insolvency having regard to the
Committee’s assessment of the involvement of the individual
to such event; and
• take into account Company-wide pay and
employment conditions.
56
WH Smith PLC Annual Report and Accounts 2020
Corporate governance The Committee considers it essential that management is clearly
incentivised to restructure the business to deliver long-term
shareholder returns both through the current market uncertainty
and to have the right platform to maximise sustainable and
significant returns as and when the travel sector returns to some
form of normality. To this end, the Committee consulted with the
Company’s largest shareholders and the principal advisory firms
in respect of redesigning the Company’s long-term incentive
arrangements to better align with the expected recovery period.
A clear majority of those shareholders with whom we engaged
confirmed support for such a change in the Company’s incentive
arrangements. While the Committee believes that it is in the best
interests of the Company and its shareholders to develop such a
plan linked to the Board’s strategy of returning the Company to
pre-Covid levels of profitability, it decided that it is not appropriate
to make any change to these arrangements now given the
current uncertainty around the ongoing impact of Covid-19 on the
Company and the wider economy. The current policy is due for
renewal in the normal course at the 2022 AGM and the
Committee will continue discussing its plans with the Company’s
largest shareholders and the principal advisory firms during 2021
and will, if appropriate, submit proposals to shareholders for
approval at the AGM in 2022. The Committee will only do so if an
approach can be agreed which ensures that the long-term
interests of the Company, its shareholders and other
stakeholders are aligned.
Following the decision to retain the current policy for the financial
year ending 31 August 2021, the Committee approved the regular
annual award of LTIPs which will be granted in November 2020
on their normal terms except that, given the difficulty of setting
a suitable EPS target range in the current climate, all of the
award will be granted subject to the relative total shareholder
return condition. Previously this measure had applied to 40 per
cent of the award with 60 per cent relating to EPS.
When considering the quantum of the award, the Committee
actively considered whether to apply a discount to the award
levels. Given the current levels of uncertainty the Committee
decided that it would be in a better position at the end of the
award period to assess whether and to what extent there had
been circumstances that would warrant exercising its discretion
to reduce the vesting levels. Consistent with the Code, the
Committee retains a broad discretion to reduce vesting levels,
including if it considers that there would otherwise be a
windfall gain.
Covid-19
Unfortunately, as with the wider economy and society more
generally, this year’s financial results have been impacted by
Covid-19 with the Company making a Headline loss before tax1
of £69m* in the financial year ended 31 August 2020. As a result,
no bonuses were paid to the executive directors in respect of
the year.
The Company has been significantly affected by the Covid-19
pandemic. As a result of this the Company has accessed
Government support since the start of the lockdown. This allowed
the Company time to reflect on what would be necessary in
terms of long-term structural changes to support a recovery
plan. Given the fact that the recovery period will take a number of
years, the Board took the difficult decision to make a significant
headcount reduction. Although regretting that this was
necessary, the situation was handled sensitively, in full
consultation with the unions and employee representative
groups, and on enhanced redundancy terms. The Company has
also maintained a dialogue with suppliers and landlords to
mitigate disruption and understand their concerns as a result
of the impact of Covid-19. Given the Company’s loss for the full
year no dividends have been declared for the financial year
ended 31 August 2020.
The executive directors, alongside the wider leadership team and
the Board, took a voluntary 20 per cent reduction in salary/fees
during the lockdown period in April to June 2020. Following the
Committee assessing that Carl Cowling had performed well
against his personal objectives, we agreed to delay payment of
the salary increase which he was due to receive on 1 April 2020
to the end of the lockdown period. He subsequently voluntarily
donated the increased amount to charity until October 2020.
The Committee took the decision not to adjust the financial
targets for the Company’s annual bonus plan and, therefore,
no bonuses under the annual bonus plan were awarded to the
executive directors and senior management in respect of the
financial year ended 31 August 2020.
Furthermore, the Committee also took the decision not to adjust
the performance targets in respect of the Company’s ‘in flight’
LTIP awards notwithstanding the fact that the Committee
believes that management has performed extremely well in
protecting the Company during the Covid-19 pandemic. This will
mean that little or no ‘in flight’ LTIP awards are expected to vest
in 2021 and 2022. There is a 13 per cent vesting of the LTIP award
maturing in 2020 which management has voluntarily agreed will
all be subject to a two-year holding period.
Due to the uncertainty around Covid-19 and its impact on
domestic and international travel in the coming months, the
Committee will delay finalising the performance measures and
targets for the bonus plan for the financial year ending 31 August
2021 until December 2020. ESG measures will be included in the
Group Chief Executive’s personal objectives. These personal
objectives operate as a downward-only modifier to the annual
bonus out-turn.
1
Headline loss before tax is on a pre-IFRS 16 basis, and excludes non-underlying items. This is an Alternative Performance Measure defined and explained in the Glossary on page 146.
57
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report continued
Outcome 2019/20
As the Company has been significantly affected by the Covid-19
pandemic, the Group made a Headline loss before tax1 of £69m*
in the financial year ended 31 August 2020 and no dividends will
be paid to shareholders in respect of this financial year.
Further information regarding the Company’s performance
during the year can be found in the Strategic report on pages
2 to 37.
No annual bonus payments will be made to the executive
directors or senior management in respect of the financial year
ended 31 August 2020.
The 2017 LTIP vesting percentage is determined by the growth in
the Company’s Headline EPS and TSR over the three-year
performance period which ended on 31 August 2020.
The Company partially met the performance targets for the 2017
LTIP as the Company’s TSR ranked above median when
compared to the 27 companies in the comparator group resulting
in 13 per cent of the overall award vesting. The executive
directors have voluntarily agreed that all the shares that have
vested in respect of the 2017 LTIP will be subject to a two-year
holding period.
The Committee determined that the formulaic out-turn under the
LTIP was appropriate and should be applied without
discretionary adjustment.
As set out on page 55 and disclosed in the Directors’
remuneration report for the financial year ended 31 August 2019,
Stephen Clarke stepped down as Group Chief Executive and left
the Company on 31 October 2019 and was treated as a good
leaver under the LTIP and received payment of the 2019 annual
bonus, subject to appropriate deferral.
Annemarie Durbin
Chair of the Remuneration Committee
19 November 2020
Key decisions and changes
The key decisions and changes made by the Committee during
the year are highlighted as follows:
• The Committee took the decision not to adjust the financial
targets for the Company’s annual bonus plan or the
performance targets in respect of the Company’s outstanding
LTIP awards. This has meant that no annual bonus will be
payable under the Company’s annual bonus plan as the
Company did not meet the minimum financial target.
• The Committee approved the 2019 Directors’
remuneration report.
• The Committee reviewed Carl Cowling’s performance since his
appointment as Group Chief Executive and, in accordance with
the terms of his appointment which were set out in the 2019
Annual report, agreed that his performance merited him
receiving the £25,000 increase in his annual salary.
Carl Cowling agreed to delay receipt of this salary increase
until 1 July 2020.
• The Committee approved the performance targets for the
Long-Term Incentive Plan (‘LTIP’) and annual bonus plan for
the financial year ended 31 August 2020. The Committee also
reviewed and approved the personal objectives for the
executive directors, which are set out in Section 2.14 on
page 66.
• The Committee has agreed that the personal objectives of the
executive directors under the annual bonus plan for the
financial year ending 31 August 2021 will include ESG targets
which are relevant to the Company.
• The Committee approved the vesting under the 2017 LTIP.
• The Committee considered the Company’s gender pay gap
report, Workforce Remuneration Report and CEO pay gap
ratios and recommended to the Board that the gender pay gap
report be published.
• During the year, the Committee consulted with our largest
shareholders and their representative bodies on the
Company’s remuneration policy.
• The Committee approved seeking shareholder consent for the
adoption of the WH Smith Employee Stock Purchase Plan (the
‘US ESPP’) to provide broadly equivalent benefits to the
Sharesave Scheme for employees in the United States.
• The Committee agreed that the pension contributions for Carl
Cowling and Robert Moorhead will be reduced to align with the
wider workforce rate of approximately 3.5 per cent from
1 January 2023.
1 Headline loss before tax is on a pre-IFRS 16 basis, and excludes non-underlying items. This is an Alternative Performance Measure defined and explained in the Glossary on page 146.
58
WH Smith PLC Annual Report and Accounts 2020
Corporate governance 1. Information subject to audit
The following information has been audited by PwC:
• Section 2.5 – Summary of non-executive directors’
remuneration 2020;
• Section 2.6 – Summary of executive directors’
remuneration 2020;
• Section 2.7 – Payments made to former directors;
• Section 2.8 – Payments for loss of office;
• Section 2.14 – Annual bonus targets;
• Section 2.15 – Share plans; and
• Section 2.19 – Directors’ interests in shares.
2. Annual remuneration report
The Committee presents the annual report on remuneration
which, together with the introductory letter by the Chair of the
Committee on pages 56 to 58, will be put to shareholders as an
advisory vote at the forthcoming Annual General Meeting.
2.1 Remuneration Committee
The other members of the Committee are Suzanne Baxter, Nicky
Dulieu, Simon Emeny, Henry Staunton and Maurice Thompson.
At the invitation of the Committee, the Group Chief Executive and
representatives of the Committee’s external independent
remuneration adviser regularly attend meetings.
The Committee met six times during the year. All Committee
members are expected to attend meetings. The table on page 41
in the Corporate governance report shows the number of
meetings held during the year ended 31 August 2020 and the
attendance record of individual directors.
In order to avoid any conflict of interest, remuneration is
managed through well-defined processes ensuring no individual
is involved in the decision-making process related to their own
remuneration. In particular, the remuneration of all executive
directors is set and approved by the Committee; none of the
executive directors are involved in the determination of their own
remuneration arrangements. The Committee also receives
support from external advisers and evaluates the support
provided by those advisers annually to ensure that advice is
independent, appropriate and cost-effective.
During the year, the Committee continued to receive advice from
FIT Remuneration Consultants LLP (FIT), which is a member of
the Remuneration Consultants Group (the professional body) and
adheres to its code of conduct. FIT was appointed by the
Committee and has no other relationship with the Company.
The Committee is satisfied that FIT continues to provide objective
and independent advice. FIT’s fees in respect of the year under
review were £68,560 (excluding VAT) and were charged on the
basis of FIT’s standard terms of business.
Ian Houghton, Company Secretary, also materially assisted the
Committee in carrying out its duties, except in relation to his own
remuneration. No director or manager is involved in any
decisions as to their own remuneration. The Group Chief
Executive also attends Committee meetings but excludes himself
in relation to discussion of his own remuneration, as does
the Chairman.
The Committee maintains an ongoing dialogue with our major
shareholders and proxy agencies to understand their views.
Any major changes to the policy or its operation would be subject
to prior consultation as necessary.
2.2 Statement of consideration of employment conditions
elsewhere in the Company and differences to executive
director policy
Our employees are a key component of the Company’s
performance and our overall reward strategy aims to support
this. When considering remuneration arrangements for executive
directors and senior management, the Committee takes into
account the pay and conditions of employees across the Group.
The Committee receives in-depth data regarding employee
remuneration from the HR Director on wider workforce pay and
conditions and does, where appropriate, exercise oversight of
remuneration throughout the Group.
The Committee does not formally consult with employees on the
remuneration policy. Each business has an employee forum and
employees are invited to participate in the annual Engagement
Survey where their views on all aspects of working conditions can
be collected and shared with the Committee and the Board.
The Company is proud of its long history of being regarded as a
responsible and respected employer and regularly reviews the
overall structure of pay practices across the Group and the wider
retail sector to ensure it remains competitive and is able to retain
and attract employees.
Our approach to reward for our employees is based on the
following principles:
• Competitive: setting pay with reference to internal relativity
and external market practices;
• Simple: helping all employees to understand how they
are rewarded;
• Fair: achieving consistent outcomes through flexible and
transparent policies; and
• Sustainable: aligning reward to business strategy
and performance.
All employees are entitled to base salary and benefits, including
pension and staff discount. Eligible employees are able to
participate in the Company’s Sharesave plan and thereby become
shareholders in the Company. Our Employee Assistance
Programme offers all employees access to free, 24/7 confidential
telephone, online and face-to-face advice for problems they may
be experiencing at home or work. Employees also have access to
the Company’s Benevolent Fund charity, which can provide
financial assistance in cases of significant hardship and provide
recuperative holidays and care breaks.
Participation in a pension plan is offered to all employees on a
contributory basis and we have approximately 6,475 employees
in our pension plans.
59
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report continued
2.3 Implementation of remuneration policy in the financial year ended 31 August 2020
This section sets out how the remuneration policy has been implemented in the financial year ended 31 August 2020.
Element of pay
Implementation of policy
Executive directors
Base salary
Benefits
Pension
Carl Cowling was appointed as Group Chief Executive on 1 November 2019 with a salary of £525,000. In accordance
with the arrangements put in place on his appointment as Group Chief Executive and the Committee’s assessment
that Carl Cowling had performed well against his personal objectives, his salary increased to £550,000 with effect
from 1 July 2020. The proposed increase was due to take effect from 1 April 2020 but was deferred following the
executive directors, alongside the wider leadership team and the Board, taking a 20 per cent reduction in salary/fees
during the lockdown period, April to June 2020. Carl Cowling donated the monthly amount of the salary increase
that he received following 1 July 2020 to charity until October 2020.
The current salaries are: Carl Cowling – £550,000; and Robert Moorhead – £440,000.
No changes were made to these elements of remuneration within the financial year ended 31 August 2020 (although
the cost of providing benefits may change without any action by the Company).
Executive directors received a car allowance, private medical insurance and life assurance, in addition to other
benefits, during the financial year ended 31 August 2020.
Carl Cowling received a total benefit equivalent to 12.5 per cent of base salary and Robert Moorhead received a total
benefit equivalent to 25 per cent of base salary. During the financial year ended 31 August 2020, Carl Cowling and
Robert Moorhead received all of their pension contribution as a salary supplement after applying for fixed
protection. Part of the amount otherwise paid to the Company’s defined contribution scheme was reduced to reflect
the requirement to pay employers’ National Insurance.
Annual bonus No bonuses were payable under the annual bonus plan for the financial year ended 31 August 2020. The Committee
Long-term
incentives
took the decision not to adjust the financial targets for the Company’s annual bonus plan as the Company made a
Headline loss before tax1 of £69m* in the financial year ended 31 August 2020 as a result of the impact of Covid-19
on the Company.
The bonus is normally assessed against a sliding scale target of Headline profit before tax and is then moderated
(on a downwards only basis) by reference to the achievement of personal objectives.
The target range for the year ended 31 August 2020 is set out on page 66.
Annual LTIP awards were set at the policy level being 335 per cent for Carl Cowling and 310 per cent for
Robert Moorhead.
The terms of and the performance measures applicable to the LTIP awards made in the financial year ended
31 August 2020 are described on page 67.
Vesting of LTIP awards is determined based on the following measures: 60 per cent is based on EPS growth and
40 per cent is based on relative TSR. The performance period is three years. There is a subsequent two-year holding
period.
The Committee approved these performance measures as they are directly linked to the objectives set out in the
Group’s strategy; there is a direct link with shareholder value and there is a clear line of sight for participants
between performance and reward.
The Committee took the decision not to adjust the financial targets for the outstanding LTIP awards. It currently
seems likely that the awards granted in November 2018 and November 2019 will lapse as a result of the impact of
Covid-19 on the Company.
Shareholding
guidelines
Carl Cowling is required to hold 300 per cent of salary in shares. Robert Moorhead is required to hold 250 per cent
of salary in shares. In accordance with the Company’s remuneration policy, Carl Cowling is expected to achieve
compliance with the shareholding requirement within six years of him joining the Board on 26 February 2019.
As at 31 August 2020 Carl Cowling held 22,335 shares with a value of £262,883 (approximately 48 per cent of salary)
and Robert Moorhead held 197,263 shares with a value of £2,321,786 (approximately 528 per cent of salary).
Malus/
clawback
The annual bonus plan, DBP and LTIP rules included a provision for clawback (before or within a period of two
years in the case of the annual bonus or three years in the case of the LTIP and DBP following payment or vesting
or earlier change of control) of a bonus or award if the Company materially misstated its financial results and as a
result the bonus or award was made, paid or vested to a greater extent than it should have been, if the extent to
which any performance target or other condition was met was based on an error or inaccurate or misleading
information or assumptions and as a result the bonus or award was made, paid or vested to a greater extent than
it should have been, if the Committee concludes that circumstances arose during the bonus year or vesting period
which would have warranted summary dismissal of the individual concerned or, in the case of the LTIP and DBP,
in the event of insolvency having regard to the involvement of the individual executive in the circumstances which
led to such insolvency.
1 Alternative performance measure defined and explained in the Glossary on page 146.
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WH Smith PLC Annual Report and Accounts 2020
Corporate governance Element of pay
Implementation of policy
Non-executive directors
Annual fees
Current fees are £235,000 for the Chairman of the Board and £55,000 for the role of non-executive director with
additional fees of:
(i) £12,000 payable for the role of Senior Independent Director (‘SID’); and
(ii) £12,000 payable for being the Chair of the Audit or Remuneration Committee
The Chairman and non-executive directors took a 20 per cent reduction in fees during the lockdown period
between April to June 2020.
2.4 Implementation of remuneration policy in the financial year ending 31 August 2021
The Committee envisages that there will be no changes to the implementation of the remuneration policy, beyond the proposed
changes to the remuneration policy set out on page 58, during the financial year ending 31 August 2021. The policy in respect of the
executive directors will be applied as follows:
Element of pay
Implementation of policy
Executive directors
Base salary
Carl Cowling’s salary will increase to £575,000, subject to his personal performance, with effect from 1 April 2021.
Robert Moorhead will be eligible, in line with other head office staff, for any increase in salary following the March
2021 review.
Benefits
Pension
No changes are expected to be made to these elements of remuneration within the financial year ending
31 August 2021.
No changes are expected to be made to these elements of remuneration within the financial year ending
31 August 2021. Any new executive director would have their allowance aligned to that available to the majority of
UK-based employees. The pension contributions for Carl Cowling and Robert Moorhead will be reduced to align
with the wider workforce rate from 1 January 2023.
Annual bonus
The bonus opportunity for Carl Cowling will be 160 per cent of annual salary and Robert Moorhead will be 130 per
cent of annual salary. It is envisaged that the bonus metrics will be based on a matrix of financial and personal
performance which may be measured partly on a half yearly and partly on a full year basis. The Committee does
not expect to finalise the performance measures and targets or the measurement period until December 2020.
Any bonus in excess of the on-target level will be deferred into shares.
Long-term
incentives
Annual LTIP awards will again be set at the policy level (335 per cent of salary for Carl Cowling and 310 per cent for
Robert Moorhead). Vesting of LTIP awards will be determined using the following performance measure: relative
TSR. The number of shares vesting for threshold performance is 25 per cent with a median to upper quartile scale
relative to the FTSE All Share Retailers Index constituents.
Shareholding
guidelines
Carl Cowling is required to hold 300 per cent of salary in shares and Robert Moorhead is required to hold 250 per
cent of salary in shares. The Committee will develop a formal policy for post-employment shareholding
requirements which will be put to shareholders on the policy renewal at the AGM in January 2022.
Malus/
clawback
The malus/clawback provisions under the annual bonus plan will be brought in line with those applicable to the
LTIP and the DBP (i.e. the rules will include a provision for clawback before or within a period of three years
following payment of a bonus if the Company materially misstates its financial results and as a result the bonus
is made or paid to a greater extent than it should have been, if the extent to which any performance target or other
condition is met is based on an error or inaccurate or misleading information or assumptions and as a result the
bonus is paid to a greater extent than it should be, if the Committee concludes that circumstances arose during
the bonus year which would have warranted summary dismissal of the individual concerned or in the event of
insolvency having regard to the involvement of the individual executive in the circumstances which led to such
insolvency).
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Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report continued
The policy in respect of the non-executive directors will be applied as follows:
Element of pay
Implementation of policy
Non-executive directors
Annual fees
The fees of the Chairman and non-executive directors will be subject to a review in March 2021.
2.5 Summary of Non-executive directors’ remuneration 2020 (audited)
The table below summarises the total remuneration for non-executive directors as a single figure for the financial year ended
31 August 2020. Non-executive directors are not paid a pension and do not participate in any of the Company’s variable
incentive schemes:
Henry Staunton
Suzanne Baxter
Annemarie Durbin
Simon Emeny
Maurice Thompson
Directors who resigned during the year
Drummond Hallc
Base feeb
£’000
Committee/SID feeb
£’000
Benefitsa
£’000
Total
£’000
2020
223
52
52
52
52
23
2019
235
55
55
28
28
55
2020
–
11
11
7
–
5
2019
–
12
7
–
–
17
2020
–
–
–
–
1
–
2019
–
2
–
–
1
–
2020
223
63
63
59
53
28
2019
235
69
62
28
29
72
a) Benefits primarily consist of travel and subsistence costs incurred in the normal course of business, in relation to meetings on Board and Committee matters and other Company events which are
considered taxable.
b) The Chairman and non-executive directors took a 20 per cent reduction in fees during the lockdown period between April to June 2020.
c) Drummond Hall stepped down as a director of the Company on 22 January 2020.
d) Nicky Dulieu was appointed as a non-executive director on 9 September 2020.
2.6 Summary of Executive directors’ remuneration 2020 (audited)
The table below summarises the total remuneration for executive directors as a single figure for the financial year ended
31 August 2020:
Salaryc
£’000
Benefitsa
£’000
Pensiong
£’000
Total fixed
remuneration
£’000
Annual bonusd
£’000
LTIe, f
£’000
2019
28
97
2020
556
534
2019
236
510
2020
–
–
2019
520
516
2020
2019
54
789
85 1,272
Total variable
remuneration
£’000
2020
2019
54 1,309
85 1,788
Total
remuneration
£’000
2020
2019
610 1,545
619 2,298
2020
482
418
2019
201
399
Carl Cowling
Robert Moorhead
Directors who resigned during the year
Stephen Clarkeb
Total £’000s
568
997 1,168
97
3
31
2020
14
14
2019
7
14
14
35
2020
60
102
24
186
721
124
139
264 1,214 1,467
908
–
– 1,944
97 2,019
236 4,080
97 2,927
221 3,648
236 6,024 1,450 7,491
a) Benefits relate mainly to the provision of a car allowance, private medical insurance and life assurance.
b) Stephen Clarke stepped down as Group Chief Executive on 31 October 2019.
c) Carl Cowling and Robert Moorhead took a 20 per cent salary reduction during the lockdown period between April to June 2020. Carl Cowling received a £25,000 pay increase with effect from
1 July 2020 but donated this increase to charity. No bonuses were paid to the executive directors under the annual bonus plan.
d) The Company did not achieve the threshold profit target for the financial year ended 31 August 2020 and no bonuses were paid to Carl Cowling and Robert Moorhead under the annual bonus plan.
Stephen Clarke was not eligible to receive a bonus for the financial year ended 31 August 2020.
e) The performance measures for the LTIP, and achievement against them, are set out on page 67. The performance conditions for the awards granted in the financial year ended 31 August 2018 were
partially met with 13 per cent of the shares subject to awards vesting. As a result, the total number of shares vesting for Carl Cowling will be 5,104 shares including 336 dividend accrual shares; for
Robert Moorhead 7,982 shares including 526 dividend accrual shares; and for Stephen Clarke 9,148 shares including 602 dividend accrual shares. The 2019 figures in the table above have been
updated to the actual values of the LTIP that vested in respect of the performance period ending in that financial year, using the share price of 2274p, being the closing price on the vesting date,
21 October 2019.
f)
The share price used to calculate the 2020 LTI figures in the table is 1064.89p, being the average share price for the Company over the last quarter of the financial year ended 31 August 2020.
The LTI figures in the table for 2020 do not include any share price appreciation as the share price as at the date of grant on 26 October 2017 was 2036.67p.
g) The pension figures in the table above include both the pension contribution into the Company’s defined contribution pension scheme and any salary supplement received in lieu.
The total aggregate emoluments (excluding LTI) paid to the Board in the financial year ended 31 August 2020 was £1,703,000 and in
the financial year ended 31 August 2019 was £3,906,000.
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WH Smith PLC Annual Report and Accounts 2020
Corporate governance 2.7 Payments made to former directors (audited)
No payments were made in the financial year ended 31 August 2020 to former directors of the Company other than to Stephen Clarke,
as disclosed in the single total figure table on page 64 and the Directors’ remuneration report for the financial year ended
31 August 2019.
2.8 Payments for loss of office (audited)
Stephen Clarke stepped down as Group Chief Executive on 31 October 2019. Stephen Clarke received his salary and other benefits
until 31 October 2019. Under the rules of the LTIP, Stephen Clarke was treated as a good leaver and retained a reduced number of
unvested awards as set out in the notes to the table of outstanding awards on page 68. These awards will continue to be subject to
meeting the performance criteria and were reduced on a pro-rata basis to reflect the time elapsed from the commencement of the
performance period until his ceasing to be an employee of the Company. Stephen Clarke also retained awards under the DBP, as set
out in the table of outstanding awards on page 68. These awards will continue to vest at the end of the relevant vesting period in
accordance with the rules of the DBP.
As set out in the single total figure table on page 64, Stephen Clarke received payment of the 2019 annual bonus following cessation of
employment with the Group.
No payments were made in respect of any other director’s loss of office in the financial year ended 31 August 2020.
2.9 Service contracts
Executive directors are on rolling service contracts with no fixed expiry date. The contract dates and notice periods for each executive
director are as follows:
Carl Cowling
Robert Moorhead
Date of contract
26 February 2019
8 October 2008
Notice period by Company
12 months
12 months
Notice period by director
12 months
9 months
Carl Cowling’s service contract provides for notice of 12 months from either party, permits summary dismissal with no compensation
in specified cases, has no special provisions in the event of a change of control and limits the maximum sum due on termination to
base salary only for the notice period. Robert Moorhead’s service contract provides for notice of 12 months from the Company and
nine months from Robert Moorhead and has no special provisions in the event of a change of control and limits the maximum sum
due on termination to base salary only for the notice period. Copies of the service contracts may be inspected at the registered office
of the Company.
2.10 Assessing pay and performance
You can see how the Company has generated shareholder value since 2010 in the TSR graph below.
Total shareholder return performance since 31 August 2010
700
600
500
400
300
200
100
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Accounting year end
WH Smith PLC
FTSE All Share General Retailers Index
a) The graph illustrates the TSR performance on a cumulative basis (with dividends reinvested) as at the end of each of the last ten financial years compared with the FTSE All Share General Retailers
Index (the ‘Index’) over the same period.
b) The Company is a member of the Index and, as such, this sector was considered to be the most appropriate comparator group upon which a broad equity market index is calculated.
63
Corporate governanceWH Smith PLC Annual Report and Accounts 2020
Directors’ remuneration report continued
The table below summarises the Group Chief Executive’s remuneration and how the Company’s variable pay plans have paid out over
the past ten years.
Financial year ended 31 August
2020 – from 1 November 2019
2019 – until 31 October 2019
2019
2018
2017
2016
2015
2014
2013 – from 1 June
2013 – until 31 May
2012
2011
2010
CEO
Carl Cowling
Stephen Clarke
Stephen Clarke
Stephen Clarke
Stephen Clarke
Stephen Clarke
Stephen Clarke
Stephen Clarke
Stephen Clarke
Kate Swann
Kate Swann
Kate Swann
Kate Swann
Single figure of total remuneration
£’000
533
221
3,416
2,879
4,112
5,179
4,148
2,546
4,067
9,192
3,147
3,313
6,966
Annual bonus (vesting versus
maximum opportunity)
%
–
–
100
93
98
100
100
100
100
100
100
100
100
Long-term incentive (vesting versus
maximum opportunity)
%
13
13
69
58
81
98
100
100
97
98
90
92
97
The 2019 single figure of total remuneration has been updated to reflect the actual value of the LTIP award that vested in respect of
the performance period ending in that financial year.
2.11 Annual change in remuneration of each director compared to employees
The table below shows the percentage changes in the remuneration of each director (salary/fees, annual bonus and taxable benefits)
between the financial year ended 31 August 2019 and the financial year ended 31 August 2020 compared with the percentage changes
in the average of those components of pay for UK employees employed by WH Smith Retail Holdings Limited. The Company has
chosen to voluntarily disclose this information, given that WH Smith PLC is not an employing company.
Carl Cowling
Robert Moorhead
Henry Staunton
Suzanne Baxter
Annemarie Durbin
Simon Emeny
Maurice Thompson
UK employees
Salary/fee increase/decrease
%
140
5
(5)
(6)
2
111
86
7
Annual bonus increase/decrease
%
(100)
(100)
n/a
n/a
n/a
n/a
n/a
(100)
Taxable benefits increase/decrease
%
100
–
–
(100)
–
–
–
18
a) The directors took a 20 per cent voluntary reduction in salary/fees during the lockdown period between April to June 2020.
b) Carl Cowling was appointed to the Board on 26 February 2019 and became Group Chief Executive on 1 November 2019.
c) Annemarie Durbin was appointed Chair of the Remuneration Committee on 23 January 2019.
d) Simon Emeny and Maurice Thompson were appointed as non-executive directors on 26 February 2019.
e) Simon Emeny was appointed as the Company’s Senior Independent Director on 22 January 2020.
f) Nicky Dulieu was appointed as a non-executive director on 9 September 2020.
64
WH Smith PLC Annual Report and Accounts 2020
Corporate governance 2.12 Group Chief Executive pay compared to pay of UK employees
In line with new reporting requirements, set out below are ratios which compare the total remuneration of the Group Chief Executive
(as included in the single total figure of remuneration table on page 64) to the remuneration of the 25th, 50th and 75th percentile of
our UK employees. The total remuneration of the Group Chief Executive used in this comparison is a combination of Stephen Clarke
and Carl Cowling’s remuneration for their respective periods as Group Chief Executive during the financial year ended 31 August 2020.
The disclosure will build up over time to cover a rolling ten-year period.
We expect the pay ratio to vary from year to year, driven largely by the variable pay outcome for the Group Chief Executive, which will
significantly outweigh any other changes in pay at WH Smith.
Group Chief Executive pay ratios
Financial year ended 31 August
2020
2019
Method
Option A
Option A
25th percentile pay ratio
43:1
239:1
Median pay ratio
41:1
207:1
75th percentile pay ratio
33:1
201:1
WH Smith has chosen to use Option A to calculate its Group Chief Executive pay ratio as it believes that it is the most robust way for it
to calculate the three ratios from the options available in the Regulations.
Total remuneration for all UK full-time equivalent employees of the Company on 31 August 2020 has been calculated in line with the
single figure methodology and reflects their actual earnings received in the financial year ended 31 August 2020 (excluding business
expenses). Set out in the table below is the base salary and total pay and benefits for each of the percentiles.
£
Salary
Total pay and benefits
25th percentile pay ratio
17,684
17,684
Median pay ratio
17,684
18,203
75th percentile pay ratio
22,500
23,016
The Company believes the median pay ratio for the year ended 31 August 2020 is consistent with the pay, reward and progression
policies for the Company’s UK employees taken as a whole. This group has been selected as the most appropriate comparator for the
Group Chief Executive as he is a full-time employee based in the UK and approximately 95 per cent of all WH Smith employees are
based in the UK. The reduction in the pay ratios in 2020 as compared to 2019 is attributable to the reduction in the amount of variable
remuneration received by the Group Chief Executive as a result of the impact of Covid-19, as explained in the Chair’s annual statement
on pages 56 to 58 and the summary of executive remuneration on page 62.
Supplemental ratios
The Company’s Chief Executive pay ratio is likely to vary, potentially significantly, over time since it will be driven largely by variable pay
outcomes. This means that depending on the Company’s performance the ratio could increase or decrease significantly.
The Committee believes that the Company’s senior executives should have a significant proportion of their pay directly linked
to performance.
In light of this we have provided supplemental ratios, where the long-term incentive remuneration has been excluded. We believe this
provides additional context as long-term incentives form a substantial proportion of the Chief Executive’s total remuneration.
The Group Chief Executive’s single figure of remuneration excluding long-term incentives is £556,000.
Financial year ended 31 August
2020
2019
Method
Option A*
Option A*
25th percentile pay ratio
31:1
114:1
Median pay ratio
31:1
99:1
75th percentile pay ratio
25:1
96:1
*Total single figure remuneration less long-term incentive plans.
2.13 Relative importance of spend on pay
The table below shows the total cost of remuneration paid to or receivable by all employees in the Group as well as dividends/share
buybacks made during the financial year ended 31 August 2020. There were not considered to be any other significant distributions
and payments or other uses of profit or cash flow deemed by the directors to assist in understanding the relative importance of spend
on pay for the purposes of the table below.
Total cost of remuneration
Distribution to shareholders
2019
£m
248
2020
£m
217
% change
(13)%
2019
£m
91
2020
£m
–
% change
(100)%
65
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report continued
2.14 Annual bonus targets (audited)
The performance targets used under the annual bonus plan are normally set annually to support the Company’s strategic priorities
and reinforce financial performance. The performance targets are set by the Committee based on a range of factors, principally the
Company’s budget as approved by the Board either prior to or shortly following the start of the financial year.
Under the annual bonus plan, participants can earn a bonus based on the achievement of a financial target and a personal rating
measured against one or more specific (financial and/or non-financial) objectives. The maximum level of bonus paid to a participant in
the plan is dependent on the achievement of both the maximum financial target and the highest personal performance rating.
The Committee sets a threshold pay-out target and a maximum pay-out target with straight-line vesting between the targets.
No bonus is paid unless both the threshold financial target and at least an acceptable personal rating (i.e. ‘Developing’) are achieved.
For on-target achievement of the profit target and a good personal rating (i.e. ‘Strong’), an executive would earn approximately
48 per cent of the maximum bonus available under the plan. Any bonus payable will be paid in cash and shares.
Bonuses for the financial year ended 31 August 2020 could be earned according to the following scale (as a percentage of each
executive’s respective maximum):
Financial performance against Headline Group profit before tax1 target
Max: £170.3m
Target: £162.2m
Threshold: £157.3m
Interpolation between points in the matrix is permitted.
Role model
100%
80%
40%
Outstanding
80%
64%
32%
Strong
60%
48%
24%
Developing
40%
32%
16%
Underachiever
0%
0%
0%
The Committee took the decision not to adjust the financial targets for the Company’s annual bonus plan as the Company made a
Headline loss before tax1 of £69m* in the financial year ended 31 August 2020 as a result of the impact of Covid-19 on the Company.
Accordingly, the Company did not achieve the threshold profit target for the financial year ended 31 August 2020 and no bonuses were
paid to employees under the annual bonus plan.
For Carl Cowling, his personal rating was based on a range of objectives including the successful integration of MRG into the Group,
format evolution in UK Travel, development of the talent and succession pipeline, new format and space development in the High
Street business and promotion of the Group’s culture. Despite the successful achievement of all of his personal objectives, the
Committee determined that, in accordance with the rules of the annual bonus plan, Carl Cowling will not receive a bonus for the
financial year ended 31 August 2020.
For Robert Moorhead, his personal rating was based on a range of objectives including the acquisition and integration of MRG,
development of a finance succession plan, developing Funky Pigeon, growing International Travel expansion and managing pensions.
Despite the successful achievement of all of his personal objectives, the Committee determined that, in accordance with the rules of
the annual bonus plan, Robert Moorhead will not receive a bonus for the financial year ended 31 August 2020.
For the annual bonus plan for the financial year ending 31 August 2021, due to the ongoing uncertainty around Covid-19 and how
domestic and international travel will recover in the coming months, the Committee does not expect to finalise the performance
measures and targets which may be measured on a half yearly or full year basis until December 2020. The Committee will publish the
targets for the financial year ending 31 August 2021 in the 2021 Directors’ remuneration report. In addition, the Committee confirms
that the personal objectives of the executive directors will include ESG targets which are relevant to the Company. Any bonus payable
in respect of the financial year ending 31 August 2021 will be paid in cash and shares. Any bonus payable over target will be deferred
into shares for a period of up to three years under the DBP. The shares will be released one third on each anniversary of assessment
irrespective of whether the recipient is an employee of the Company.
1 Headline Group profit before tax is on a pre-IFRS 16 basis and excludes non-underlying items. This is an Alternative Performance Measure defined and explained in the Glossary on page 146.
66
WH Smith PLC Annual Report and Accounts 2020
Corporate governance 2.15 Share plans (audited)
The Committee regularly reviews the performance targets applicable to the LTIP to ensure that they align with the Company’s
strategy and reinforce financial performance. The Committee may change the measures and/or targets in respect of subsequent
awards. For awards granted in the financial year ended 31 August 2020, the Committee determined that a combination of financial
and market-based conditions as the basis for the performance targets for the LTIP was best suited to the needs of the Company and
its shareholders in order to reward sustained long-term performance and the creation of shareholder value.
Annual LTIP awards in the financial year ended 31 August 2020 were set at the policy level being 335 per cent of salary for
Carl Cowling and 310 per cent of salary for Robert Moorhead using the share price calculated over the three days preceding the grant
date to determine the number of awards granted. The performance targets for awards were: 60 per cent was based on Headline
earnings per share1 growth and 40 per cent was based on relative TSR. EPS has for some years been defined as fully diluted
pre-exceptional items and excluding IAS 19 pension charges together with other adjustments as considered appropriate by the
Committee (although practice has been to make limited adjustments).
The performance conditions for awards granted under the Company’s long-term incentive plans in the financial year ended
31 August 2020 were as follows:
WH Smith LTIP
As reported last year, the performance conditions, which apply over the three years, commencing with the financial year of grant
(the ‘Performance Period’), were as follows:
a) 60 per cent based on growth in the adjusted diluted EPS of the Company. Vesting will occur on the following basis:
Annual rate of growth in adjusted diluted EPS of the Company (compounded annually) over the Performance Period
Below 5%
5%
10% or more
Between 5% and 10%
Proportion exercisable
Zero
25%
100%
On a straight-line basis between 25% and 100%
For these purposes, EPS will continue to be determined by reference to fully diluted EPS pre-exceptional items and will exclude IAS 19
pension charges from the calculation, adjusted as considered appropriate by the Committee to ensure consistency. The Company has,
as an inherent part of its corporate strategy and its rigorous capital allocation discipline, undertaken share buybacks and the
Committee assumed a level of such buybacks consistent with its established approach in setting the above target range.
b) 40 per cent based on the Company’s TSR performance against the FTSE All Share General Retailers Index constituents. Vesting will
occur on the following basis:
TSR performance ranking at end of the Performance Period
Below median
Median
Upper quartile
Between median and upper quartile
Proportion exercisable
Zero
25%
100%
On a straight-line basis between 25% and 100%
FIT independently carries out the relevant TSR growth calculation for the Company.
¹ Headline earnings per share is on a pre-IFRS 16 basis, and excludes non-underlying items. This is an Alternative Performance Measure defined and explained in the Glossary on page 146.
67
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report continued
Outstanding awards
Details of the conditional awards (in the form of nil-cost options) to acquire ordinary shares of the Company granted to executive
directors are as follows:
Number of
shares subject
to awards at
31 August 2019 (a)
Number of
shares subject
to awards
granted
during the
year
Number of
dividend
accrual shares
awarded
during the
year
Number of
shares subject
to awards
exercised
during the
year
Number of
shares subject
to awards
lapsed
during the
year
Number of
shares subject
to awards at
31 August
2020(f)
(or date of
leaving)
Share price
at date
of grant
(pence)
Face value of
award at date
of grant
£’000
Exercise period
Carl Cowling
LTIP 2016(b)
LTIP 2017(e)
LTIP 2018(g)
LTIP 2019(g)
DBP 2019(i)
Total
Robert Moorhead
LTIP 2016(c)
LTIP 2017(e)
LTIP 2018(g)
LTIP 2019(g)
DBP 2019(i)
Total
Stephen Clarke(h)
LTIP 2016(d)
LTIP 2017(e)
LTIP 2018(g)
DBP 2019(i)
Total
46,422
36,457
40,515
–
–
123,394
74,861
57,009
63,354
–
–
195,224
118,794
90,466
100,534
–
309,794
–
–
–
79,557
3,990
83,547
–
–
61,701
3,962
65,663
–
–
–
6,967
6,967
2,660
–
–
–
–
2,660
4,292
–
–
–
–
4,292
6,813
–
–
–
6,813
17,346
–
–
–
–
17,346
27,973
–
–
–
–
27,973
14,391
–
–
–
–
14,391
23,207
–
–
–
–
23,207
–
–
–
–
–
36,827
25,130
61,437
–
123,394
17,345
36,457
40,515
79,557
3,990
177,864
27,973
57,009
63,354
61,701
3,962
213,999
88,780
65,336
39,097
6,967
200,180
1551.00
2036.67
1832.67
2210.67
2258.67
1551.00
2036.67
1832.67
2210.67
2258.67
1551.00
2036.67
1832.67
2258.67
720 20.10.19 – 20.10.26
743 26.10.20 – 26.10.27
743 01.11.23 – 01.11.28
1,759 05.11.24 – 05.11.29
90 24.10.20 – 24.10.29
1,161 20.10.19 – 20.10.26
1,161 26.10.20 – 26.10.27
1,161 01.11.23 – 01.11.28
1,364 05.11.24 – 05.11.29
90 24.10.20 – 24.10.29
1,842 20.10.19 – 20.10.26
1,842 26.10.20 – 26.10.27
1,842 01.11.23 – 01.11.28
157 24.10.20 – 24.10.29
a) The number of shares subject to awards is the maximum (100 per cent) number of shares that could be received by the executive if the performance targets are fully met except that, in respect of
awards granted from October 2016 onwards, consistent with market practice, any part of the awards which vest will benefit from the accrual of dividend roll-up.
b) In respect of the award granted on 20 October 2016 under the LTIP held by Carl Cowling, 34,691 shares vested, including 2,660 dividend shares, and 14,391 shares lapsed. The award is subject to a
holding period with 50 per cent of any vested shares becoming exercisable on the third anniversary of the date of grant and the remaining 50 per cent of any vested shares becoming exercisable on
the fifth anniversary of the date of grant.
c) In respect of the award granted on 20 October 2016 under the LTIP held by Robert Moorhead, 55,946 shares vested, including 4,292 dividend accrual shares, and 23,207 shares lapsed. The award is
subject to a holding period with 50 per cent of any vested shares becoming exercisable on the third anniversary of the date of grant and the remaining 50 per cent of any vested shares becoming
exercisable on the fifth anniversary of the date of grant.
d) In respect of the award granted on 20 October 2016 under the LTIP held by Stephen Clarke, 88,780 shares vested, including 6,813 dividend accrual shares, and 36,827 shares lapsed. The award is
subject to a holding period with 50 per cent of the vested shares becoming exercisable on the third anniversary of the date of grant and the remaining 50 per cent of the vested shares becoming
exercisable on the fifth anniversary of the date of grant.
e) The performance conditions for awards granted in the financial year ended 31 August 2018 under the LTIP are:
(i) 40 per cent based on the Company’s TSR performance against the FTSE All Share General Retailers Index constituents. Vesting will occur on the following basis: Below median – Nil; Median –
25%; Upper quartile – 100%; and on a straight-line basis between 25% and 100%; and
(ii) 60 per cent based on growth in the adjusted diluted EPS of the Company. Vesting will occur on the following basis: Below 5% – Nil; 5% – 25%; 10% or more – 100%; and on a straight-line basis
between 25% and 100%. For these purposes, EPS will be determined by reference to fully diluted EPS before exceptional items and will exclude IAS 19 pension charges from the calculation,
adjusted as considered appropriate by the Committee to ensure consistency.
The performance conditions were partially met with 13 per cent of the shares subject to the awards vesting. As a result, the total number of shares vesting for Carl Cowling will be 5,104 shares
including 336 dividend accrual shares; for Robert Moorhead 7,982 shares including 526 dividend accrual shares; and for Stephen Clarke 9,148 shares including 602 dividend accrual shares.
The Committee confirmed it was satisfied that the Company’s TSR was reflective of its underlying financial performance and that nothing occurred to negatively impact the performance achieved
during the performance period. The award is subject to a holding period with 50 per cent of any vested shares becoming exercisable on the third anniversary of the date of grant and the remaining
50 per cent of any vested shares becoming exercisable on the fifth anniversary of the date of grant. Carl Cowling and Robert Moorhead have agreed that 100 per cent of their vested shares should
be subject to the two-year holding period and will become exercisable on the fifth anniversary of the date of grant.
f) No awards have been granted to directors between 1 September 2020 and 12 November 2020.
g) The awards granted in the financial years ended 31 August 2019 and 31 August 2020 under the LTIP will only vest to the extent that the performance targets as set out on page 67 are satisfied.
h) Stephen Clarke resigned as a director of the Company on 31 October 2019. He was treated as a good leaver under the rules of the WH Smith LTIP and retained a reduced number of unvested awards
as follows: 2016 Grant – 88,780 shares, 2017 Grant – 65,336 shares and 2018 Grant – 39,097 shares.
i)
The awards granted in the financial year ended 31 August 2020 under the DBP will be released one third on each anniversary of the date of grant. Details of the awards are set out on page 66.
The awards will accrue the benefit of any dividends paid by the Company and are not subject to performance targets.
68
WH Smith PLC Annual Report and Accounts 2020
Corporate governance
2.16 WH Smith Employee Benefit Trust
The WH Smith Employee Benefit Trust (the ‘Trust’) is used to facilitate the acquisition of ordinary shares in the Company to satisfy
awards granted under the Company’s share plans. The Trust is a discretionary trust, the sole beneficiaries being employees (including
executive directors) and former employees of the Group and their close relations. The Trustee is Computershare Trustees (C.I.)
Limited, an independent professional trustee company based in Jersey. The Company intends that the ordinary shares in the Trust will
be used to satisfy all outstanding awards and options made under the Company’s share plans. The Trustee may exercise all rights
attached to the shares held in the Trust in accordance with their fiduciary duties and the relevant plan rules or other governing
documents. The Trustee has agreed to waive its rights to all dividends payable on the ordinary shares held in the Trust.
Following share purchases of 131,924 shares in the financial year ended 31 August 2020, the number of WH Smith shares held in the
Trust at 31 August 2020 was 203,628. The Group’s accounting policy with respect to the Trust is detailed within Note 1 to the financial
statements and movements are detailed in the Group statement of changes in equity on page 92.
2.17 Dilution limits
Awards under the LTIP are currently satisfied using market purchase shares which may be acquired by the Trust as described in the
paragraph above. WH Smith’s share plans comply with recommended guidelines on dilution limits, and the Company has always
operated within these limits.
2.18 External appointments
Each executive director may accept up to two non-executive directorships provided they are not both appointments to companies in
the FTSE 100 or include a chairmanship of a FTSE 100 company. Non-executive directorships must not conflict with the interests
of the Company. Executive directors may retain fees from one of their external directorships. The fee received and retained by
Robert Moorhead in respect of his non-executive directorship is shown in the table below:
Robert Moorhead
The Watches of Switzerland Group PLC
Received
£’000s
59
Retained
£’000s
59
2.19 Directors’ interests in shares (audited)
The beneficial interests of the directors and their immediate families in the ordinary shares of the Company are set out below:
Ordinary shares
DBP
LTIP
LTIP
Number of shares subject to holding periods
Number of shares subject to
performance conditions
31 August
2020
(or date of
leaving)
1,952
Suzanne Baxter
22,335
Carl Cowling
1,952
Annemarie Durbin
2,952
Simon Emeny
197,263
Robert Moorhead
39,523
Henry Staunton
3,452
Maurice Thompson
Directors who resigned during the year
187,609
Stephen Clarke
10,000
Drummond Hall
31 August
2019
1,000
6,000
1,000
–
177,676
30,000
2,500
187,609
10,000
31 August
2020
(or date of
leaving)
–
3,990
–
–
3,962
–
–
6,967
–
31 August
2019
–
–
–
–
–
–
–
–
–
31 August
2020
(or date of
leaving)
–
17,345
–
–
27,973
–
–
44,390
–
31 August
2020
(or date of
leaving)
–
156,529
–
–
182,064
–
–
31 August
2019
–
–
–
–
–
–
–
31 August
2019
–
123,394
–
–
195,224
–
–
–
–
148,823
–
309,794
–
a) Nicky Dulieu was appointed as a non-executive director on 9 September 2020 and does not own any shares in the Company.
b) The LTIP amount above is the maximum potential award that may vest subject to the performance conditions described on page 67.
c) The performance conditions for the October 2017 LTIP were partially met with 13 per cent of the shares subject to awards due to vest on 26 October 2020. See note (e) to the Table of Outstanding
awards on page 68 for further information.
d) There has been no further change in the directors’ interests shown above between 1 September 2020 and 12 November 2020.
e) The middle market price of an ordinary share at the close of business on 28 August 2020 was 1177p (30 August 2019: 1958p).
f) See Table of Outstanding awards on page 68 for details of awards exercised during the financial year ended 31 August 2020.
g) Stephen Clarke stepped down as Group Chief Executive on 31 October 2019.
h) Drummond Hall stepped down as a director on 22 January 2020.
69
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report continued
2.20 Voting at the Annual General Meeting
Statement of voting at 2019 AGM
The table below shows the voting outcome at the Annual General Meeting on 23 January 2019 for approval of the remuneration policy:
Resolution
Approval of remuneration policy
Votes for
72,435,253
% for
96.47
Votes
against
% against
Total votes
cast
Votes
withheld
2,648,367
3.53
75,083,620
1,549,457
Statement of voting at 2020 AGM
The table below shows the voting outcome at the Annual General Meeting on 22 January 2020 for approval of the annual Directors’
remuneration report:
Resolution
Votes for
% for
Votes
against
% against
Total votes
cast
Votes
withheld
Approval of remuneration report
76,249,101
87.77
10,627,325
12.23
86,876,426
2,327,803
A vote withheld is not a vote in law and is not counted in the calculation of the proportion of votes ‘for’ and ‘against’ a resolution.
3. The Directors’ remuneration policy: extract
The Directors’ remuneration policy was approved by shareholders at the Annual General Meeting held on 23 January 2019 and applies
from that date. The Directors’ remuneration policy table is set out below for information only. The full Directors’ remuneration policy is
set out on pages 42 to 50 of the 2018 Annual report and accounts which is available in the investor relations section of the Company’s
website whsmithplc.co.uk/investors..
3.1 Executive directors
The following table explains the different elements of remuneration we pay to our executive directors:
Element and purpose
Policy and opportunity
Operation and performance measures
• Base salary is paid monthly in cash.
• Base salaries are reviewed annually
with any changes normally taking effect
from 1 April.
Base salary
This is the basic element
of pay and reflects the
individual’s role and
position within the Group,
with some adjustment to
reflect their capability and
contribution. Base salary is
used to attract and retain
executives who can deliver
our strategic objectives and
create shareholder value.
• While base salaries are reviewed each year, the
Company’s policy is not automatically to award an
inflationary increase. When reviewing salaries,
the Committee takes into account a range of factors
including the Group’s performance, market
conditions, the prevailing market rates for similar
positions in comparable companies, the
responsibilities, individual performance and
experience of each executive director and the level of
salary increases awarded to employees throughout
the Group.
• Base salaries are benchmarked against both FTSE
250 companies and other leading retailers. While the
Committee applies judgement rather than setting
salaries by reference to a fixed percentile position,
its general approach is to constrain base salaries to
a median or lower level.
• While the Committee’s general approach is to keep
salaries to a relatively low level, and, in the normal
course, would not expect salary increases to be
higher than the average for other head office staff,
given the need for a formal cap, the Committee had
limited the maximum salary in the previous policy
which it may award to 110 per cent of the median of
salaries of CEO’s in the top half of FTSE 250
companies even though, in practice, the Committee
would normally seek to keep it below the median of
this benchmark. To comply with the latest GC100
guidance, the formal cap set out in the preceding
sentence is replaced with a formal monetary amount
of £680,000 (as increased by RPI) being the current
110 per cent median level.
70
WH Smith PLC Annual Report and Accounts 2020
Corporate governance Element and purpose
Policy and opportunity
Operation and performance measures
Benefits
To provide other benefits
valued by the recipient
which assist them in
carrying out their duties
effectively. Competitive
benefits assist in attracting
and retaining executives.
• Provide market competitive benefits in kind.
• The Company may periodically amend the benefits
available to staff. The executive directors would
normally be eligible to receive such amended benefits
on similar terms to all senior staff.
• The value of benefits (other than relocation costs)
paid to an executive director in any year will not
exceed £80,000. In addition, the Committee reserves
the right to pay relocation costs in any year or any
ongoing costs incurred as a result of such relocation
to an executive director if considered appropriate to
secure the better performance by an executive
director of their duties. In the normal course, such
benefits would be limited to two years following
a relocation.
• Benefits received by executive directors
comprise a car allowance, staff
discount, private medical insurance and
life assurance.
• While the Committee does not consider
it to form part of benefits in the normal
usage of that term, it has been advised
that corporate hospitality (whether paid
for by the Company or another) and
business travel for directors may
technically come within the applicable
rules and so the Committee expressly
reserves the right to authorise such
activities within its agreed policies.
Pension
To aid retention and remain
competitive within the
marketplace. The pension
provides an income
following retirement.
• Provide a competitive employer-sponsored pension
plan or equivalent cash allowance with a total value
of up to 25 per cent of base salary. For new joiners to
the Board, this will not be more than 20 per cent
of salary.
Annual bonus
To motivate employees and
incentivise delivery of
annual performance
targets.
• During the policy period the bonus potential is 160
per cent of base salary for Stephen Clarke (or any
replacement) and 130 per cent of base salary for
Robert Moorhead (or any other executive director),
with target levels at 48 per cent of their respective
maxima and threshold bonus levels at 16 per cent of
their respective maxima.
• Clawback provisions apply to the annual bonus plan.
• Bonuses are paid in cash and shares. Any bonus
payable over target is deferred into shares for a
period of up to three years. The shares are released
one third on each anniversary of assessment.
Transitional introduction with one third of bonus
payable over target in 2019, two thirds of bonus
payable in 2020 and full implementation in 2021.
• All executive directors are eligible to
participate in the Company’s defined
contribution pension plan and/or
receive a salary supplement in lieu
(which is not taken into account as
salary for calculation of bonus, LTIP or
other benefits).
• Although the mix may change, currently
up to five per cent of salary is paid into
a registered pension and 20 per cent
by way of a salary supplement. If the
individual elects to receive the five per
cent direct (e.g. to avoid breaching
HMRC limits), employers’ NICs are
deducted from that element.
• The performance measures applied
may be financial or non-financial and
corporate, divisional or individual and in
such proportions as the Committee
considers appropriate.
• The appropriateness of performance
measures is reviewed annually to
ensure they continue to support the
Company’s strategy.
• Once set, performance measures and
targets will generally remain unaltered
unless events occur which, in the
Committee’s opinion, make it
appropriate to make adjustments to
ensure they operate as originally
intended and to take account of events
which were not foreseen when the
performance targets were originally set.
71
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ remuneration report continued
Element and purpose
Policy and opportunity
Operation and performance measures
Long-term incentives
To motivate and incentivise
delivery of sustained
performance over the
long term, the Group will
operate the Long-Term
Incentive Plan (‘LTIP’).
Awards will be delivered
in shares to provide
further alignment with
shareholders.
• The policy is to award executive directors with shares
with an initial face value of up to 350 per cent of base
salary each year under the LTIP.
• In practice, awards of 335 per cent are envisaged for
the Group Chief Executive and 310 per cent for any
other executive director.
• The LTIP will credit participants with the benefit of
accrual for dividends paid over the performance and
any holding period.
• Malus and clawback provisions (in respect of both
unvested and vested paid awards) apply to the LTIP.
• Awards are subject to holding periods preventing the
delivery and sale of shares until the fifth anniversary
of the date of grant.
Shareholding guidelines
To encourage share
ownership by the executive
directors and ensure
interests are aligned with
shareholders.
• Executive directors are expected to retain at least
50 per cent (net of tax) of the shares which vest under
the LTIP (or any other discretionary long-term
incentive arrangement that may be introduced in the
future) until such time as they hold a specified value
of shares.
• Shares subject to the guidelines (together with any
unvested share awards) may not be hedged by the
executive or used as collateral for any loans.
• To the extent that an executive director is not meeting
the guidelines, he or she will be expected to achieve
compliance within six years of joining the Board or
any significant promotion.
• The Committee may set such
performance conditions as it considers
appropriate (whether financial or
non-financial and whether corporate,
divisional or individual) over a period of
at least three financial years.
• Once set, performance measures and
targets will generally remain unaltered
unless events occur which, in the
Committee’s opinion, make it
appropriate to make adjustments to the
performance conditions, provided that
any adjusted performance condition is,
in its opinion, neither materially more
nor less difficult to satisfy than the
original condition.
• Executive directors can earn a
minimum of 25 per cent of the award
for threshold performance.
Although not currently envisaged, the
Committee has the right to lengthen
the performance period or to make
similar additional changes, not to the
benefit of participants.
• The Company will honour the vesting of
all outstanding awards in accordance
with the terms of such awards.
• 300 per cent of base salary for Stephen
Clarke (or any other Chief Executive)
and 250 per cent of base salary for
Robert Moorhead (or any other
executive director).
• Once the shareholding guidelines have
been met, individuals are expected to
maintain these levels as a minimum.
The Committee will review
shareholdings annually in the context of
this policy. The Committee will review
compliance with the policy as awards
approach maturity.
• The Committee reserves the right to
alter the shareholding guidelines during
the period of this policy but any such
alterations will not make the guidelines
less onerous.
72
WH Smith PLC Annual Report and Accounts 2020
Corporate governance Element and purpose
Policy and opportunity
Operation and performance measures
All-employee share plans
To encourage share
ownership by employees,
thereby allowing them to
share in the long-term
success of the Group and
align their interests with
those of the shareholders.
• Executive directors are able to participate in all-
employee share plans on the same terms as other
Group employees.
• Sharesave – individuals may save up to
such limit as permitted by the relevant
legislation (currently £500 each month)
for a fixed period of three years. At the
end of the savings period, individuals
may use their savings to buy ordinary
shares in the Company at a discount of
up to 20 per cent of the market price set
at the launch of each scheme.
• In line with the governing legislation, no
performance conditions are attached to
options granted under the Sharesave
Scheme. In addition, executive directors
may participate in other comparable all-
employee incentives on the same basis
as other employees.
On behalf of the Board
Annemarie Durbin
Chair of the Remuneration Committee
19 November 2020
73
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Directors’ report
The directors present their report and the audited consolidated
financial statements for the financial year ended 31 August 2020.
The Company is the ultimate parent company of the WH Smith
group of companies (the ‘Group’). WH Smith PLC is registered in
England and Wales (Number 5202036) and domiciled in the
United Kingdom.
The Company has chosen, in accordance with Section 414C(11) of
the Companies Act 2006, to include certain information in the
Strategic report that would otherwise be required to be disclosed
in this Directors’ report, as follows:
Information
Likely future developments in the business
Branches outside the UK
Disclosures concerning greenhouse gas
emissions and energy consumption
Employment of disabled persons
Employee engagement
Engagement with external stakeholders
Page number
8 to 19
14
29 to 32
32
32, 35, 36
38
Other information, which forms part of this Directors’ report,
can be found in the following sections of the Annual report:
Section
Corporate governance report
Directors’ biographies
Statement of directors’ responsibilities
Information on use of financial instruments
Page number
38 to 45
54 and 55
77
124 to 127
This Directors’ report (including information specified above as
forming part of this report) fulfils the requirements of the
Corporate governance statement for the purposes of DTR 7.2.
The information required by Listing Rule 9.8.4R is disclosed on
the following pages of this Annual report:
Subject matter
Allotment of shares for cash
pursuant to the WH Smith
employee share incentive plans
Arrangement under which the
directors waived salary or fees
Arrangement under which the
WH Smith Employee Benefit
Trust has waived or agreed to
waive dividends/future dividends
Page number
73 Directors’ remuneration
report/ Note 23 on page 127
of the financial statements
60 and 61 Directors’
remuneration report
69 Directors’
remuneration report
Dividends
In light of the ongoing uncertainty and the impact of Covid-19
on the Group which has resulted in the Group making a Headline
loss before tax1 of £69m*, no interim dividend was declared at the
half year and the Board will not propose a final dividend in
relation to the financial year ended 31 August 2020. The Board
believes that the decision not to pay a dividend is in the best
long-term interests of shareholders but understands the
importance of dividends to shareholders and will consider the
quantum and timing of possible future dividend payments when
appropriate to do so.
Share capital
WH Smith PLC is a public company limited by shares. The issued
share capital of the Company, together with details of shares
issued during the year, is shown in Note 23 to the financial
statements on page 127.
On 17 October 2019 the Company entered into an agreement to
purchase the entire share capital of Marshall Retail Group
Holding Company, Inc., an independent travel retailer operating in
the United States, for a consideration of $402m. The acquisition
was part-financed through the net proceeds of a placing of
7,209,303 new ordinary shares in the Company, at a price of 2150
pence per placing share (a discount of 4.8 per cent to the
intra-day price), raising gross proceeds of approximately £155m
(net of issue costs £152m). The shares were issued and admitted
to trading on the main market of the London Stock Exchange on
21 October 2019. At the date of allotment and issue, the placing
shares issued represented approximately 7 per cent of the issued
ordinary share capital of the Company. Further information on
the acquisition can be found in the Strategic report on pages
8 to 19.
Due to the significant impact of the Covid-19 pandemic on the
business, the Company consulted with major shareholders and
banks in April 2020 in order to secure new financing
arrangements to strengthen its balance sheet, working capital
and liquidity position. On 9 April 2020, the Company completed a
placement and subscription of a total of 15,802,768 new ordinary
shares, raising gross proceeds of approximately £165.9m (net of
issue costs £160m) at a placing price of 1050 pence per placing
share (a discount of 4 per cent to the closing share price on
6 April 2020). The shares were issued and admitted to trading on
the main market of the London Stock Exchange on 9 April 2020.
At the date of allotment and issue, the placing shares issued
represented approximately 13.7 per cent of the issued ordinary
share capital of the Company. Over the three years preceding the
issue, there was, including the April 2020 placing, a 17.48 per
cent increase in share capital due to the non-pre-emptive issue
of shares for cash by the Company.
The issued share capital of the Company as at 31 August 2020
was 130,865,456 ordinary shares of 226⁄67p each. These shares are
listed on the London Stock Exchange and can be held in
certificated or uncertificated form.
The Company is not aware of any agreements between
shareholders that may result in restrictions on the transfer of
securities and voting rights.
There are no restrictions on the transfer of ordinary shares in the
Company other than certain restrictions imposed by laws and
regulations (such as insider trading laws and market
requirements relating to closed periods), including the
requirements of the Market Abuse Regulation and the Listing
Rules, and also the Company’s Share Dealing Code whereby
directors and certain employees of the Company require Board
approval to deal in the Company’s securities.
1 Headline loss before tax is on a pre-IFRS 16 basis, and excludes non-underlying items. This is an Alternative Performance Measure defined and explained in the Glossary on page 146.
74
WH Smith PLC Annual Report and Accounts 2020
Corporate governance The rights and obligations attaching to the Company’s ordinary
shares, in addition to those conferred on their holders by law,
are set out in the Company’s Articles of Association, a copy
of which can be obtained from the Company’s website
whsmithplc.co.uk. The holders of ordinary shares are entitled to
receive the Company’s report and accounts, to attend and speak
at general meetings of the Company, to appoint proxies and to
exercise voting rights, and to receive a dividend, if declared,
subject to the deduction of any sums due from the holder of
ordinary shares to the Company on account of calls or otherwise.
Changes to the Company’s Articles of Association must be
approved by special resolution of the Company.
The Trustee of the WH Smith Employee Benefit Trust holds
ordinary shares in the Company on behalf of the beneficiaries
of the Trust, who are the employees and former employees of the
Group. If any offer is made to the holders of ordinary shares to
acquire their shares, the Trustee will not be obliged to accept or
reject the offer in respect of any shares which are at that time
subject to subsisting options, but will have regard to the interests
of the option holders and can consult them to obtain their views
on the offer, and subject to the foregoing, the Trustee will take
the action with respect to the offer it thinks fair.
Purchase of own shares
At the 2020 AGM, authority was given for the Company to
purchase, in the market, up to 11,505,894 ordinary shares of
226⁄67p each, renewing the authority granted at the 2019 AGM.
The Company did not purchase any of its own shares during the
financial year. The Company intends to renew the authority to
purchase its own shares at the forthcoming AGM as the directors
believe that having the flexibility to buy back shares is in the best
interests of the Company. The directors do not currently envisage
utilising this authority in the financial year ending 31 August 2021.
Issue of new ordinary shares
During the financial year ended 31 August 2020, 5,024 ordinary
shares of the Company were issued under the Sharesave
Scheme at prices between 1434.40p and 1609.60p. The Articles of
Association of the Company provide that the Board may, subject
to the prior approval of the members of the Company, be granted
authority to exercise all the powers of the Company to allot
shares or grant rights to subscribe for or convert any security
into shares, including new ordinary shares.
Significant agreements – change of control
A change of control of the Company following a takeover bid may
cause a number of agreements to which the Company or its
trading subsidiaries is party, such as commercial trading
contracts, banking arrangements, property leases, licence and
concession agreements to take effect, alter or terminate.
In addition, the service agreements of some senior executives
and employee share plans would be similarly affected on a
change of control, including, in the case of some employees,
in relation to compensation for loss of office.
The Company has an unsecured £200m multi-currency revolving
credit facility with Barclays Bank PLC, HSBC Bank PLC,
Santander UK PLC and BNP Paribas for general corporate and
working capital purposes. If there is a change of control of the
Company, and agreeable terms cannot be negotiated between
the parties, any lender may cancel the commitment under the
facility and all outstanding utilisations for that lender, together
with accrued interest, shall be immediately payable.
Directors’ conflicts
The Company’s Articles of Association permit the Board to
consider and, if it sees fit, to authorise situations where a director
has an interest that conflicts, or may possibly conflict, with the
interests of the Company (‘Situational Conflicts’). The Board has
a formal system in place for directors to declare Situational
Conflicts to be considered for authorisation by those directors
who have no interest in the matter being considered. In deciding
whether to authorise a Situational Conflict, the non-conflicted
directors must act in the way they consider, in good faith, would
be most likely to promote the success of the Company, and they
may impose limits or conditions when giving the authorisation,
or subsequently, if they think this is appropriate. Any Situational
Conflicts considered by the Board, and any authorisations given,
are recorded in the Board minutes and in a register of conflicts
which is reviewed regularly by the Board.
Directors’ indemnities
The Company maintained directors’ and officers’ liability
insurance in the financial year ended 31 August 2020 and up to
the date of this report which gives appropriate cover for any legal
action brought against its directors. The Company has provided
and continues to provide an indemnity for its directors, which is
a qualifying third-party indemnity provision for the purposes of
Section 234 of the Companies Act 2006.
Company’s shareholders
Information provided to the Company pursuant to the Financial
Conduct Authority’s (FCA) Disclosure Guidance and
Transparency Rules (DTRs) is published on a Regulatory
Information Service and on the Company’s website. As at
31 August 2020, the following information had been received,
in accordance with DTR5, from holders of notifiable interests in
the Company’s issued share capital. It should be noted that these
holdings may have changed since notified to the Company.
However, notification of any change is not required until the next
applicable threshold is crossed.
Holder
BlackRock Inc.
Causeway Capital
Management LLC
M&G PLC
Marathon Asset
Management LLP
Royal London Asset
Management Ltd
Standard Life Aberdeen plc
Number
6,553,863
6,559,135
7,971,971
5,968,068
% as at date of
notification
5.00
5.01
Nature of
holding
Indirect
Direct
6.92
4.56
Indirect
Indirect
7,565,013
5.78
Direct
9,910,996
7.57
Indirect
a) On 5 October 2020 Standard Life Aberdeen plc notified the Company of a holding of
9,330,560 shares (7.13 per cent Indirect holding). Subsequently, on 26 October 2020 Standard
Life Aberdeen plc notified the Company of an increase in its holding to 9,699,165 shares
(7.41 per cent Indirect holding).
b) On 9 October 2020 Causeway Capital Management LLC notified the Company of a holding of
8,004,093 shares (6.12 per cent Direct holding).
c) On 6 November 2020 BlackRock Inc. notified the Company that its holding had fallen below
5 per cent.
The Company received no other notifications in the period
between 31 August 2020 and the date of this report.
75
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 The basis of preparation of the accounts and a more detailed
explanation of the work undertaken in respect of going concern
are set out in Note 1 of the financial statements on page 93.
The longer-term viability statement is in the Strategic report on
page 28.
Independent auditors
PwC has expressed its willingness to continue in office as
auditors of the Company. A resolution to re-appoint PwC as
auditors to the Company and a resolution to authorise the
Audit Committee to determine its remuneration will be proposed
at the AGM.
Disclosure of information to the auditors
Having made the requisite enquiries, as far as each of the
directors is aware, there is no relevant audit information (as
defined in Section 418 of the Companies Act 2006) of which the
Company’s auditors are unaware, and each of the directors has
taken all steps he or she should have taken as a director in order
to make himself or herself aware of any relevant audit
information and to establish that the Company’s auditors are
aware of that information.
Annual General Meeting
The AGM of the Company will be held at the Company’s offices at
Greenbridge Road, Swindon, Wiltshire SN3 3RX on 20 January
2021 at 11.30am. The Notice of Annual General Meeting is given,
together with explanatory notes, in the booklet which
accompanies this report. As explained in that notice, in light of
the ongoing Covid-19 pandemic we strongly encourage
shareholders not to attend the meeting in person and to appoint
the Chair of the meeting as their proxy to ensure that their vote
is counted.
This report was approved by the Board on 19 November 2020.
By order of the Board
Ian Houghton
Company Secretary
19 November 2020
Directors’ report continued
Political donations
It is the Company’s policy not to make political donations and no
political donations, contributions or political expenditure were
made in the year (2019: £nil).
Going concern
The Group’s business activities, together with the factors that are
likely to affect its future developments, performance and position,
are set out in the Strategic report on pages 2 to 37. The Financial
review on pages 16 to 19 of the Strategic report also describes
the Group’s financial position, cash flows and borrowing facilities,
further information on which is detailed in Notes 19 to 22 of the
financial statements on pages 122 to 127. In addition, Note 22 of
the financial statements on page 124 includes the Group’s
objectives, policies and processes for managing its capital;
its financial risk management objectives; details of its financial
instruments and hedging activities; and its exposures to credit
risk and liquidity risk. The Strategic report on pages 21 to 28 also
highlights the principal risks and uncertainties facing the Group.
The directors are required to assess whether the Group can
continue to operate for the 12 months from the date of approval
of these financial statements, and to prepare the financial
statements on a going concern basis.
The directors report that they have reviewed current performance
and forecasts, combined with expenditure commitments,
including capital expenditure and borrowing facilities.
The potential financial impact of the Covid-19 pandemic has been
modelled in our cash flow projections for the period to February
2022 and stress tested by including several severe but plausible
downside scenarios which are linked to our principal risks. In our
downside Covid-19 scenario, we have considered the key impacts
of the pandemic for each business and country in which we
operate. We have then considered the expected duration of the
ongoing Covid-19 pandemic, as well as a forecast for the length
of time to recovery (a return to 2019 sales), based on industry
projections. As a result of these factors, in our severe but
plausible scenarios, we do not anticipate that Group sales will
recover to 2019 levels within the period to February 2022.
Even with these negative sensitivities for each business taken
into account, the Group’s cash position is still considered to
remain strong, as we have strengthened our balance sheet,
working capital and liquidity position by raising approximately
£165.9m in April 2020 by a placing of 13.7 per cent of the issued
ordinary share capital and the maturity on the Group’s two £200m
term loans was extended to October 2022. The Company also
secured eligibility for the Government’s Covid Corporate
Financing Facility (CCFF). Mitigating actions, should they be
required, are all within management’s control and could include
reduced dividend cash payments, non-essential overheads and
non-committed capital expenditure in the period to February
2022. Having considered the outcome of these assessments,
it is deemed appropriate to prepare the consolidated financial
statements on a going concern basis. The directors have also
assessed the prospects of the Company over a three-year period.
76
WH Smith PLC Annual Report and Accounts 2020
Corporate governance Statement of directors’ responsibilities
in respect of the financial statements
Directors’ confirmations
The directors consider that the Annual report and accounts,
taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess
the Group and Company’s position and performance, business
model and strategy.
Each of the directors, whose names and functions are listed
in the Directors’ biographies, confirm that, to the best of
their knowledge:
• the Company financial statements, which have been prepared
in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 101 ‘Reduced Disclosure Framework’,
and applicable law), give a true and fair view of the assets,
liabilities, financial position and loss of the Company;
• the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial
position and loss of the Group; and
• the Strategic report includes a fair review of the development
and performance of the business and the position of the Group
and Company, together with a description of the principal risks
and uncertainties that it faces.
On behalf of the Board
Carl Cowling
Group Chief Executive
Robert Moorhead
Chief Financial Officer and Chief Operating Officer
19 November 2020
The directors are responsible for preparing the Annual report
and the financial statements in accordance with applicable law
and regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the Group financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted
by the European Union and Company financial statements in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS
101 ‘Reduced Disclosure Framework’, and applicable law).
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company and of the
profit or loss of the Group and Company for that period.
In preparing the financial statements, the directors are
required to:
• select suitable accounting policies and then apply
them consistently;
• state whether applicable IFRSs as adopted by the European
Union have been followed for the Group financial statements
and United Kingdom Accounting Standards, comprising
FRS 101, have been followed for the Company financial
statements, subject to any material departures disclosed and
explained in the financial statements;
• make judgements and accounting estimates that are
reasonable and prudent; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and
Company will continue in business.
The directors are also responsible for safeguarding the assets of
the Group and Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Group and Company and
enable them to ensure that the financial statements and the
Directors’ remuneration report comply with the Companies Act
2006 and, as regards the Group financial statements, Article 4 of
the IAS Regulation.
The directors are responsible for the maintenance and integrity
of the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
77
Corporate governanceWH Smith PLC Annual Report and Accounts 2020 Independent auditors’ report to the members
of WH Smith PLC
Report on the audit of the financial statements
Our audit approach
Opinion
In our opinion:
• WH Smith PLC’s Group financial statements and Company
financial statements (the 'financial statements') give a true
and fair view of the state of the Group’s and of the Company’s
affairs as at 31 August 2020 and of the group’s loss and cash
flows for the year then ended;
• the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
• the Company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 'Reduced Disclosure
Framework', and applicable law); and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the
IAS Regulation.
We have audited the financial statements, included within the
Annual Report and Accounts (the 'Annual Report'),
which comprise: the Group and Company balance sheets as
at 31 August 2020; the Group income statement and Group
statement of comprehensive income; the Group cash flow
statement, and the Group and Company statements of changes
in equity for the year then ended; and the Notes to the financial
statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the
Audit Committee.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ('ISAs (UK)') and applicable law.
Our responsibilities under ISAs (UK) are further described in the
Auditors’ responsibilities for the audit of the financial statements
section of our report. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for
our opinion.
Independence
We remained independent of the Group in accordance with
the ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC’s Ethical
Standard, as applicable to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance with
these requirements.
To the best of our knowledge and belief, we declare that non-
audit services prohibited by the FRC’s Ethical Standard were not
provided to the Group or the Company.
Other than those disclosed in Note 3 to the financial statements,
we have provided no non-audit services to the Group or the
Company in the period from 1 September 2019 to 31 August 2020.
78
WH Smith PLC Annual Report and Accounts 2020
Overview
Materiality
• Overall Group materiality: £6.1 million (2019: £7.6 million),
based on 5% of the three year average of absolute Headline
loss/profit before tax.
• Overall Company materiality: £11.2 million (2019: £6.1 million),
based on 1% of total assets.
Audit scope
• For the purposes of scoping the Group audit we have assessed
the seven areas of the business; High Street, Travel UK,
InMotion, MRG, Travel International, Company and Central.
• For the purposes of the Group audit, we performed a full
scope audit on the High Street, Travel UK, MRG and InMotion
components, whilst performing specified audit procedures
over balances within the Central and Company component
based on their overall size and values of their specific financial
statement line items. Travel International was not included in
the scope of our Group work.
• The audits of the InMotion and MRG components were
performed by PwC USA.
• Our audit scoping gave us coverage of 82% of Group loss before
tax, with 91% coverage of revenue.
• We performed a full scope audit over the Company for the
Company audit.
Key audit matters
• Covid-19 (Group and Company)
• Going concern (Group and Company)
• Impairment of store property, plant and equipment and right-
of-use assets
• Inventory valuation
• IFRS 16 Right-of-use asset and lease liability valuation
• One off transactions
• Acquisition of Marshall Retail Group (‘MRG’)
• Pension scheme valuation
The scope of our audit
As part of designing our audit, we determined materiality
and assessed the risks of material misstatement in the
financial statements.
Capability of the audit in detecting irregularities,
including fraud
Based on our understanding of the Group and industry,
we identified that the principal risks of non-compliance with
laws and regulations related to employment law, health and
safety regulation, GDPR, pensions regulation and general
food law regulation, and we considered the extent to which
non-compliance might have a material effect on the financial
statements. We also considered those laws and regulations
that have a direct impact on the preparation of the financial
statements such as the Companies Act 2006, the Listing Rules
and UK tax legislation. We evaluated management’s incentives
and opportunities for fraudulent manipulation of the financial
statements (including the risk of override of controls) and
Financial statements determined that the principal risks were related to manipulation
of revenue and or costs, and management bias in accounting
estimates. The Group engagement team shared this risk
assessment with the component auditors so that they could
include appropriate audit procedures in response to such
risks in their work. Audit procedures performed by the Group
engagement team and/or component auditors included:
• Discussions with management and internal audit,
including consideration of known or suspected instances of
non-compliance with laws and regulation and fraud;
• Reviewing legal confirmations from external lawyers;
• Reviewing the financial statement disclosures and agreement
to underlying supporting documentation;
• Challenging assumptions made by management in
determining their significant judgements and accounting
estimates (key audit matters included on Impairment of store
property, plant & equipment and right-of-use assets, Inventory
valuation and One off transactions); and
• Identifying and testing unusual journals posted to revenue,
journals posted after period close and journals posted by
senior management.
There are inherent limitations in the audit procedures described
above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the
financial statements, the less likely we would become aware of
it. Also, the risk of not detecting a material misstatement due
to fraud is higher than the risk of not detecting one resulting
from error, as fraud may involve deliberate concealment by,
for example, forgery or intentional misrepresentations, or
through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’
professional judgement, were of most significance in the audit
of the financial statements of the current period and include
the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by the auditors, including
those which had the greatest effect on: the overall audit strategy;
the allocation of resources in the audit; and directing the efforts
of the engagement team. These matters, and any comments we
make on the results of our procedures thereon, were addressed
in the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. This is not a complete list of
all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Covid-19 (Group and Company)
Refer to Note 1 (a), and Note 1 (q) Accounting policies for the
directors’ disclosure on the impact of Covid-19 on Going concern
and Non-underlying items, and Note 4 (Non-underlying items).
The pandemic has had a significant impact on the recent trading
performance of the Group and particularly in the second half of
the year. The extent of the negative impact of the pandemic on
future trading performance and measurement of the impacts
as they relate to the financial statements entails a significant
degree of estimation uncertainty.
Management developed a forecast model based on its best
estimate of the impact of Covid-19 (the ‘base case’). This model
and related assumptions was used by management in its
assessment of the carrying value of store assets and goodwill.
The most significant financial impact to the financial statements
was in respect of the store asset impairment charge and
inventory provisioning. These are described in the respective
key audit matters within this section of our report. Additionally,
there are a number of non-underlying items in relation to
restructuring costs which have been recorded as a result of the
impact of Covid-19 on the business. The classification of these
has been detailed in the one-off transactions key audit matter.
Refer to Note 4 in the financial statements.
The base case, along with a downside scenario, (the ‘severe but
plausible’ model), was used to underpin the directors’ going
concern assessment, refer to Note 1 (a) Basis of preparation and
the separate key audit matter.
We evaluated the base case forecast by comparing
assumptions to third party forecast data.
Our audit procedures on the base case and the severe but
plausible case models are set out in the Going concern key
audit matter.
We ensured that the base case was consistently applied to
other accounting judgements including asset carrying value
assessments and going concern.
We considered the appropriateness of the directors’ disclosures
in the financial statements of the impact of the current
environment and the increased uncertainty on the accounting
estimates and found these to be adequate. We tested the costs
caused by Covid-19 to supporting evidence and considered
the disclosures of Covid-19 specific costs to be reasonable as
detailed within the One off transactions key audit matter.
We considered the carrying value of the Company investments
in light of the impact of Covid-19, and noted no impairment.
The directors considered the Government announcement on
31 October 2020 to be a non-adjusting post balance sheet
event and therefore did not update the base case forecast
for the purposes of assessing the carrying value of balance
sheet assets. We evaluated the disclosures included in the
financial statements and found them to be appropriate.
The going concern assessment was updated for the impact of
this announcement.
We considered whether changes to working practices brought
about by Covid-19 had an adverse impact on the effectiveness
of management’s business process and IT controls. Our work
did not identify any evidence of material deterioration in the
control environment.
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Financial statementsWH Smith PLC Annual Report and Accounts 2020
Independent auditors’ report to the members
of WH Smith PLC continued
Key audit matter
How our audit addressed the key audit matter
Going concern (Group and Company)
Refer to Note 1 (a) Accounting policies for the basis of
preparation regarding Going concern.
We agree with the Directors’ conclusion to prepare the financial
statements on a going concern basis. In forming this conclusion
we have performed the following:
• ensured the mathematical accuracy of the models
• confirmed that consistent approaches to going concern,
viability, impairment and other key areas of estimation
assumptions have been used
• assessed the reasonableness of estimates made regarding
the inclusion of a six-week lockdown in the base case and
three-month lockdown in the severe but plausible case
• compared the assumptions regarding the timing and extent
of recovery from Covid-19, to historical actuals and third party
forecast data
• critically assessed the forecast cost mitigations applied to the
severe but plausible case and performed sensitivity analysis to
assess the impact on liquidity headroom
No significant issues were identified from our work.
In addition to the above, we have obtained evidence of the
covenant waivers for February 2021 and August 2021.
We consider the disclosure within the Basis of Preparation
to appropriately highlight the process the directors
have undertaken and the judgements, estimates and
uncertainty involved.
In undertaking their assessment of going concern for the
Company and Group, the directors modelled future business
performance and cashflow forecast, by means of a ‘base case’
and a ‘severe but plausible’ discounted cash flow model. In both
models, the directors considered the financing available to the
Group and associated debt covenants, including the covenant
waivers that the Group has obtained in relation to its financing
facilities in February and August 2021. Anticipated cost savings
have been included.
The base case model assumes a six-week lockdown from
1 November 2020 with a steady recovery thereafter. The severe
but plausible model sensitises the base case and assumes a
three-month lockdown ending January 2021. The sales forecast
thereafter mirrors those that were experienced after the first
lockdown of 2020, incorporating a further haircut on the base
case revenue assumptions. In both scenarios, the lockdowns
assume that WH Smith stores located within hospitals and
those with Post Offices remain open, consistent with March to
June 2020.
Taking into account both the base case and severe but plausible
scenario, the directors concluded that the Group has sufficient
resources available to meet its liabilities as they fall due and
is therefore a going concern. Further details of the directors’
assessment are included within the Directors’ report on
page 76.
Due to the on-going Covid-19 pandemic, which has led to the
mandatory closure of non-essential retail for two separate
periods in 2020, there is significant judgement in developing
the cash flow forecasts, in particular, the assumptions relating
to revenue. We therefore focused audit effort on the going
concern risk.
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WH Smith PLC Annual Report and Accounts 2020
Financial statements Key audit matter
How our audit addressed the key audit matter
Impairment of store property, plant & equipment and
right-of-use assets
Refer to Note 1 (q), Accounting policies for the directors’
disclosure on the critical accounting judgements and key
sources of estimation uncertainty and Notes 12 and 13 (Property,
plant & equipment and Right-of-use assets).
In respect of the opening impairment provision recorded
on transition to IFRS 16, we assessed the methodology for
determining the value-in-use of the CGUs. We assessed the
appropriateness of the discount rate and assumptions applied
and assessed the reasonableness of the impairment charge
calculated. We satisfied ourselves that it was appropriate.
The Group has a material operational retail asset base which
may be vulnerable to impairment in the event of trading
performance being below expectations. For the purposes of
impairment testing, each retail store is considered to be a
separate cash generating unit (CGU).
Following implementation of IFRS 16, there has been a material
increase in this asset base, as right-of-use assets in respect
of the Group’s leases are now capitalised in accordance with
that standard. On transition to IFRS 16, the Group re-measured
its impairment provisions in respect of its retail store leases.
This resulted in an impairment of £21m.
In the year, an impairment trigger was identified for the entire
portfolio of stores as a result of the adverse impact of Covid-19
on trading.
As explained in the financial statement notes, there is significant
uncertainty as to the ultimate impact of the Covid-19 pandemic
on the Group’s operations and the global economy and by
extension the future trading levels of the Group.
The value-in-use models used to determine the amount of any
impairment charge are based on store specific assumptions.
Management’s assessment resulted in the recognition of an
impairment charge of £134m.
We focussed on this area because of the inherent judgement and
estimation uncertainty involved in determining key assumptions
such as the future sales profile and discount rates, particularly
given the uncertainty associated with Covid-19, and the
magnitude of the assets under consideration.
In respect of the CGU impairment assessment at year end,
we obtained an understanding of how management had
developed its forecast for the future trading conditions of the
Group, following the emergence of Covid-19. We satisfied
ourselves that the forecasts were reasonable and had been
prepared with appropriate Board involvement. In forming this
conclusion, we benchmarked the projections of trading and
recovery to pre-Covid levels against forecasts of credible third
parties. With the assistance of our valuation experts we tested
the value-in-use models, including challenging management
forecasts at a store level, as well other assumptions such as
the sales profile, assumptions under-pinning the timing of
recovery and discount rate, and found that these assumptions
were reasonable. We assessed the mathematical accuracy and
integrity of the impairment models and determined that the
impairment charge had been appropriately calculated. Given the
estimation uncertainty inherent in the impairment calculations,
particularly given the impact of Covid-19, the financial
statements include a sensitivity analysis (refer to Note 12).
Having re-performed the sensitivity calculations and considered
whether any other sensitivities might be more appropriate, we
are satisfied that the financial statements adequately disclose
the potential risk of future impairment or requirement for
reversal of impairment if the performance of the stores differs
from that forecast.
We considered whether the disclosure of the impairment charge
as ‘directly attributable to Covid-19’ was appropriate and were
satisfied that there was evidence that supports this statement.
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Financial statementsWH Smith PLC Annual Report and Accounts 2020 Independent auditors’ report to the members
of WH Smith PLC continued
Key audit matter
How our audit addressed the key audit matter
For both the underlying and non-underlying provisions we
critically assessed the basis for the inventory provisions,
the consistency of the provisioning methodology and the
reasonableness of the overall provisioning in light of the impact
of Covid-19. We gained an understanding of each provision
category and analysed the movement between the current year
and prior year.
In testing the underlying provision, we developed an independent
expectation of the provision required using a combination of
ageing analysis and historic inventory turn data. We performed
testing over the ageing data to ensure its accuracy.
For the portion of the non-underlying provision that relates to
perishable inventory, we developed an independent expectation
based on historic and future inventory turn and write-offs and
verified that the provision was materially accurate. We verified
the accuracy of the historic write-offs by agreeing them to the
Income Statement. For book stock we developed an independent
expectation using the inventory turn pattern throughout the year.
The provisions are consistent with the Group’s accounting policy
and also reflect changes in the ageing profile and estimated
future sales forecasts resulting from Covid-19. We satisfied
ourselves that the inventory provisions were materially accurate.
Given the estimation uncertainty inherent in determining the
provisions, a sensitivity analysis has been presented in the
financial statements (refer to Note 1(q).
Inventory valuation
Refer to Note 1 (h) and Note 1 (q) for the inventory accounting
policy and the directors’ disclosure of the critical accounting
judgements and key sources of estimation uncertainty.
Inventory consists of a number of product categories including
books, news and magazines, impulse, stationery, travel essentials
and digital. As at 31 August 2020, inventory was £150m.
A large proportion of inventory is supplied through sale or return
arrangements, including the majority of books, newspapers
and magazines and therefore the valuation of these items are
considered to be lower risk, however a number of inventory lines
are perishable and items such as firm sale books, digital, fashion
and journey solutions are at greater risk of obsolescence in a
reduced trading environment.
Historically the Group has recognised an ‘underlying’ inventory
provision primarily based on ageing profile and obsolescence risk
based on historic sales performance. This has been calculated in
the current year using consistent assumptions.
The impact of Covid-19 has been to introduce significant
uncertainty with respect to the Group’s future performance and
has had a material impact on the level of inventory risk within
the business through a combination of reduced rates of sale, the
loss of sale clearance events, deteriorating clearance sales, stock
commitments placed prior to lockdown and the heightened risk of
dated product reaching its use-by or warranty date. Accordingly,
the approach to provisioning for short-dated inventory and
inventory obsolescence was reviewed and an additional,
‘non-underlying’ provision was recognised (refer to Note 4).
Judgement is required to estimate future sales to clear this
inventory and intentions with respect to alternative exit routes for
inventory which attract different provisioning rates.
We focused on the valuation of the inventory provisions due to the
size of the balance and provision and the estimates involved in
determining the future sales forecasts and the complexity of the
calculation due to the number of inventory categories.
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WH Smith PLC Annual Report and Accounts 2020
Financial statements Key audit matter
How our audit addressed the key audit matter
IFRS 16 Right-of-use asset and lease liability valuation
Refer to Note 1 (g) of Accounting policies; Leasing and Note 13
and 16 (Right-of-use assets and Lease liabilities).
As at 1 September 2019, the Group adopted the new accounting
standard IFRS 16: Leases; this supersedes the previous lease
guidance IAS 17. The Group has a significant number of leases
related to its property portfolio, principally in relation to its retail
stores. Accordingly, the implementation of IFRS 16 has had a
material impact on the Group financial statements.
The scale of the lease portfolio increases the risk that
incomplete or inaccurate lease data could result in a
misstatement of lease balances. In addition, implementation of
IFRS 16 requires management to make certain judgements in
respect of its leases, namely:
• Identification of a lease, whereby those which include
substantive substitution rights or are short term have been
excluded; and
• Determination of the incremental borrowing rate (‘IBR’) which
is the discount rate applied to its lease calculations
A lease liability of £559m and right-of-use asset of £413m (net
of impairment) were recognised at year end. Movements in the
year relating to these balances are described in Note 13 and 16.
The Group elected to adopt the optional practical expedient for
Covid-19 rent concessions, resulting in the concession being
accounted for as a variable lease payment. The value of the
concessions recognised within the Income Statement is £15m.
One off transactions
Refer to Note 1 (q) for the directors’ disclosure on the critical
accounting judgements and key sources of estimation
uncertainty and Note 4 (Non-underlying items).
The Group has historically included ‘Non-underlying items’ on
the face of the Group Income Statement and discussed these
items in the Annual Report.
Given the quantum and number of non-underlying items in the
year, we focused on the presentation of these items to ensure
they were treated consistently with the Group’s accounting policy.
We performed procedures over the completeness of the leases
included within the transition. In addition, we performed
inquiries across the business including procurement, property
and business development teams in order to identify any leases
that had been excluded from the assessment. No exceptions
were noted.
We analysed management’s process for identifying a lease and
substantiated the basis upon which leases were excluded from
IFRS 16 due to landlord substitution rights.
The IBRs were assessed by our valuation specialists and were
found to be within an acceptable range.
A substantive procedure was performed to test the accuracy of
the inputs into the IFRS 16 calculation by verifying a sample of
original lease contracts. We recalculated the balances based on
the audited inputs, with no material exceptions noted.
We performed procedures over the reconciliation of the
operating lease commitment under IAS 17 as at 31 August 2019
to the opening lease liability under IFRS 16 on 1 September 2019
and noted no material differences.
We assessed the subsequent accounting treatment of leases,
performing substantive procedures over material movements in
the balances with no material exceptions noted.
Management’s disclosures within Notes 13 and 16 of the
financial statements were reviewed and considered appropriate.
We substantiated a sample of non-underlying items to
corroborating evidence. We considered whether the designation
of items as ‘non-underlying’ was consistent with the Group’s
accounting policy as disclosed in Note 1 and treatment in
prior years.
We considered the evidence to support the segregation of
‘costs attributable to Covid-19’ and did not identify any arbitrary
splitting of items between Covid-19 and non Covid-19.
Based on our procedures, we are satisfied that the treatment
and classification of non-underlying items is consistent with the
Group’s policy.
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Financial statementsWH Smith PLC Annual Report and Accounts 2020 Independent auditors’ report to the members
of WH Smith PLC continued
Key audit matter
How our audit addressed the key audit matter
Acquisition of Marshall Retail Group (‘MRG’)
Refer to Note 1 (e), Accounting policies: ‘Business combinations’
and Note 27 (Acquisitions).
The Group acquired the entire issued share capital of MRG on
20 December 2019 for a total consideration of £317m.
A fair value exercise was performed over the consolidated MRG
Group balance sheet as at the acquisition date and an external
expert was used to complete a purchase price allocation
exercise. This resulted in the recognition of £29m of intangible
assets relating to the MRG brand and £258m of goodwill
which has been allocated to the Travel grouping of CGUs.
These numbers are provisional subject to the finalisation of fair
value adjustments.
We focused on risk of valuation of the assets, specifically the
brand, as this requires significant estimation.
In order to determine the value of the brand, management
applied the relief from royalties valuation approach.
This calculation was based on the forecast revenue stream of
MRG stores for the next 20 years, being the estimated useful life
of the brand.
Pension scheme valuation
Refer to Note 1 (q) for the directors’ disclosure on the critical
accounting judgements and key sources of estimation
uncertainty and Note 5 (Retirement benefit obligations).
The Group has two defined benefit pension plans which
comprise total gross plan assets of £1,419m and total pension
liabilities of £1,152m which are significant in the context of
the overall balance sheet of the Group. The valuation of the
schemes’ liabilities requires judgement and technical expertise
in choosing appropriate assumptions. The Group uses third-
party actuaries to calculate the schemes’ liabilities. Changes to
a number of the key assumptions can have a material impact on
the pension balance (refer Note 5).
The most recent triennial valuation was completed in
November 2020.
We focused on this area because of the financial impact of the
judgements inherent in the valuation of the schemes’ liabilities
due to these assumptions.
Pension costs of £14m have been recognised as a non
underlying item in relation to the equalisation of pension
benefits relating to a period between 1 April 1992 and 29 July
1993 ('Barber equalisation').
In order to obtain evidence over the opening balance sheet we
reviewed the predecessor auditor working papers as well as
performed audit procedures over the rollback from MRG’s year
end date to the date of acquisition.
We obtained the sale and purchase agreement and other
supporting documentation and agreed these to the acquisition
accounting calculation.
We obtained the provisional schedules and re-calculated the
goodwill arising on acquisition with no issues noted.
The most judgemental adjustment was the valuation of the
brand. We engaged our specialists to test the reasonableness
of the valuation methodology.
We obtained the actuarial report for the WH Smith Pension Trust
Retail Section for the scheme as at 31 August 2020.
We reviewed the pension assumptions, including discount rates,
salary increases, inflation and mortality rates. We considered
and challenged the reasonableness of the actuarial assumptions
comparing the discount and inflation rates used to our internally
developed benchmark ranges, finding them to be within an
acceptable range. Other assumptions were also assessed and
considered to be reasonable.
We obtained the latest census data information from both the
actuary and payroll and agreed a sample of the data used by the
actuary to the supporting payroll information without exception.
For the Barber equalisation adjustment, we reviewed the
methodology applied and the information obtained from the
actuary for computing the past service cost impact and
re-performed the computation using the same data and criteria
without exception. There is no impact on the balance sheet
arising from this adjustment as the pension scheme is in a
surplus position. We ensured that the classification of the
£14m charge is appropriate given its nature and size, and
ensured this was consistent with the Group’s policy on non
underlying items.
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WH Smith PLC Annual Report and Accounts 2020
Financial statements How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
Group and the Company, the accounting processes and controls,
and the industry in which they operate.
For the purposes of scoping the Group audit we have assessed
the seven areas of the business; High Street, Travel UK, InMotion,
MRG, Travel International, Central and Company.
There are four significant components. High Street and Travel
UK were audited by the UK Group team, and InMotion and MRG
were audited by PwC US as component auditors operating under
our instruction. Audit work was performed over the consolidation
process, tax, impairment and going concern at a UK Group
level. Where the work was performed by the component auditor,
we determined the level of involvement we needed to have in
their audit work to be able to conclude whether sufficient audit
evidence had been obtained as a basis for our opinion on the
Group financial statements as a whole. As part of our year end
procedures, due to the restrictions imposed by Covid, the majority
of our work was performed remotely, however we did attend
physical stock counts. We held detailed discussions with the
InMotion and MRG component audit teams, including evaluation
of and remote review of the work performed, update calls on
the progress of their fieldwork and by attending the clearance
meetings with management via video call. We also visited
the MRG component and relevant PwC US audit team during
the year.
The components where we performed audit work accounted for
82% of Group loss before tax and 91% of revenue.
We performed specified audit procedures over balances within
the Central and Company components based on their overall
size and values of their specific financial statement line items.
Travel International was not included in the scope of our
Group work.
For the Company financial statements, we performed a full scope
audit, providing us with 100% coverage.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us
to determine the scope of our audit and the nature, timing
and extent of our audit procedures on the individual financial
statement line items and disclosures and in evaluating the effect
of misstatements, both individually and in aggregate on the
financial statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Overall
materiality
How we
determined it
Rationale for
benchmark applied
Group financial
statements
£6.1 million
(2019: £7.6 million).
5% of the three year
average of absolute
Headline loss/profit
before tax.
Based on the
benchmarks used
in the annual
report, Headline
loss/profit before
tax is the primary
measure used by
the shareholders
in assessing the
performance of
the Group and is a
generally accepted
auditing benchmark.
Company financial
statements
£11.2 million
(2019: £6.1 million).
1% of total assets.
As the parent
entity, WH Smith
PLC is a holding
company for the
Group and therefore
the materiality
benchmark has
been determined to
be based on total
assets which is a
generally accepted
auditing benchmark.
For each component in the scope of our Group audit, we
allocated a materiality that is less than our overall Group
materiality. The range of materiality allocated across components
was between £5.0 million and £5.3 million.
We agreed with the Audit Committee that we would report to
them misstatements identified during our audit above £305,000
(Group audit) (2019: £380,000) and £563,000 (Company audit)
(2019: £300,000) as well as misstatements below those amounts
that, in our view, warranted reporting for qualitative reasons.
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Financial statementsWH Smith PLC Annual Report and Accounts 2020 Independent auditors’ report to the members
of WH Smith PLC continued
Going concern
In accordance with ISAs (UK) we report as follows:
We have nothing to report.
and explain how they are being managed or mitigated.
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 August 2020 is consistent with the
financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and
Company and their environment obtained in the course of the
audit, we did not identify any material misstatements in the
Strategic Report and Directors’ Report. (CA06)
The directors’ assessment of the prospects of the Group
and of the principal risks that would threaten the solvency
or liquidity of the Group
We have nothing material to add or draw attention to regarding:
• The directors’ confirmation on page 21 of the Annual Report
that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks
• The directors’ explanation on page 28 of the Annual Report as
to how they have assessed the prospects of the Group,
over what period they have done so and why they consider that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be able
to continue in operation and meet its liabilities as they fall
due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications
or assumptions.
We have nothing to report having performed a review of
the directors’ statement that they have carried out a robust
assessment of the principal risks facing the Group and statement
in relation to the longer-term viability of the Group. Our review
was substantially less in scope than an audit and only consisted
of making inquiries and considering the directors’ process
supporting their statements; checking that the statements are
in alignment with the relevant provisions of the UK Corporate
Governance Code (the 'Code'); and considering whether the
statements are consistent with the knowledge and understanding
of the Group and Company and their environment obtained in the
course of the audit. (Listing Rules)
Outcome
We have nothing material to
add or to draw attention to.
However, because not all
future events or conditions
can be predicted, this
statement is not a guarantee
as to the Group’s and
Company’s ability to continue
as a going concern.
Reporting obligation
We are required to report if we
have anything material to add
or draw attention to in respect
of the directors’ statement in
the financial statements about
whether the directors considered
it appropriate to adopt the going
concern basis of accounting
in preparing the financial
statements and the directors’
identification of any material
uncertainties to the Group’s
and the Company’s ability to
continue as a going concern over
a period of at least twelve months
from the date of approval of the
financial statements.
We are required to report if the
directors’ statement relating to
Going Concern in accordance with
Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge
obtained in the audit.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our
auditors’ report thereon. The directors are responsible for the
other information. Our opinion on the financial statements
does not cover the other information and, accordingly, we do
not express an audit opinion or, except to the extent otherwise
explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing
so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or
material misstatement, we are required to perform procedures
to conclude whether there is a material misstatement of the
financial statements or a material misstatement of the other
information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report,
we also considered whether the disclosures required by the
UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless
otherwise stated).
86
WH Smith PLC Annual Report and Accounts 2020
Financial statements A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at:
frc.org.uk/auditorsresponsibilities. This description forms part
of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and
only for the Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• adequate accounting records have not been kept by the
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
• certain disclosures of directors’ remuneration specified by law
are not made; or
• the Company financial statements and the part of the
Directors’ Remuneration report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee,
we were appointed by the members on 21 January 2015 to audit
the financial statements for the year ended 31 August 2015 and
subsequent financial periods. The period of total uninterrupted
engagement is 6 years, covering the years ended 31 August 2015
to 31 August 2020.
Jonathan Lambert (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
19 November 2020
Other Code Provisions
We have nothing to report in respect of our responsibility to
report when:
• The statement given by the directors, on page 45, that they
consider the Annual Report taken as a whole to be fair,
balanced and understandable, and provides the information
necessary for the members to assess the Group’s and
Company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of the
Group and Company obtained in the course of performing
our audit.
• The section of the Annual Report on page 46 describing the
work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
• The directors’ statement relating to the Company’s compliance
with the Code does not properly disclose a departure from
a relevant provision of the Code specified, under the Listing
Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Responsibilities for the financial statements
and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’
Responsibilities in respect of the financial statements set out
on page 77, the directors are responsible for the preparation
of the financial statements in accordance with the applicable
framework and for being satisfied that they give a true and fair
view. The directors are also responsible for such internal control
as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group’s and the Company’s ability
to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern
basis of accounting unless the directors either intend to liquidate
the Group or the Company or to cease operations, or have no
realistic alternative but to do so.
Auditors’ responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors’ report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
financial statements.
87
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Group income statement
For the year ended 31 August 2020
£m
Continuing operations
Revenue
Group operating (loss)/profit
Finance costs
(Loss)/profit before tax
Income tax credit/(expense)
(Loss)/profit for the year
Attributable to equity holders of the parent
Attributable to non-controlling interests
(Loss)/earnings per share
Basic
Diluted
Equity dividends per share4
20201
Non-
underlying
items3
Note
Headline2
20191
Non-
underlying
items3
Total
Headline2
1,021
(48)
(20)
(68)
16
(52)
(52)
–
(52)
2
2, 3
7
8
10
10
–
(212)
–
(212)
25
(187)
(187)
–
(187)
1,021
(260)
(20)
(280)
41
(239)
(239)
–
(239)
(199.2)p
(199.2)p
1,397
160
(5)
155
(28)
127
125
2
127
–
(20)
–
(20)
1
(19)
(19)
–
(19)
Total
1,397
140
(5)
135
(27)
108
106
2
108
98.1p
97.2p
58.2p
1 The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of
applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 29).
2
‘Headline’ denotes an alternative performance measure. The Group has defined and explained the purpose of its alternative performance measures in the Glossary on page 146.
3 See Note 4 for an analysis of Non-underlying items. See Glossary on page 146 for definition of Alternative Performance Measures.
4 Prior year equity dividends per share is the final dividend of 41.0p and the interim dividend of 17.2p. The Board of Directors do not propose a dividend in respect of the year end 31 August 2020.
88
WH Smith PLC Annual Report and Accounts 2020
Financial statements Group statement of comprehensive income
For the year ended 31 August 2020
£m
(Loss)/profit for the year
Other comprehensive (loss)/income:
Items that will not be reclassified subsequently to the income statement:
Actuarial gains/(losses) on defined benefit pension schemes
Items that may be reclassified subsequently to the income statement:
(Losses)/gains on cash flow hedges
– Net fair value (losses)/gains
– Reclassified and recognised in inventories
– Reclassified and recognised in goodwill
– Reclassified and reported in the income statement
Exchange differences on translation of foreign operations
Other comprehensive (loss)/income for the year, net of tax
Total comprehensive (loss)/income for the year
Attributable to equity holders of the parent
Attributable to non-controlling interests
Note
2020¹
(239)
2019¹
108
5
11
11
(8)
(1)
8
(1)
(22)
(24)
(13)
(252)
(252)
–
(252)
(3)
(3)
2
(1)
–
–
10
11
8
116
114
2
116
1 The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of
applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 29).
89
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Group balance sheet
As at 31 August 2020
£m
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right-of-use assets
Investments in joint ventures
Deferred tax assets
Trade and other receivables
Current assets
Inventories
Trade and other receivables
Derivative financial assets
Current tax receivable
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Bank overdrafts and other borrowings
Retirement benefit obligations
Lease liabilities
Current tax liabilities
Short-term provisions
Non-current liabilities
Retirement benefit obligations
Bank loans and other borrowings
Long-term provisions
Lease liabilities
Deferred tax liabilities
Other non-current liabilities
Total liabilities
Total net assets
Shareholders’ equity
Called up share capital
Share premium
Capital redemption reserve
Translation reserve
Other reserves
Retained earnings
Total equity attributable to the equity holders of the parent
Non-controlling interests
Total equity
Note
2020¹
2019¹
11
11
12
13
18
14
14
22
19
15
19
5
16
17
5
19
17
16
18
23
26
418
75
192
413
2
23
9
1,132
150
49
–
8
108
315
1,447
(241)
–
(1)
(130)
–
(5)
(377)
(3)
(400)
(9)
(429)
(2)
–
(843)
(1,220)
227
29
315
13
(14)
(279)
158
222
5
227
176
49
201
–
4
8
10
448
174
73
2
–
49
298
746
(250)
(15)
(1)
(5)
(7)
(1)
(279)
(3)
(200)
(4)
(9)
(3)
(11)
(230)
(509)
237
24
9
13
8
(274)
455
235
2
237
1 The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of
applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 29).
The consolidated financial statements of WH Smith PLC, registered number 5202036, on pages 88 to 142 were approved by the
Board of Directors and authorised for issue on 19 November 2020 and were signed on its behalf by:
Carl Cowling
Group Chief Executive
Robert Moorhead
Chief Financial Officer and Chief Operating Officer
90
WH Smith PLC Annual Report and Accounts 2020
Financial statements
Group cash flow statement
For the year ended 31 August 2020
£m
Operating activities
Cash generated from operating activities
Interest paid2
Net cash inflow from operating activities
Investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Acquisition of subsidiaries, net of cash acquired
Net cash outflow from investing activities
Financing activities
Dividend paid
Distributions to non-controlling interests
Proceeds from share placings
Issue of new shares for employee share schemes
Purchase of own shares for cancellation
Purchase of own shares for employee share schemes
Proceeds from borrowings
Repayments of borrowings
Financing arrangement fees
Repayments of obligations under leases
Net cash inflow from financing activities
Net increase in cash and cash equivalents in the year
Opening cash and cash equivalents
Effect of movements in foreign exchange rates
Closing cash and cash equivalents
Reconciliation of net cash flow to movement in net debt3
£m
Net debt at beginning of the year
Net increase in cash and cash equivalents
Impact of adoption of IFRS 16
Lease liability acquired through business combinations
Decrease in debt
Increase in long-term borrowings
Net movement in lease liability
Effect of movements in foreign exchange rates
Net debt at end of the year
Note
2020¹
2019¹
21
27
9
23
23
23
19
19
19
Note
29
27
19
94
(13)
81
(67)
(12)
(316)
(395)
(47)
1
312
–
–
(2)
200
(15)
(3)
(72)
374
60
49
(1)
108
2020¹
(180)
60
(479)
(106)
15
(200)
32
7
(851)
153
(4)
149
(47)
(12)
(161)
(220)
(60)
(2)
–
1
(32)
(7)
200
(18)
(1)
(6)
75
4
45
–
49
2019¹
(2)
4
–
–
18
(200)
–
–
(180)
1 The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect
of applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 29).
2
Includes interest payments of £6m on lease liabilities.
3 Net debt is an Alternative Performance Measure defined and explained in the Glossary on page 146. Further information on the items in the above reconciliation are provided in Note 19.
91
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Group statement of changes in equity
For the year ended 31 August 2020
£m
Balance at 31 August 2019
Impact of adoption of IFRS 16 (Note 29)
Adjusted balance at 1 September 2019
Loss for the year
Other comprehensive loss:
Actuarial gains on defined benefit pension
schemes (Note 5)
Cash flow hedges
Exchange differences on translation of
foreign operations
Total comprehensive loss for the year
Issue of new shares (Note 23)
Dividends paid (Note 9)
Net cash flows from non-controlling
interests
Employee share schemes
Non-controlling interests arising on
acquisition (Note 27)
Balance at 31 August 2020
£m
Balance at 1 September 2018
Profit for the year
Other comprehensive income/(loss):
Actuarial losses on defined benefit pension
schemes
Cash flow hedges
Exchange differences on translation of
foreign operations
Total comprehensive income for the year
Recognition of share-based payments
Premium on issue of shares (Note 23)
Dividends paid (Note 9)
Distributions to non-controlling interests
Employee share schemes
Purchase of own shares for cancellation
(Note 23)
Non-controlling interests arising on
acquisition
Balance at 31 August 2019
1 For further analysis of Other reserves, see Note 26.
Called up
share capital
and share
premium
33
–
33
–
Capital
redemption
reserve
13
–
13
–
Translation
reserve
8
–
8
–
Other
reserves1
(274)
–
(274)
–
Retained
earnings²
455
(22)
433
(239)
Total equity
attributable
to the equity
holders of
the parent
235
(22)
213
(239)
Non-
controlling
interests Total equity
237
(22)
215
(239)
2
–
2
–
–
–
–
–
311
–
–
–
–
344
–
–
–
–
–
–
–
–
–
13
–
–
(22)
(22)
–
–
–
–
–
(14)
–
(2)
–
(2)
–
–
–
(3)
–
(279)
11
–
–
(228)
–
(47)
–
–
–
158
11
(2)
(22)
(252)
311
(47)
–
(3)
–
222
–
–
–
–
–
–
1
–
2
5
11
(2)
(22)
(252)
311
(47)
1
(3)
2
227
Called up
share capital
and share
premium
32
–
Capital
redemption
reserve
13
–
Translation
reserve
(2)
–
Other
reserves1
(268)
–
Retained
earnings
437
106
Total equity
attributable
to the equity
holders of
the parent
212
106
Non-
controlling
interests
–
2
Total equity
212
108
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
33
–
13
–
–
10
10
–
–
–
–
–
–
–
8
–
1
–
1
–
–
–
–
(7)
–
(3)
–
–
103
6
–
(60)
–
–
(3)
1
10
114
6
1
(60)
–
(7)
(31)
(31)
–
(274)
–
455
–
235
–
–
–
2
–
–
–
(2)
–
–
2
2
(3)
1
10
116
6
1
(60)
(2)
(7)
(31)
2
237
2 The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of
applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 29).
92
WH Smith PLC Annual Report and Accounts 2020
Financial statements Notes to the financial statements
1. Accounting policies
a) Basis of preparation
The consolidated Group financial statements have been
prepared in accordance with International Financial Reporting
Standards (‘IFRS’) and IFRS Interpretations Committee (‘IFRS
IC’) interpretations as adopted by the European Union and with
those parts of the Companies Act 2006 applicable to companies
reporting under IFRS. These are the standards, subsequent
amendments and related interpretations issued and adopted by
the International Accounting Standards Board (‘IASB’) that have
been endorsed by the European Union.
Going concern
The consolidated financial statements have been prepared on
a going concern basis. The directors are required to assess
whether the Group can continue to operate for the 12 months
from the date of approval of these financial statements, and
to prepare the financial statements on a going concern basis.
The directors report that they have assessed the principal
risks, reviewed current performance and forecasts, combined
with expenditure commitments, including capital expenditure,
and borrowing facilities. The directors have concluded that it
is appropriate to adopt the going concern basis of accounting
in preparing these financial statements, having undertaken a
rigorous assessment of the financial forecasts particularly in the
context of the ongoing Covid-19 pandemic, for the reasons set
out below.
The Strategic report describes the Group’s financial position,
cash flows and borrowing facilities and also highlights the
principal risks and uncertainties facing the Group. The Group
acted quickly to mitigate the impact of Covid-19 by taking steps
to strengthen our balance sheet and to ensure access to further
funding. As announced on 6 April 2020, we raised c£160m of
additional funding via a share placing. In addition, we agreed
a £120m 12-month (plus 7 months at the option of the Group)
committed banking facility.
As at 19 November 2020, the Group has in place a five-year
committed multi-currency revolving credit facility of £200m
maturing on 8 December 2023. In addition the Group has
a further £120m multi-currency revolving credit facility as
described above which is in place until 8 November 2021.
As at 19 November 2020, the Group is not drawn down on either
of these facilities.
The Group has a four-year committed £200m term loan, that was
drawn down at the time of the acquisition of InMotion. This loan
is due to mature on 29 October 2022. In addition, during the year,
the Group agreed an additional committed term loan of £200m
which matures in October 2022.
In making the going concern assessment, the directors have
modelled a number of scenarios for the period to February 2022.
The base case scenario is consistent with the Board approved
2021 Budget, adjusted for the lockdown across England
announced by the UK Government on 31 October and the three
year plan. These reflect our expectations of ongoing challenging
trading conditions, with sales remaining significantly below
pre-Covid levels for the duration of the going concern period.
In light of the considerable uncertainty surrounding the ongoing
impact of Covid-19, a downside scenario has also been modelled,
applying severe but plausible assumptions to the base case.
This scenario assumes a further two-month lockdown in
addition to the November lockdown, with High Street store sales
down over 80 per cent from November 2020 through to January
2021 compared to the equivalent 2019 levels and down over
50 per cent in February 2021. We then assume a gradual
recovery, reflecting our experience of the post-lockdown
recovery period from earlier in the year, to a position in February
2022 where High Street store sales are down over 20 per cent
compared to February 2019. This scenario assumes that our
207 Post Office stores and 130 hospital stores continue to trade
during a second national lockdown reflecting our experience
from the national lockdown earlier in 2020. In Travel UK we have
assumed a sales reduction of over 80 per cent from November
2020 through to January 2021 compared to last year and down
over 70 per cent in February 2021. We then assume a gradual
recovery, reflecting our experience of the post-lockdown recovery
period from earlier in the year, to a position in February 2022
where Travel store sales are down over 30 per cent compared
to February 2019. The severe but plausible scenario includes a
number of mitigating actions including further savings in store
and head office payrolls, a reduction in inventory purchases,
a reduction in discretionary spend and reductions in capital
expenditure across High Street and Travel.
In both the base case and severe but plausible scenarios the
Group would continue to have sufficient liquidity headroom on its
existing facilities, as described above.
The covenants on the above facilities, tested half-yearly, are
based on fixed charges cover and net borrowings. In response to
the impact of the Covid-19 pandemic on the Group's operations,
the Group has secured waivers on the existing bank covenants at
31 August 2020, 28 February 2021 and 31 August 2021.
The Group will next be tested on its covenants at 28 February
2022, over 15 months from the date of signing these accounts.
Under current conditions, it is likely that the Group would require
a further waiver or amendment to its February 2022 covenant
tests. If this situation prevailed, the Group would engage its
lending banks in advance of this date to secure a further
covenant waiver. Throughout the pandemic we have received
excellent support from our banks who have granted covenant
waivers for February 2021 and August 2021. The Strategic
report also sets out the Group’s business activities together
with the factors that are likely to affect its future developments,
performance and position. Note 22 outlines the Group’s
objectives, policies and processes for managing its capital;
its financial risk management objectives; details of its financial
instruments and hedging activities; and its exposures.
As a result of the above analysis, the directors believe that the
Group has sufficient financial resources to continue in operation
and meet its obligations as they fall due for the 12 months from
the date of approval of these financial statements.
93
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
Alternative Performance Measures (‘APMs’)
The Group has identified certain measures that it believes will
assist the understanding of the performance of the business.
These APMs are not defined or specified under the requirements
of IFRS.
The Group believes that these APMs, which are not considered
to be a substitute for, or superior to, IFRS measures, provide
stakeholders with additional useful information on the
underlying trends, performance and position of the Group and
are consistent with how business performance is measured
internally. The APMs are not defined by IFRS and therefore may
not be directly comparable with other companies’ Alternative
Performance Measures.
The key APMs that the Group uses include: Headline profit
before tax, Headline earnings per share, High Street and Travel
trading profit, Group profit from trading operations, like-for-like
revenue, gross margin, fixed charges cover, Net debt/funds and
free cash flow. These APMs are set out in the Glossary on page
146 including explanations of how they are calculated and how
they are reconciled to a statutory measure where relevant.
Non-underlying items
The Group has chosen to present a Headline measure of profit
and earnings per share which excludes certain items, that
are considered non-underlying and exceptional due to their
size, nature or incidence, and are not considered to be part
of the normal operating costs of the Group. These costs may
include the financial effect of non-underlying items which are
considered exceptional and occur infrequently such as, inter
alia, restructuring costs linked to a Board agreed programme,
amortisation of acquired intangibles assets, costs relating
to business combinations, impairment charges and onerous
lease charges, significant items relating to pension schemes,
and impairment charges and items meeting the definition of
non-underlying specifically related to the Covid-19 pandemic,
and the related tax effect of these items. The Group believes
that the separate disclosure of these costs provides additional
useful information to users of the financial statements to
enable a better understanding of the Group’s underlying
financial performance.
Further details of the non-underlying items are provided in
Note 4.
Accounting convention
The financial statements are drawn up on the historical cost
basis of accounting, except for certain financial instruments,
share-based payments and pensions that have been measured
at fair value. The financial information is rounded to the nearest
million, except where otherwise indicated. The principal
accounting policies, which have been applied consistently
throughout both years except as noted above, are set out on the
following pages.
1. Accounting policies (continued)
a) Basis of preparation
New standards
The Group has adopted the following standards and
interpretations which became mandatory during the current
financial year.
IFRS 16
(including amendments)
IFRIC 23
Amendment to IFRS 9
Amendments to IAS 28
Amendments to IAS 19
Leases
Uncertainty over Income
Tax Treatments
Financial Instruments – Prepayment
features with negative compensation
Investments in associates –
Long-term interests in associates
and joint ventures
Employee benefits – Plan
amendment, curtailment
or settlement
Annual improvements
2015-2017 cycle
The Group has considered the above new standards and
amendments and has concluded that, with the exception of
IFRS 16, they are either not relevant to the Group or they do
not have a significant impact on the Group’s consolidated
financial statements.
The impact of the adoption of IFRS 16 is described in Note 29.
The revised accounting policy in respect of IFRS 16 is described
in Note 1(g).
At the date of authorisation of these consolidated Group financial
statements, the following standards and interpretations, which
have not been applied in these financial statements, were in
issue but not yet effective (and in some cases had not yet been
adopted by the EU):
IFRS 17
Amendments to IFRS 3
Amendments to IFRS 9,
IAS 39 and IFRS 7
Amendments to IFRS 3
Amendments to IAS 1
Amendments to IAS 1
and IAS 8
Amendments to IAS 16
Amendments to IAS 37
Insurance Contracts
Reference to the
Conceptual Framework
Interest Rate Benchmark Reform
Definition of a Business
Classification of liabilities as current
or non-current
Definition of Material
Proceeds before intended use
Onerous contracts – Cost of fulfilling
a contract
Amendments references to the Conceptual Framework in
IFRS Standards
Annual Improvements to IFRS Standards 2018–2020
The directors anticipate that the adoption of these standards and
interpretations in future years will have no material impact on
the Group’s financial statements.
94
WH Smith PLC Annual Report and Accounts 2020
Financial statements
1. Accounting policies (continued)
Basis of consolidation
The consolidated Group financial statements incorporate the
financial statements of WH Smith PLC and all its subsidiaries.
Subsidiary undertakings are all entities over which the Group has
control. The Group controls an entity when the Group is exposed
to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power
over the entity. Subsidiaries are fully consolidated from the date
on which control is transferred to the Group.
Goodwill arising on acquisition is recognised as an asset and
initially measured at cost, being the excess of the fair value of
consideration transferred over the Group’s interest in the net
fair value of the identifiable assets, liabilities and contingent
liabilities recognised. If, after reassessment, the Group’s interest
in the net fair value of the acquiree’s identifiable assets, liabilities
and contingent liabilities exceeds the fair value of consideration
transferred, after taking into account recognised goodwill, the
excess is immediately recognised in the income statement.
The separable net assets, both tangible and intangible, of the
newly acquired subsidiary undertakings are incorporated into
the financial statements on the basis of the fair value as at the
effective date of control, if appropriate. Non-controlling interests
are stated at the non-controlling interests’ proportion of the fair
values of the assets and liabilities recognised.
Results of subsidiary undertakings disposed of during the
financial year are included in the financial statements up to
the effective date of disposal. Where a business component
representing a separate major line of business is disposed of,
or classified as held for sale, it is classified as a discontinued
operation. The post-tax profit or loss of the discontinued
operations is shown as a single amount on the face of the
income statement, separate from the other results of the Group.
A joint venture is an entity in which the Group holds an interest
on a long-term basis and which is jointly controlled by the Group
and one or more other venturers under a contractual agreement.
Management has assessed whether it has joint control of the
arrangement. Joint control exists only when decisions about the
relevant activities require the unanimous consent of the parties
that collectively control the arrangement. In assessing this joint
control no significant judgements have been necessary.
The Group’s share of results of joint ventures is included in the
Group consolidated income statement using the equity method
of accounting. The results of joint ventures in the current and
prior year are not material to disclose. Investments in joint
ventures are carried in the Group consolidated balance sheet at
cost plus post-acquisition changes in the Group’s share of net
assets of the entity less any impairment in value.
If the Group’s share of losses in the joint venture equals or
exceeds its investment in the joint venture, the Group does not
recognise further losses, unless it has incurred obligations to do
so, or made payments on behalf of the joint venture.
All intercompany transactions, balances and unrealised gains
on transactions between Group companies are eliminated.
b) Revenue
Revenue is measured at the fair value of the consideration
received or receivable and represents amounts receivable
for the sale of goods and services to customers (which is the
most significant revenue stream), sale of wholesale goods to
franchisees, and commission and fee income on concession and
franchise arrangements. Revenue excludes discounts, estimated
returns, VAT and other sales-related taxes.
Revenue is recognised when performance obligations have
been met and control of the goods has transferred to the
customer. The majority of the Group’s sales are for standalone
products made direct to customers at standard prices either
in-store, online or through franchisees, where there is a single
performance obligation. Revenue generated from different store
formats are considered to be a single revenue stream and are
subject to the same underlying economic risks.
For in-store transactions, control of the goods is deemed to
have transferred to the customer at the point of sale. For online
transactions and wholesale sale of goods to franchisees, control
is deemed to have transferred to the customer at the point of
delivery of the goods.
Revenue on in-store transactions is recognised at the point of
sale. Revenue in respect of online and wholesale (including sales
directly to franchisees) transactions is recognised on the transfer
of control, which is on delivery of the goods to the customers.
Revenue in respect of gift cards sold by the Group is recognised
on the redemption of the gift card either in-store at the point
of sale or on delivery for online redemptions. Franchise and
concession fees and commission are recognised on the accruals
basis in accordance with the substance of the contracts in place,
which is typically on the basis of fixed fees spread evenly over
the contract period, and/or variable amounts earned based
on revenue.
c) Supplier income
The Group receives income from its suppliers in the form
of supplier incentives and discounts (collectively ‘Supplier
incomes’). These incomes are recognised as a deduction from
cost of sales on an accruals basis as they are earned for each
supplier contract. The level of complexity and judgement is low
in relation to establishing the accounting entries and estimates,
and the timing of recognition.
Supplier incomes that have been invoiced but not received at
the period end are recognised in Trade Receivables, or in Trade
Payables where we have the right of offset. Incomes that have
been earned but not yet invoiced are accrued and are recorded in
Accrued income.
The types of supplier income recognised by the Group, and the
recognition policies are detailed overleaf.
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Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
acquiree. Costs directly attributable to the business combination
are recognised in the income statement in the period they are
incurred. The cost of a business combination is allocated at the
acquisition date by recognising the acquiree’s identifiable assets,
liabilities and contingent liabilities that satisfy the recognition
criteria at their fair values at that date.
The acquisition date is the date on which the acquirer effectively
obtains control of the acquiree. Intangible assets are recognised
if they meet the definition of an intangible asset contained in
IAS 38 and their fair value can be measured reliably. The excess
of the cost of acquisition over the fair value of the Group’s share
of identifiable net assets acquired is recognised as goodwill.
Where less than the entire equity interest of a subsidiary is
acquired, the non-controlling interest is recognised at the
non-controlling interest’s share of the net assets of the
subsidiary. Changes in the Group’s ownership percentage of
subsidiaries are accounted for within equity.
Goodwill
Goodwill represents the excess of the fair value of purchase
consideration over the net fair value of identifiable assets and
liabilities acquired.
Goodwill is recognised as an asset at cost and subsequently
measured at cost less accumulated impairment. For the
purposes of impairment testing, goodwill is allocated to the
cash-generating units (CGUs) that have benefited from the
acquisition. Each store is considered to be a CGU. Goodwill is
allocated to either the group of CGUs making up the Travel or
High Street operating segments, as this is the lowest level at
which management monitor goodwill. The carrying value of
goodwill is reviewed for impairment at least annually or where
there is an indication that goodwill may be impaired. If the
recoverable amount of the group of cash-generating units is less
than its carrying amount, then the impairment loss is allocated
first to reduce the carrying amount of the goodwill allocated to
the units and then to the other assets of the units on a pro-rata
basis. Any impairment is recognised immediately in the income
statement and is not subsequently reversed.
On disposal of a subsidiary, the attributable amount of goodwill
is included in the determination of the profit and loss on disposal.
Other intangible assets
The costs of acquiring and developing software that
is not integral to the related hardware is capitalised
separately as an intangible asset. These intangibles
are stated at cost less accumulated amortisation and
impairment losses. Amortisation is charged so as to write off
the costs of assets over their estimated useful lives, using the
straight-line method, and is recorded in Distribution costs.
The amortisation period for capitalised software costs is over
a maximum period of five years.
1. Accounting policies (continued)
c) Supplier income (continued)
Retrospective discounts
Income earned based on sales or purchase volume triggers set
by the supplier for specific products over specific periods.
Income is calculated and invoiced based upon actual sales or
purchases over the period set out in the supplier agreement,
and is recognised in the income statement as it is earned.
Where the period of an agreement spans accounting periods,
income is recognised based on forecasts for expected sales or
purchase volumes, informed by current performance, trends,
and the terms of the supplier agreement. Income is invoiced
throughout the year in accordance with the specific supplier
terms. The carrying value of inventories is adjusted to reflect
unearned elements of supplier income as the product has not
yet been sold. This income is subsequently recognised in cost
of sales when the product has been sold.
Promotional and marketing activity
Supplier income from promotional and marketing activity
includes income in respect of in-store marketing and point of
sale, supplying dedicated promotional space or receiving margin
support for products on promotion.
Income for promotional and marketing activity is agreed with
suppliers for specific periods and products. Income is recognised
over the period of the agreement. Income is invoiced when
the performance conditions in the supplier agreement have
been achieved.
d) Retirement benefit costs
Payments to the WHSmith Group defined contribution pension
schemes are recognised as an expense in the income statement
as they fall due.
The cost of providing benefits for the main defined benefit
scheme, WHSmith Pension Trust, and the United News Shops
Retirement Benefits Scheme are determined by the Projected
Unit Credit Method, with actuarial calculations being carried out
at the balance sheet date.
Actuarial gains and losses are recognised in full in the period
in which they occur. They are recognised outside the income
statement in the Group statement of comprehensive income.
The retirement benefit obligation recognised in the balance sheet
represents the present value of the defined benefit obligation,
as reduced by the fair value of scheme assets. Any asset
resulting from the calculation is limited to the present value
of available refunds and reductions in future contributions to
the plan. Where the Group is considered to have a contractual
obligation to fund the pension scheme above the accounting
value of the liabilities, an onerous obligation is recognised.
e) Intangible assets
Business combinations
The acquisition of subsidiaries is accounted for using the
acquisition method. The consideration transferred is measured
at the aggregate of the fair values, at the date of exchange,
of assets given, liabilities incurred or assumed, and equity
instruments issued by the Group in exchange for control, of the
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WH Smith PLC Annual Report and Accounts 2020
Financial statements or less) and leases of low-value assets. For these leases, the
Group recognises the lease payments as an operating expense
on a straight-line basis over the term of the lease unless another
systematic basis is more representative of the time pattern in
which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value of the
lease payments that are not paid at the commencement date,
discounted by using the rate implicit in the lease. If this rate
cannot be readily determined, the lessee uses its incremental
borrowing rate.
Lease payments included in the measurement of the lease
liability comprise:
• Fixed lease payments, less any lease incentives receivable;
• Variable lease payments that depend on an index or
rate, initially measured using the index or rate at the
commencement date;
• The amount expected to be payable by the lessee under
residual value guarantees;
• The exercise price of purchase options, if the lessee is
reasonably certain to exercise the options; and
• Payments of penalties for terminating the lease, if the lease
term reflects the exercise of an option to terminate the lease.
The lease liability is presented as a separate line in the
consolidated balance sheet.
The lease liability is subsequently measured by increasing the
carrying amount to reflect interest on the lease liability (using the
effective interest method) and by reducing the carrying amount
to reflect the lease payments made.
The Group remeasures the lease liability (and makes a
corresponding adjustment to the related right-of-use asset)
whenever:
• The lease payments change due to changes in an index,
rent review or rate, in which cases the lease liability is
remeasured by discounting the revised lease payments using
an unchanged discount rate.
• A lease contract is modified, and the lease modification is not
accounted for as a separate lease, in which case the lease
liability is remeasured based on the lease term of the modified
lease by discounting the revised lease payments using a
revised discount rate at the effective date of the modification.
The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before
the commencement date, less any lease incentives received and
any initial direct costs. They are subsequently measured at cost
less accumulated depreciation and impairment losses.
1. Accounting policies (continued)
e) Intangible assets (continued)
Other intangible assets are valued at cost and amortised
over their useful life, and the amortisation is recorded in
Administrative expenses, unless the asset can be demonstrated
to have an indefinite life. Other intangible assets, such as brands,
arising on business combinations are amortised over their useful
lives. Amortisation of other intangible assets arising on business
combinations is included in non-underlying costs. The useful life
and residual value of all intangible assets are determined at the
time of acquisition and reviewed annually for appropriateness.
All intangible assets are reviewed for impairment in accordance
with IAS 36 Impairment of Assets, when there are indications
that the carrying value may not be recoverable. Assets with
indefinite useful lives are tested for impairment annually.
f) Property, plant and equipment
Property, plant and equipment assets are carried at cost less
accumulated depreciation and any recognised impairment
in value. The carrying values of tangible fixed assets
previously revalued have been retained at their book amount.
Depreciation is charged so as to write off the costs of assets,
other than land, over their estimated useful lives, using the
straight-line method, with the annual rates applicable to the
principal categories being:
Freehold properties
Leasehold improvements
Fixtures and fittings
Equipment and vehicles
– over 20 years
– shorter of the lease period
and the estimated remaining
economic life
– up to ten years
– up to ten years
The residual values of property, plant and equipment are
reassessed on an annual basis.
At each balance sheet date, property, plant and equipment is
reviewed for impairment if events or changes in circumstances
indicate that the carrying amount may not be recoverable.
When a review for impairment is conducted, the recoverable
amount is assessed by reference to the net present value
of expected future pre-tax cash flows of the relevant
cash-generating unit or fair value, less costs to sell, if higher.
Any impairment in value is charged to the income statement
in the period in which it occurs.
g) Leasing
The Group has applied IFRS 16 using the modified retrospective
transition approach and therefore comparative information has
not been restated and is presented under IAS 17. The details of
accounting policies under both IAS 17 and IFRS 16 are presented
separately below and on the following page.
Policies applicable from 1 September 2019
The Group as a lessee
The Group assesses whether a contract is or contains a lease,
at inception of the contract. The Group recognises a right-of-
use asset and a corresponding lease liability with respect to all
lease arrangements in which it is the lessee, except for short-
term leases (defined as leases with a lease term of 12 months
97
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
1. Accounting policies (continued)
g) Leasing (continued)
Whenever the Group incurs an obligation for costs to dismantle
and remove a leased asset, restore the site on which it is located
or restore the underlying asset to the condition required by the
terms and conditions of the lease, a provision is recognised and
measured under IAS 37. To the extent that the costs relate to a
right-of-use asset, the costs are included in the related right-of-
use asset.
Right-of-use assets are depreciated over the lease term.
The depreciation starts at the commencement date of the lease.
The right-of-use assets are presented as a separate line in the
consolidated balance sheet.
The Group applies IAS 36 to determine whether a right-of-use
asset is impaired and accounts for any identified impairment loss
as described in the ‘Property, Plant and Equipment’ policy.
The lease contracts that include variable rents based on sales,
which is the case with many of our retail concession contracts,
are not included in the measurement of the lease liability and
the right-of-use asset. The related rents payable are recognised
as an expense in the period in which the event or condition that
triggers those payables occurs and are included in profit or loss
(see Note 3).
The Group has applied the Amendment to IFRS 16 issued in
June 2020, and endorsed by the EU in October 2020.
This practical expedient allows the impact on the lease liability
of temporary rent reductions/waivers affecting rent payments
due on or before June 2021, to be recognised in the Income
statement in the period they are received, rather than as lease
modifications, which would require the remeasurement of the
lease liability using a revised discount rate with a corresponding
adjustment to the right-of-use asset.
For leases acquired as part of a business combination, the
lease liability is measured at the present value of the remaining
lease payments. The right-of-use asset is measured at the
same amount as the lease liability adjusted to reflect favourable
or unfavourable terms of the lease when compared to
market terms.
The Group as a lessor
The Group enters into lease agreements as an intermediate
lessor with respect to some of its property leases. It accounts
for the head lease and the sublease as two separate contracts.
The sublease is classified as finance lease or operating lease by
reference to the right-of-use asset arising from the head lease.
Whenever the terms of the lease transfer substantially all the
risks and rewards of ownership to the lessee, the contract is
classified as a finance lease. All other leases are classified as
operating leases.
Rents receivable from operating leases are recognised on a
straight-line basis over the term of the relevant lease.
Policies applicable prior to 1 September 2019
Leases are classified as finance leases whenever the terms
of the lease transfer substantially all the risks and rewards
of ownership to the lessee. All other leases are classified as
operating leases.
Assets held under finance leases are recognised as assets of
the Group at their fair value determined at the inception of the
lease or, if lower, at the present value of the minimum lease
payments. The corresponding liability to the lessor is included
in the balance sheet as a finance lease obligation. These assets
are depreciated over their expected useful lives on the same
basis as owned assets or, where shorter, over the term of the
relevant lease. Lease payments are apportioned between
finance charges and a reduction of the lease obligations so as
to achieve a constant rate of interest on the remaining balance
of the liability. Finance charges are recognised directly in the
income statement.
Rentals payable and receivable under operating leases are
charged to the income statement on a straight-line basis over
the term of the relevant lease. Benefits received and receivable
as an incentive to enter into an operating lease are also spread
on a straight-line basis over the lease term. The Group has a
number of lease arrangements in which the rent payable is
contingent on revenue. Contingent rentals payable, based on
store revenues, are accrued in line with revenues generated.
h) Inventories
Inventories comprise goods held for resale and are stated at the
lower of cost or net realisable value. Consignment stocks are not
included within stocks held by the Group. Inventories are valued
using a weighted average cost method.
Cost is calculated to include, where applicable, duties, handling,
transport and directly attributable costs (including a deduction
for applicable supplier income) in bringing the inventories to
their present location and condition. Net realisable value is
based on estimated normal selling prices less further costs
expected to be incurred in selling and distribution. Cost of
inventories includes the transfer from equity of any gains or
losses on qualifying cash flow hedges relating to purchases.
Provisions are made for obsolescence, markdown below cost
and shrinkage.
i) Government grants
Government grants are not recognised until there is reasonable
assurance that the grants will be received and that the Group will
comply with any conditions attached to them.
Government grants are recognised in the income statement
over the same period as the costs for which the grants are
intended to compensate. Government grants that are receivable
as compensation for expenses or losses already incurred or for
the purpose of giving immediate financial support to the Group
with no future related costs are recognised in profit or loss in the
period in which they become receivable.
Government grant income is disclosed in Note 3. In addition, the
Group has benefited from government assistance in the form of
business rates relief of £20m in the year (2019: £nil).
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WH Smith PLC Annual Report and Accounts 2020
Financial statements 1. Accounting policies (continued)
j) Provisions
Provisions are recognised in the balance sheet when the Group
has a present legal or constructive obligation as a result of a past
event and it is probable that an outflow of economic benefits will
be required to settle the obligation. Provisions are measured at
the directors’ best estimate of the expenditure required to settle
the obligation at the balance sheet date. Where the effect is
material, the provision is determined by discounting the expected
future cash flows at a pre-tax rate which reflects current market
assessments of the time value of money and, where appropriate,
the risks specific to the liability.
k) Foreign currencies
The consolidated financial statements are presented in pounds
sterling (GBP), which is WH Smith PLC’s functional and
presentation currency. Items included in the financial statements
of each of the Group’s subsidiaries are measured using the
currency of the primary economic environment in which the
entity operates (‘the functional currency’).
On consolidation, the assets and liabilities of the Group’s
overseas operations are translated into sterling at exchange
rates prevailing on the balance sheet date. Income and expense
items are translated into sterling at the average exchange rates
for the period. Exchange differences arising, if any, are classified
as equity and transferred to the Group’s translation reserve.
Transactions denominated in foreign currencies are recorded at
the rates of exchange prevailing on the dates of the transactions.
At each balance sheet date, monetary items denominated
in foreign currencies are retranslated at the rates prevailing
on the balance sheet date. Exchange differences arising on
the settlement of monetary items, and on the retranslation
of monetary items, are included in the income statement for
the period.
In order to hedge its exposure to certain foreign exchange risks,
the Group enters into forward contracts (see below for details
of the Group’s accounting policies in respect of such derivative
financial instruments).
l) Taxation
The tax expense/credit included in the income statement
comprises current and deferred tax.
Current tax is the expected tax payable or receivable based on
the taxable profit or loss for the period, using tax rates that have
been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised on differences between the carrying
amounts of assets and liabilities in the financial statements and
the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognised for
all taxable temporary differences and deferred tax assets are
recognised to the extent that it is probable that taxable profits
will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if
the temporary difference arises from goodwill or from the initial
recognition (other than in business combination) of other assets
and liabilities in a transaction that affects neither the tax profit
nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered. Deferred tax is calculated
at the tax rates that are expected to apply in the period when the
liability is settled or the asset is realised.
Current and deferred tax is charged or credited in the income
statement, except when it relates to items charged or credited
directly to equity, in which case the current or deferred tax is also
recognised directly in equity.
m) Financial instruments
Financial assets and liabilities are recognised in the Group’s
balance sheet when the Group becomes party to the contractual
provisions of the instrument.
i) Initial recognition and subsequent measurement
(a) Financial assets
Trade and other receivables
Trade receivables are measured at fair value at initial recognition,
do not carry any interest and are subsequently measured
at amortised cost using the effective interest rate method.
Appropriate allowances for estimated irrecoverable amounts
are recognised in the income statement.
Allowances for doubtful debts are recognised based on
management’s expectation of losses, without regard to whether
an impairment trigger has occurred or not (an ‘expected credit
loss’ model under IFRS 9).
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash
at bank and in hand and short-term deposits with an original
maturity of three months or less.
(b) Financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that evidences
a residual interest in the assets of the Group after deducting all
of its liabilities.
Bank borrowings
Interest-bearing bank loans and overdrafts are initially measured
at fair value (being proceeds received, net of direct issue costs),
and are subsequently measured at amortised cost, using
the effective interest rate method. Transaction fees such as
arrangement fees associated with the securing of financing
are capitalised and amortised through the income statement
over the term of the relevant facility. Finance charges, including
premiums payable on settlement or redemptions and direct
issue costs are accounted for on an accruals basis and taken to
the income statement using the effective interest rate method
and are added to the carrying value of the instrument to the
extent that they are not settled in the period in which they arise.
Trade and other payables
Trade and other payables are initially measured at fair value and
are subsequently measured at amortised cost, using the effective
interest rate method.
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Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
1. Accounting policies (continued)
m) Financial instruments (continued)
i) Initial recognition and subsequent measurement (continued)
(b) Financial liabilities and equity (continued)
Equity instruments
Equity instruments issued are recorded at the proceeds received,
net of direct issue costs.
ii) Derecognition of financial assets and financial liabilities
Financial assets
The Group derecognises a financial asset when the contractual
rights to the cash flows from the financial asset expire, or it
transfers the rights to receive the contractual cash flows in a
transaction in which substantially all of the risks and rewards of
ownership of the financial asset are transferred or in which the
Group neither transfers nor retains substantially all of the risks
and rewards of ownership and it does not retain control of the
financial asset.
Financial liabilities
The Group derecognises a financial liability when its contractual
obligations are discharged or cancelled, or expire. The Group
also derecognises a financial liability when its terms are modified
and the cash flows of the modified liability are substantially
different, in which case a new financial liability based on the
modified terms is recognised at fair value.
On derecognition of a financial liability, the difference between
the carrying amount extinguished and the consideration
paid (including any non-cash assets transferred or liabilities
assumed) is recognised in profit or loss.
iii) Offsetting
Financial assets and financial liabilities are offset and the net
position presented in the balance sheet when, and only when,
the Group has a legally enforceable right to set off the amounts
and it intends either to settle them on a net basis or to realise
the asset and settle the liability simultaneously.
iv) Impairment
The Group recognises loss allowances for expected credit
losses (‘ECLs’) on financial assets measured at amortised cost.
These are always measured at an amount equal to lifetime ECL.
The maximum period considered when estimating ECLs is the
maximum contractual period over which the Group is exposed to
credit risk.
When determining whether the credit risk of a financial
asset has increased significantly since initial recognition and
when estimating ECL, the Group considers reasonable and
supportable information that is relevant and available without
undue cost or effort.
This includes both qualitative and quantitative information
and analysis, based on the Group’s historical experience and
informed credit assessment and forward-looking information.
Loss allowances for financial assets measured at amortised
cost are deducted from the gross carrying amount of the assets.
The gross carrying amount of a financial asset is written off
(either partially or in full) to the extent that there is no realistic
100 WH Smith PLC Annual Report and Accounts 2020
prospect of recovery. This is generally the case when the Group
determines that the debtor does not have the assets or sources
of income that could generate sufficient cash flows to repay the
amounts subject to the write-off. However, financial assets that
are written off could still be subject to enforcement activities
in order to comply with the Group’s procedures for recovery of
amounts due.
v) Derivative financial instruments and hedge accounting
The Group uses certain derivative financial instruments to reduce
its exposure to foreign exchange movements in accordance
with its risk management policies. The Group primarily uses
forward foreign currency contracts to manage its exposure to
changes in foreign exchange rates. The Group does not hold or
use derivative financial instruments for speculative purposes.
Further details of the Group’s risk management policies are
provided in Note 22.
These instruments are initially recognised at fair value on the
trade date and are subsequently measured at their fair value at
the end of the reporting period. The method of recognising the
resulting gain or loss is dependent on whether the derivative is
designated as a hedging instrument and the nature of the items
being hedged.
Changes in the fair value of derivative financial instruments
that are designated and effective as hedges of future cash flows
are recognised directly in equity and any ineffective portion is
recognised immediately in the income statement.
If the cash flow hedge of a highly probable forecasted transaction
results in the recognition of an asset or liability, then, at the time
the asset or liability is recognised, the associated gains or losses
on the derivative that had previously been recognised in equity
are included in the initial measurement of the asset or liability.
For hedges that do not result in the recognition of an asset or a
liability, amounts deferred in equity are recognised in the income
statement in the same period as the hedged item.
For an effective hedge of an exposure to changes in the fair value
of a recognised asset or liability, changes in fair value of the
hedging instrument are recognised in profit or loss at the same
time that the recognised asset or liability that is being hedged is
adjusted for movements in the hedged risk and that adjustment
is also recognised in profit or loss in the same period.
Changes in the fair value of derivative financial instruments that
do not qualify for hedge accounting are recognised in the income
statement as they arise.
Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated, or exercised, or no longer qualifies
for hedge accounting. At that time, any cumulative gain or loss
on the hedging instrument recognised in equity is retained
in equity until the forecasted transaction occurs. If a hedged
transaction is no longer expected to occur, the net cumulative
gain or loss recognised in equity is transferred to profit or loss
for the period.
Derivatives embedded in other financial instruments or other
host contracts are treated as separate derivatives when their
risks and characteristics are not closely related to those of host
contracts and the host contracts are not carried at fair value with
unrealised gains or losses reported in the income statement.
Financial statements 1. Accounting policies (continued)
n) Share schemes
WHSmith Employee Benefit Trust
The shares held by the WHSmith Employee Benefit Trust are
valued at the historical cost of the shares acquired. They are
deducted in arriving at shareholders’ funds and are presented
as an Other reserve.
Share-based payments
Employees of the Group receive part of their remuneration in the
form of share-based payment transactions, whereby employees
render services in exchange for shares or rights over shares
(equity settled transactions).
Equity settled share-based payments are measured at fair
value at the date of grant. The fair value is calculated using an
appropriate option pricing model. The fair value is expensed to
the income statement on a straight-line basis over the vesting
period, based on the Group’s estimate of the number of shares
that will eventually vest.
For cash-settled share-based payments, a liability is recognised
at the current fair value determined at each balance sheet date,
taking into account performance conditions and the extent
to which employees have rendered service to date, with any
changes in fair value recognised in the profit or loss for the year.
o) Dividends
Final dividends are recorded in the financial statements
in the period in which they are approved by the Company’s
shareholders. Interim dividends are recorded in the period in
which they are approved and paid.
p) Share capital, Share premium and Other reserves
Ordinary shares are classified as equity. Share premium arises
on the excess between the fair value of the shares issued and
the par value of the shares issued. Incremental costs directly
attributable to the issue of new shares or options are shown in
equity as a deduction, net of tax, against share premium. The par
value of shares repurchased and cancelled under the Group’s
share buyback programme is reclassified from Share capital to
the Capital redemption reserve.
For a description of Other reserves, see Note 26.
q) Critical accounting judgements and key sources of
estimation uncertainty
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make judgements, estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities. Actual results could differ from
these estimates and any subsequent changes are accounted for
with an effect on income at the time such updated information
becomes available.
The most critical accounting judgements and sources of
estimation uncertainty in determining the financial condition
and results of the Group are those requiring the greatest
degree of subjective or complex judgement. These relate to
the classification of items as non-underlying, assessment
of lease substitution rights, determination of the lease term,
determination of the incremental borrowing rate, valuation of
retirement benefit obligations, valuation of goodwill and other
non-current assets and inventory valuation.
Critical accounting judgements
Non-underlying items
The Group has chosen to present a Headline measure of profit
and earnings per share which excludes certain items that
are considered non-underlying and exceptional due to their
size, nature or incidence, and are not considered to be part
of the normal operating costs of the Group. These costs may
include the financial effect of non-underlying items which are
considered exceptional and occur infrequently such as, inter
alia, restructuring costs linked to a Board agreed programme,
amortisation of acquired intangible assets, costs relating to
business combinations, significant items related to pension
schemes, and impairment charges and items meeting the
definition of non-underlying specifically related to the Covid-19
pandemic, and the related tax effect of these items. The Group
believes that they provide additional useful information to users
of the financial statements to enable a better understanding of
the Group’s underlying financial performance.
The classification of items as non-underlying requires significant
management judgement. The definition of non-underlying items
has been applied consistently year on year. Further details of
non-underlying items are provided in Note 4.
IFRS 16 Lease accounting
Substantive substitution rights
Judgement is required in determining whether a contract
meets the definition of a lease under IFRS 16. Management has
determined that certain retail concession contracts give the
landlord substantive substitution rights because the contract
gives the landlord rights to relocate the retail space occupied
by the Group. In such cases, management has concluded that
there is not an identified asset and therefore such contracts
are outside the scope of IFRS 16. For these contracts, the
Group recognises the payments as an operating expense on a
straight-line basis over the term of the contract unless another
systematic basis is more representative of the time pattern
in which economic benefits from the underlying contract are
consumed. The value of such contracts excluded from the lease
liability on transition to IFRS 16 is £412m, see Note 29 (i).
Determination of lease term
In determining the lease term for contracts that have options to
extend or terminate early, management has applied judgement
in determining the likelihood of whether such options will be
exercised. This is based on the length of time remaining before
the option is exercisable, performance of the individual store and
the trading forecasts.
Determination of Incremental Borrowing Rate ('IBR')
The application of IFRS 16 requires judgement around the
calculation of the IBR. This is determined on a lease-by-lease
basis based on the right-of-use asset in a similar economic
environment and taking into account the risk-free rate, adjusted
for factors such as credit rating and lease term.
101
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
1. Accounting policies (continued)
q) Critical accounting judgements and key sources of
estimation uncertainty (continued)
Sources of estimation uncertainty
Retirement benefit obligation
The Group recognises and discloses its retirement benefit
obligation in accordance with the measurement and
presentational requirement of IAS 19 ‘Retirement Benefit
Obligations’. The calculations include a number of judgements
and estimations in respect of the discount rate, inflation
assumptions, the rate of increase in salaries, and life expectancy,
among others. Changes in these assumptions can have a
significant effect on the value of the retirement benefit obligation.
Further information and sensitivity analysis in respect of the
Group’s retirement benefit obligation is included in Note 5.
Goodwill impairment review
The Group is required to review goodwill annually to determine if
any impairment has occurred. Value-in-use calculations require
the use of estimates in relation to future cash flows and suitable
discount rates. A sensitivity analysis showed that no reasonably
possible change in assumptions would lead to an impairment of
goodwill in the next financial year (see Note 11).
Further information in respect of the Group’s goodwill and other
intangible assets is included in Note 11.
Intangible assets, property, plant and equipment and
right-of-use asset impairment reviews
Property, plant and equipment, right-of use assets and intangible
assets are reviewed for impairment if events or changes in
circumstances indicate that the carrying amount may not be
recoverable. When a review for impairment is conducted,
the recoverable amount of an asset or a cash-generating unit is
determined based on value-in-use calculations prepared on the
basis of management’s assumptions and estimates.
The key assumptions in the value-in-use calculations include
growth rates of revenue and expenses, discount rates and
likelihood of lease renewal. Due to the ongoing Covid-19 global
pandemic, there is an increased level of uncertainty in all of
the above assumptions such that a reasonably possible change
in these assumptions could lead to a material change in the
carrying value of assets.
Further information in respect of the Group’s property, plant and
equipment and right-of-use assets is included in Notes 12 and
13 respectively.
Inventory valuation
Inventory is carried at the lower of cost and net realisable
value which requires the estimation of sell through rates, and
the eventual sales price of goods to customers in the future.
Any difference between the expected and the actual sales
price achieved will be accounted for in the period in which the
sale is made. A description of the Group’s accounting policy
in respect of inventories is included in Note 1(h). A sensitivity
analysis has been carried out on the calculation of inventory
provisions, including consideration of the uncertainties arising
from Covid-19. The key assumption driving the stock provision
calculation is forecast revenue. A 10 per cent change in the
revenue assumptions applied in the provision calculation,
representing a reasonably possible outcome, would reduce the
net realisable value of inventories by £2m.
102 WH Smith PLC Annual Report and Accounts 2020
Financial statements 2. Segmental analysis of results
For management and financial reporting purposes, the Group is organised into two operating divisions and reportable segments –
Travel and High Street. The Travel operating segment includes both MRG and InMotion from the dates of acquisition, as the
MRG and InMotion operations share similar economic characteristics with Travel and are managed within the Travel segment.
For further information in relation to the acquisition of MRG in the current year, and InMotion in the prior year, see Note 27.
The Group’s operating segments are based on the reports reviewed by the Board of Directors (who are collectively considered to be
the chief operating decision maker) to make strategic decisions and allocate resources.
IFRS 8 requires segment information to be presented on the same basis as that used by the Board for assessing performance and
allocating resources. The information presented to the Board is prepared in accordance with the Group's IFRS accounting policies,
with the exception of IFRS 16, and is shown below as Headline information in Section b). A reconciliation to statutory measures is
provided below in accordance with IFRS 8, and in the Glossary on page 146 (Note A2).
a) Group revenue
£m
Travel
High Street
Group revenue
b) Group results
£m
Travel trading (loss)/profit
High Street trading (loss)/profit
Group (loss)/profit from trading operations
Unallocated costs
Group operating (loss)/profit before
non-underlying items
Non-underlying items (Note 4)
Group operating (loss)/profit
Finance costs
(Loss)/profit before tax
Income tax credit/(expense)
(Loss)/profit for the year
2020
553
468
1,021
2019
817
580
1,397
2020
Non-
underlying
items (pre-
IFRS 16)
–
–
–
–
–
(157)
(157)
–
(157)
18
(139)
Headline1
(33)
(10)
(43)
(17)
(60)
–
(60)
(9)
(69)
16
(53)
IFRS 16
6
6
12
–
12
(55)
(43)
(11)
(54)
7
(47)
2019
Non-
underlying
items
–
–
–
–
–
(20)
(20)
–
(20)
1
(19)
Total
(27)
(4)
(31)
(17)
(48)
(212)
(260)
(20)
(280)
41
(239)
Headline
117
60
177
(17)
160
–
160
(5)
155
(28)
127
Total
117
60
177
(17)
160
(20)
140
(5)
135
(27)
108
1 Presented on a pre-IFRS 16 basis. Alternative Performance Measures are defined and explained in the Glossary on page 146.
Included within Travel revenue and trading (loss)/profit is International revenue of £209m (2019: £252m) and International trading
loss of £(32)m (2019: profit of £20m). International revenue includes revenue from the USA of £116m (2019: £94m) and revenue from
Australia of £38m (2019: £57m).
c) Other segmental items
£m
Capital additions1
Depreciation and amortisation of
non-current assets1
Depreciation of right-of-use assets
Impairment of non-current assets2
Impairment of right-of-use assets3
1 Excludes right-of-use assets under IFRS 16.
2020
High
Travel
48
Street Unallocated
–
24
(32)
(52)
–
–
(23)
(52)
–
–
–
(6)
(40)
(95)
Group
72
(55)
(110)
(40)
(95)
2019
High
Street
30
(25)
–
–
–
Travel
35
(25)
–
(1)
–
Group
65
(50)
–
(1)
–
2 Impairment charges relating to non-current assets for the year ended 31 August 2020 as a result of the impact of Covid-19 which have been included in Non-underlying items as described in Note 4.
3 Impairment charges relating to right-of-use assets for the year ended 31 August 2020 as a result of the impact of Covid-19 which have been included in Non-underlying items as described in Note 4.
103
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
3. Group operating profit
£m
Revenue
Cost of sales
Gross profit
Distribution costs1
Administrative expenses
Other income2
Non-underlying items (Note 4)
Group operating (loss)/profit
2020
Non-
underlying
items
–
–
–
–
–
–
(212)
(212)
Headline
1,021
(441)
580
(538)
(92)
2
–
(48)
2019
Non-
underlying
items
–
–
–
–
–
–
(20)
(20)
Total
1,021
(441)
580
(538)
(92)
2
(212)
(260)
Headline
1,397
(552)
845
(592)
(100)
7
–
160
Total
1,397
(552)
845
(592)
(100)
7
(20)
140
1 During the year there was no impairment charge (2019: £1m) for property, plant and equipment and other intangible assets included in distribution costs. Impairment charges related to Covid-19
are included in non-underlying items. See Note 4.
2 Other income is profit attributable to property and the sale of property, plant and equipment. The prior year includes the sale of a head office building.
£m
Cost of inventories recognised as an expense
Write-down of inventories in the year
Depreciation of property, plant and equipment
Depreciation of right-of-use assets
– land and buildings
– other
Amortisation of intangible assets
Impairment of property, plant and equipment
Impairment of right-of-use assets
Impairment of intangibles
(Income)/expenses relating to leasing:
– expense relating to short-term leases
– expense relating to variable lease payments not included in the measurement of the lease liability
– income relating to Covid-19 rent reductions
Net operating lease charges
– land and buildings
– equipment and vehicles
Other occupancy costs
Staff costs (Note 6)
Government grant income
Auditors’ remuneration (see below)
Audit services
Fees payable to the Group’s auditors, included in the income statement, relate to:
Fees payable to the Group’s auditors for the audit of the Group’s financial statements
Fees payable to the Group’s auditors for other services to the Group including the audit of the
Company’s subsidiaries
Total audit and audit-related services
Non-audit services
Fees payable to the Group’s auditors for other services:
Reporting accountant services
All other non-audit services
Non-audit fees including taxation and other services
Total auditors’ remuneration
2020
441
14
43
105
5
12
39
95
1
22
12
(15)
–
–
49
217
(22)
0.8
0.4
1.2
0.4
0.1
0.5
1.7
2019
552
4
41
–
–
9
1
–
–
–
–
–
236
–
69
248
–
0.5
0.1
0.6
0.3
–
0.3
0.9
Included in Administrative expenses is the auditors’ remuneration, including expenses, for audit and non-audit services, payable to
the Group’s auditors PricewaterhouseCoopers LLP and its associates as set out above. A description of the work performed by the
Audit Committee is set out in the corporate governance section of the Directors’ report and includes an explanation of how auditor
objectivity and independence are safeguarded when non-audit services are provided by auditors.
104 WH Smith PLC Annual Report and Accounts 2020
Financial statements 4. Non-underlying items
Items which are not considered part of the normal operating costs of the business are non-recurring and are considered
exceptional because of their size, nature or incidence, are treated as non-underlying items and disclosed separately. Further details
of non-underlying items are included in Note 1, Accounting policies and in the Strategic report on page 16.
£m
Costs relating to business combinations
– Transaction costs
– Integration costs
Amortisation of acquired intangible assets
High Street business review
Pension past service cost
Costs directly attributable to Covid-19
– Impairment of property, plant and equipment
– Impairment of intangible assets
– Impairment of right-of-use assets
– Write-down of inventories
– Restructuring costs
– Other
Non-underlying items, before tax
Tax credit on non-underlying items
Non-underlying item, after tax
2020
2019
11
9
3
–
14
39
1
95
14
25
1
212
(25)
187
6
5
2
7
–
–
–
–
–
–
–
20
(1)
19
Non-underlying items recognised in the period are as follows:
Costs relating to business combinations
During the year, the Group incurred transaction and integration costs of £20m in relation to the acquisition of Marshall Retail Group
('MRG'), which completed on 20 December 2019. Further information on the acquisition of MRG is included in Note 27.
Amortisation of acquired intangible assets
Amortisation of acquired intangible assets primarily relates to the MRG and InMotion brands (see Note 11).
Pension past service cost
Past service cost of £14m has been recognised in the year ended 31 August 2020. This relates to equalisation of pension benefits
between men and women over the period from 1 April 1992 to 29 July 1993 ('Barber equalisation'). The WHSmith Pension Trust has
historically been administered assuming gender equalisation was achieved on 1 April 1992, and thus a Barber equalisation window
of 17 May 1990 to 1 April 1992 applied. A new Trust Deed and Rules reflecting the equalisation of normal retirement ages at 65 was
executed on 29 July 1993. It has since been determined that Barber equalisation was not effective until 29 July 1993. Accordingly, this
past service cost is the expected cost of providing these benefits based on a normal retirement age of 60 rather than 65 for the period
between 1 April 1992 and 29 July 1993. See Note 5.
Costs directly attributable to Covid-19
As described in the Strategic report the Covid-19 pandemic has had a substantial impact on the Group's operations. As a result, the
Group has incurred significant costs which have been separately recognised in non-underlying items, in accordance with the Group’s
accounting policy. The charges have arisen as a direct consequence of Covid-19, and reflect the impact of lost revenues as a result of
store closures, and downward revisions to budgeted revenues following government interventions.
Impairment of property, plant and equipment and right-of-use assets
The impact on the Group's operations of Covid-19 is expected to continue during the next year and beyond. As a result, the Group has
carried out a review for potential impairment across the entire store portfolio. The impairment review compared the value-in-use of
individual store cash-generating units, based on management's assumptions regarding likely future trading performance (taking into
account the effect of Covid-19) to the carrying values at 31 August 2020. Following this review, a charge of £135m was recorded within
non-underlying items for impairment of retail store assets, of which £39m relates to property, plant and equipment, £1m relates to
intangible assets and £95m relates to right-of-use assets. Refer to Note 12 for details of impairment of store cash-generating units.
The impairment recognised on a pre-IFRS 16 basis is provided in the Glossary on page 146.
105
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
4. Non-underlying items (continued)
Write-down of inventories
The Group assesses the recoverability of the carrying value of inventories at every reporting period and, where the expected
recoverable amount is lower than the carrying value, a provision is recorded. Provisions of £9m have been recorded against inventory,
which relates to dated and perishable stock and stock subject to obsolescence such as technology and some apparel where the sell
through rate has significantly reduced due to store closures and lower footfall. In addition, since the outbreak of Covid-19 the Group
has incurred stock write-offs of £5m mainly relating to perishable and dated product. The Group has recognised these charges as
non-underlying as they meet the Group's definition of non-underlying.
Restructuring costs
As a result of the impact of Covid-19 on passenger numbers and lower footfall on the UK high street, in August 2020 the Group
announced a review of store operations across both our Travel and High Street businesses. The charge of £21m is principally
attributable to redundancies and restructuring costs relating to that and other corporate office restructuring undertaken by the Group.
In addition the Group has incurred £4m relating to costs of exiting the Paris bookshop and the Brazil joint venture both of which
were as a result of Covid-19. These costs are presented as an adjusting item as they are part of a restructuring programme, and are
considered material and one-off in nature.
A tax credit of £25m has been recognised in relation to the above items.
Prior year non-underlying items
Non-underlying items in 2019 relate to transaction and integration costs of £11m in relation to the acquisition of InMotion, which
completed on 30 November 2018, amortisation of acquired intangible assets of £2m (primarily relating to the InMotion brand), and
costs of £7m relating to the completed High Street business review announced in October 2018.
5. Retirement benefit obligations
WH Smith PLC has operated a number of defined benefit and defined contribution pension plans. The main pension arrangements
for employees are operated through a defined benefit scheme, WHSmith Pension Trust, and a defined contribution scheme,
WHSmith Retirement Savings Plan. The most significant scheme is WHSmith Pension Trust, which is described in Note 5 a) i).
The retirement benefit obligations recognised in the balance sheet for the respective schemes at the relevant reporting dates were:
£m
WHSmith Pension Trust
United News Shops Retirement Benefits Scheme
Retirement benefit obligation recognised in the balance sheet
Recognised as:
Current liabilities
Non-current liabilities
2020
(3)
(1)
(4)
(1)
(3)
2019
(3)
(1)
(4)
(1)
(3)
a) Defined benefit pension schemes
i) The WHSmith Pension Trust
The WHSmith Pension Trust Final Salary Section is a funded final salary defined benefit scheme; it was closed to defined benefit
service accrual on 2 April 2007 and has been closed to new members since 1996. Benefits are based on service and salary at the date
of closure or leaving service, with increases currently based on CPI inflation in deferment and RPI inflation in payment.
The WHSmith Pension Trust is independent of the Group and is administered by a Trustee. The Trustee is responsible for the
administration and management of the scheme on behalf of the members in accordance with the Trust Deed and relevant legislation.
Responsibilities include the investment of funds, the triennial valuation and determining the deficit funding schedule. Under the terms
of the Trust Deed there are ten Trustee directors of which three are appointed by the Sponsor, four are member-nominated directors,
and three are independent. Trustee directors are appointed for a term of six years, and are then eligible for re-appointment.
The WHSmith Pension Trust has assets valued at £1,412m, as at 31 August 2020, managed by third party investment managers.
In September 2005, the Pension Trust Trustee adopted a Liability Driven Investment (LDI) policy where the assets in the investment
fund were invested such that they are expected to alter in value in line with changes in the pension liability caused by changes in
interest rates and inflation. The LDI structure that is in place has a number of inflation and interest rate hedges, with collateral
posted daily to or from the scheme to the relevant counterparty. The risk of failure of counterparties could expose the scheme to loss.
The scheme’s liabilities are also subject to changes in longevity.
The principal risks associated with the Group’s defined benefit pension arrangements are as follows:
Longevity risk
Liabilities are sensitive to life expectancy, with increases in life expectancy leading to an increase in the valuation of liabilities.
106 WH Smith PLC Annual Report and Accounts 2020
Financial statements 5. Retirement benefit obligations (continued)
a) Defined benefit pension schemes(continued)
i) The WHSmith Pension Trust (continued)
Interest rate and inflation risk
Liabilities are sensitive to movements in interest rates and inflation, with lower interest rates or higher inflation leading to an increase
in the valuation of liabilities. As a result of the LDI policy outlined above, these risks are largely hedged.
An Investment Committee of the Trustees to the scheme meets regularly to review the performance of the investment managers and
the scheme as a whole. The Company is represented on this Committee. Although investment decisions are the responsibility of the
Trustee, the Group is an active participant of the investment sub-committee to ensure that pension plan risks are managed efficiently.
The risk of failure of counterparties and of the investment manager is monitored regularly by the Committee. The Trustees have the
right to determine the level of contributions and the Company has agreed with the Trustees a deficit funding schedule.
A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. The latest full
actuarial valuation of the Pension Trust was carried out as at 31 March 2020 by independent actuaries using the projected unit credit
method and has been completed. At 31 March 2020 the deficit was £9m; at 31 March 2017 the deficit was £11m. The Group has
agreed a continuation of the annual funding schedule with the Trustees from March 2020 for the following 5 years, which includes
the deficit recovery contributions and other running costs of just under £3m. During the year ending 31 August 2020, the Group made
a contribution of £3m to the WHSmith Pension Trust (2019: £3m) in accordance with the agreed pension deficit funding schedule,
being £1m of deficit funding payable to the Trustee and £2m in relation to investment management costs. The Group expects the cash
payments for the year ended 31 August 2021 to be £3m. The weighted average duration of the defined benefit obligation is 19 years.
Amounts recognised in the financial statements
Balance sheet
The amounts recognised in the balance sheet under IAS 19 in relation to this plan are as follows:
£m
Present value of the obligations
Fair value of plan assets
Surplus before consideration of asset ceiling
Amounts not recognised due to effect of asset ceiling
Additional liability recognised due to minimum funding requirements
Retirement benefit obligation recognised in the balance sheet
2020
(1,144)
1,412
268
(268)
(3)
(3)
2019
(1,107)
1,461
354
(354)
(3)
(3)
In accordance with the requirements of IFRIC 14 we have recognised the schedule of contributions as a liability of £3m (2019: £3m).
The defined benefit pension schemes are closed to further accrual. The Group does not have an unconditional right to derive
economic benefit from any surplus, as the Trustees retain the right to enhance benefits under the Trust deed, and therefore the
present value of the economic benefits of the IAS 19 surplus in the pension scheme of £268m (2019: £354m) available on a reduction
of future contributions is £nil (2019: £nil). As a result, the Group has not recognised this IAS 19 surplus on the balance sheet. There is
an ongoing actuarial deficit primarily due to the different assumptions and calculation methodologies used compared to those on
interpretation of IAS 19.
Income statement
The amounts recognised in the income statement were as follows:
£m
Net interest cost on the defined benefit liability
Past service cost
2020
–
(14)
(14)
2019
–
–
–
The net interest cost has been included in finance costs (Note 7). Actuarial gains and losses have been reported in the statement of
comprehensive income.
Past service costs of £14m have been recognised in relation to equalisation of pension benefits relating to a period between 1 April
1992 and 29 July 1993 ('Barber equalisation'). The WHSmith Pension Trust has historically been administered assuming gender
equalisation was achieved on 1 April 1992, and thus a 'Barber window' of 17 May 1990 to 1 April 1992 applied. A new Trust Deed and
Rules reflecting the equalisation of normal retirement ages at 65 was executed on 29 July 1993. It has since been determined that
Barber equalisation was not effective until 29 July 1993. Accordingly, this past service cost is the expected cost of providing these
benefits based on a normal retirement age of 60 rather than 65 for the period between 1 April 1992 and 29 July 1993.
This past service cost has been disclosed within Non-underlying items, in accordance with the accounting policy in Note 1.
107
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
5. Retirement benefit obligations (continued)
a) Defined benefit pension schemes(continued)
i) The WHSmith Pension Trust (continued)
Statement of comprehensive income
Total expense recognised in the statement of comprehensive income (‘SOCI’):
£m
Actuarial gain/(loss) on defined benefit obligations arising from experience
Actuarial (loss)/gain on defined benefit obligations arising from changes in financial assumptions
Actuarial gain on defined benefit obligations arising from changes in demographic assumptions
Total actuarial (loss)/gain before consideration of asset ceiling
Return on plan assets excluding amounts included in net interest cost
Loss resulting from changes in amounts not recognised due to effect of asset ceiling excluding amounts
recognised in net interest cost
Gain resulting from changes in additional liability due to minimum funding requirements excluding amounts
recognised in net interest cost
Total actuarial loss recognised in other comprehensive income
2020
(53)
(12)
22
(43)
(38)
92
–
11
2019
2
(165)
22
(141)
190
(52)
–
(3)
A credit of £nil (2019: £nil) was recognised in the statement of comprehensive income in relation to actuarial gains in the year on the
United News Shops Retirement Benefits Scheme.
Movements in the present value of the WHSmith Pension Trust defined benefit scheme assets, obligations and minimum funding
requirement in the current year were as follows:
2020
2019
£m
Assets
Liabilities
Effect
of asset
ceiling and
recognition
of minimum
funding
liability
Net
retirement
benefit
obligation
recognised
At 1 September
Current service cost
Past service cost
Interest income/(expense)
Actuarial gains/(losses)
Contributions from the sponsoring
companies
Benefits paid
At 31 August
1,461
–
–
26
(38)
3
(40)
1,412
(1,107)
–
(14)
(20)
(43)
–
40
(1,144)
(357)
–
–
(6)
92
–
–
(271)
(3)
–
(14)
–
11
3
–
(3)
Effect
of asset
ceiling and
recognition
of minimum
funding
liability
Net
retirement
benefit
obligation
recognised
(297)
–
–
(8)
(52)
–
–
(357)
(3)
–
–
–
(3)
3
–
(3)
Assets
1,277
–
–
35
190
3
(44)
1,461
Liabilities
(983)
–
–
(27)
(141)
–
44
(1,107)
The actual return on scheme assets was a loss of £12m (2019: gain of £225m). During the period, asset returns underperformed the
discount rate, leading to an asset remeasurement loss of £38m. Actuarial losses on scheme liabilities have arisen due to:
experience losses of £53m, as a result of the triennial valuation at 31 March 2020, which applied membership and other demographic
movements over the last 3 years; the lower discount rate and RPI assumptions, offset by higher CPI inflation assumptions resulting in
a loss of £12m; and changes in demographic assumptions that led to a £22m reduction in plan liabilities.
The increase in scheme liabilities combined with a decrease in the scheme assets, resulted in a decrease of £86m in the
unrecognised IAS 19 surplus, to £268m.
108 WH Smith PLC Annual Report and Accounts 2020
Financial statements 5. Retirement benefit obligations (continued)
a) Defined benefit pension schemes (continued)
i) The WHSmith Pension Trust (continued)
An analysis of the defined benefit scheme assets at the balance sheet date is detailed below:
Bonds
– Government bonds
– Corporate bonds
UK
Non-UK
Investment funds1
Derivatives
– Interest rate swaps
– Inflation swaps
– Other2
Cash and cash equivalents3
Total
2020
Quoted
£m
Unquoted
£m
Total
£m
1,157
–
1,157
286
342
324
–
–
–
(240)
1,869
–
–
188
28
(143)
(530)
–
(457)
286
342
512
28
(143)
(530)
(240)
1,412
2019
Quoted
£m
Unquoted
£m
976
223
211
–
–
–
–
54
1,464
–
–
–
90
(369)
258
18
–
(3)
Total
£m
976
223
211
90
(369)
258
18
54
1,461
%
82
20
24
36
2
(10)
(37)
(17)
100
%
67
15
14
6
(25)
18
1
4
100
1 These actively managed pooled funds seek to provide long-term positive returns through diversified assets and strategies.
2 Other derivatives include asset swap contracts and open repurchase agreements.
2 The negative cash and cash equivalents balance relates to our obligation to return cash collateral.
No amount is included in the market value of assets relating to either financial instruments or property occupied by the Group.
The principal long-term assumptions used in the IAS 19 valuation were:
%
Rate of increase in pension payments
Rate of increase in deferred pensions
Discount rate
RPI inflation assumption
CPI inflation assumption
2020
3.04
2.30
1.75
3.10
2.30
2019
3.13
2.20
1.85
3.20
2.20
The mortality assumptions in years underlying the value of the accrued liabilities for 2020 and 2019 are:
Years
Life expectancy at age 65
Member currently aged 65
Member currently aged 45
2020
2019
Male
Female
Male
Female
22.7
23.3
23.8
25.2
22.6
23.5
24.0
25.6
Sensitivity to changes in assumptions
The valuation of the retirement benefit obligation is considered a significant source of estimation uncertainty, see Note 1(q),
and therefore changes in assumptions can have a significant effect on the amounts recognised in the financial statements.
Sensitivity information has been derived using scenario analysis from the actuarial assumptions as at 31 August 2020, while keeping
all other assumptions consistent; in practice, changes in some of the assumptions may be correlated.
£m
Discount rate +/- 0.1% per annum
Inflation assumptions +/- 0.1% per annum
Life expectancy +/- 1 year
Effect on
liabilities
at 31 August
2020
-21/+21
+19/-19
+55/-55
109
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
5. Retirement benefit obligations (continued)
a) Defined benefit pension schemes (continued)
ii) United News Shops Retirement Benefits Scheme
United News Shops Retirement Benefits Scheme (‘UNSRBS’) is closed to new entrants. The scheme provides pension benefits for
pensioners and deferred members based on salary at the date of closure, with increases based on inflation. A full actuarial valuation
of the scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation of the
scheme was carried out at 5 April 2018 by independent actuaries. Following this valuation, the deficit was less than £1m.
The valuation of the UNSRBS used for the IAS 19 disclosures is based on consistent assumptions to those used for valuing
the WHSmith Pension Trust. Scheme assets are stated at their market value at the relevant reporting date. The deficit funding
contributions are immaterial in the context of these financial statements.
£m
Present value of the obligations
Fair value of plan assets
Retirement benefit obligation recognised in the balance sheet
The present value of obligations and fair value of assets are stated below.
2019
(8)
7
(1)
2020
(8)
7
(1)
There was a credit of £nil (2019: £nil) recognised in the statement of comprehensive income in relation to actuarial gains in the year on
the United News Shops Retirement Benefits Scheme.
b) Defined contribution pension scheme
The pension cost charged to income for the Group’s defined contribution schemes amounted to £4m for the year ended 31 August
2020 (2019: £5m).
6. Staff costs and employees
a) Staff costs
The aggregate remuneration of employees was:
£m
Wages and salaries
Social security costs
Other pension costs
Share-based payments
Total Group
b) Employee numbers
The monthly average total number of employees (including executive directors) was:
Total retailing
Support functions
Total Group
7. Finance costs
£m
Interest payable on bank loans and overdrafts
Interest on lease liabilities
Net interest cost on defined benefit pension liabilities
2020
200
13
4
–
217
2019
222
15
5
6
248
2020
14,475
39
14,514
2019
14,286
35
14,321
2020
9
11
–
20
2019
5
–
–
5
Interest expense on lease liabilities of £11m has been recorded for the current year, as a result of the adoption of IFRS 16 'Leases'.
Refer to Note 29 for details of adoption of IFRS 16.
110
WH Smith PLC Annual Report and Accounts 2020
Financial statements 8. Income tax
£m
Tax on (loss)/profit
Standard rate of UK corporation tax 19.00% (2019: 19.00%)
Adjustment in respect of prior year UK corporation tax
Total current tax (credit)/expense
Deferred tax – current year (Note 18)
Deferred tax – prior year (Note 18)
Tax on Headline (loss)/profit
Tax on non-underlying items – current tax
Tax on non-underlying items – deferred tax (Note 18)
Total tax on (loss)/profit
Reconciliation of the taxation credit/expense
£m
Tax on (loss)/profit at standard rate of UK corporation tax 19.00% (2019: 19.00%)
Tax effect of items that are not deductible or not taxable in determining taxable (loss)/profit
Unrecognised tax losses
Differences in overseas tax rates
Adjustment in respect of prior years
Total income tax (credit)/expense
The effective tax rate, before non-underlying items, was 23 per cent (2019: 18 per cent).
2020
(5)
(6)
(11)
(7)
2
(16)
(9)
(16)
(41)
2020
(53)
15
4
(3)
(4)
(41)
2019
32
(4)
28
(1)
1
28
(1)
–
27
2019
26
5
–
–
(4)
27
The UK corporation tax rate is 19 per cent effective from 1 April 2017. In the Spring Budget 2020, the UK Government announced that
from 1 April 2020 the corporation tax rate would remain at 19 per cent (rather than reducing to 17 per cent, as previously enacted).
This new law was substantively enacted on 17 March 2020, and the impact of this change is less than £1m.
9. Dividends
Amounts paid and recognised as distributions to shareholders in the year are as follows:
£m
Dividends
Final dividend for the year ended 31 August 2018 of 38.1p per ordinary share
Interim dividend for the year ended 31 August 2019 of 17.2p per ordinary share
Final dividend for the year ended 31 August 2019 of 41.0p per ordinary share
2020
2019
–
–
47
47
41
19
–
60
The Directors have not declared an interim dividend during the year and do not propose a final dividend in respect of the year ended
31 August 2020.
111
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
10. (Loss)/earnings per share
a) Loss/earnings
£m
(Loss)/profit for the year, attributable to equity holders of the parent
Non-underlying items (Note 4)
Headline (loss)/profit for the year, attributable to equity holders of the parent
b) Weighted average share capital
Millions
Weighted average ordinary shares in issue
Less weighted average ordinary shares held in ESOP Trust
Weighted average shares in issue for earnings per share
Add weighted average number of ordinary shares under option
Weighted average ordinary shares for diluted earnings per share
c) Basic and diluted (Loss)/earnings per share
Pence
Basic (loss)/earnings per share
Adjustment for non-underlying items
Headline basic (loss)/earnings per share
Pence
Diluted (loss)/earnings per share
Adjustment for non-underlying items
Headline diluted (loss)/earnings per share
2020
(239)
187
(52)
2020
120
–
120
–
120
2020
(199.2)
155.9
(43.3)
2020
(199.2)
155.9
(43.3)
2019
106
19
125
2019
108
–
108
1
109
2019
98.1
17.6
115.7
2019
97.2
17.5
114.7
Diluted earnings per share takes into account various share awards and share options including SAYE schemes, which are expected
to vest, and for which a sum below fair value will be paid. The calculation of EPS on a pre-IFRS 16 basis is provided in the Glossary on
page 146.
112
WH Smith PLC Annual Report and Accounts 2020
Financial statements 11. Intangible assets
£m
Cost
At 1 September 2019
Additions
Acquisitions (Note 27)
Disposals
Foreign exchange
At 31 August 2020
Accumulated amortisation
At 1 September 2019
Amortisation charge
Impairment charge
Disposals
Foreign exchange
At 31 August 2020
Net book value at 31 August 2020
Cost
At 1 September 2018
Additions
Acquisitions (Note 27)
Foreign exchange
At 31 August 2019
Accumulated amortisation
At 1 September 2018
Amortisation charge
Impairment charge
Foreign exchange
At 31 August 2019
Net book value at 31 August 2019
Brands and
franchise
contracts
Tenancy
rights
Goodwill
Software
Total
176
–
258
–
(16)
418
–
–
–
–
–
–
418
41
–
128
7
176
–
–
–
–
–
176
16
–
29
–
(2)
43
1
3
–
–
–
4
39
1
–
15
–
16
–
1
–
–
1
15
13
–
–
–
–
13
8
–
–
–
–
8
5
13
–
–
–
13
8
–
–
–
8
5
109
11
1
(25)
–
96
80
9
1
(25)
–
65
31
97
11
1
–
109
72
8
–
–
80
29
314
11
288
(25)
(18)
570
89
12
1
(25)
–
77
493
152
11
144
7
314
80
9
–
–
89
225
Additions to goodwill in the year relate to the acquisition of Marshall Retail Group. On 20 December 2019, the Group acquired the
entire issued share capital of Marshall Retail Group ('MRG'), for a total cash consideration of USD $402m (£317m) resulting in
the recognition of goodwill of £258m, including an £8m loss on a forward contract used to hedge the exposure on the US dollar
purchase consideration. The goodwill arising on the acquisition of MRG has been allocated to the Travel segment. See Note 27 for
further information.
Goodwill of USD $83m (£62m) relating to the acquisition of InMotion in 2018 is expected to be deductible for tax purposes in the future.
The carrying value of goodwill is allocated to the segmental businesses as follows:
£m
Travel
High Street
2020
403
15
418
2019
161
15
176
Included within Tenancy rights are certain assets that are considered to have an indefinite life of £4m (2019: £4m), representing
certain rights under tenancy agreements, which include the right to renew leases, therefore no amortisation has been charged.
Management has determined that the useful economic life of these assets is indefinite because the Company can continue to occupy
and trade from certain premises for an indefinite period. These assets are reviewed annually for indicators of impairment.
113
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
11. Intangible assets (continued)
Impairment of goodwill and intangible assets
The Group tests goodwill for impairment annually or where there is an indication that goodwill might be impaired. For impairment
testing purposes, the Group has determined that each store is a separate CGU, and goodwill is allocated to groups of CGUs in a
manner that is consistent with our operating segments, as this reflects the lowest level at which goodwill is monitored. All goodwill
has arisen on acquisitions of groups of retail stores. These acquisitions are then integrated into either the High Street or Travel
operating segments as appropriate. Acquired brands are considered together with goodwill for impairment testing purposes, and are
therefore considered annually for impairment.
Goodwill has been tested for impairment by comparing the carrying amount of each group of CGUs, including goodwill and acquired
brands, with the recoverable amount determined from value-in-use calculations. The value-in-use of each group of CGUs has been
calculated using cash flows derived from the Group's latest Board-approved budget and three year plan, initially extrapolated to five
years and taking into account the projected impact of Covid-19. The forecasts reflect knowledge of the current market, together with
the Group’s expectations on the future achievable growth and committed store openings. Cash flows beyond the initial forecast period
are extrapolated using estimated long-term growth rates.
For certain groups of CGUs, additional adjustments to cash flows have been made during the extrapolation process for an extended
period of up to 15 years before calculating a terminal value. This extended period of time is required to establish a normalised cash
flow base on which a terminal value calculation can be appropriately calculated. The main reasons for cash flow adjustments include
the need to forecast lease renewals under IFRS 16, and the unwinding of certain cash flow benefits arising from acquisitions in
North America.
The key assumptions on which forecast three-year cash flows of the CGUs are based include revenue growth, product mix and
operating costs, long-term growth rates and the pre-tax discount rate:
• The values assigned to each of the revenue, product mix and operating cost assumptions were determined based on the
extrapolation of historical trends within the Group and external information on expected future trends in the travel and high street
retail sectors.
• The pre-tax discount rates are derived from the Group’s weighted average cost of capital, which has been calculated using the
capital asset pricing model, the inputs of which include a risk-free rate, equity risk premium, Group size premium and a risk
adjustment (beta). The pre-tax discount rate used in the calculation was 8.9 per cent.
• The long-term growth rate assumptions are between 0 per cent and 2 per cent.
The value-in-use estimates indicated that the recoverable amount of goodwill exceeded the carrying value for the groups of CGUs.
As a result, no impairment has been recognised in respect of the carrying value of goodwill in the year (2019: £nil).
As disclosed in Note 1, Accounting policies, the forecast cash flows used within the impairment model are based on assumptions
which are sources of estimation uncertainty and it is possible that significant changes to these assumptions could lead to an
impairment of goodwill and acquired brands. Given the significant uncertainty surrounding the impact of Covid-19 on the Group’s
operations and on the global economy, management have considered a range of sensitivities on each of the key assumptions, with
other variables held constant. The sensitivities include applying a 10 per cent reduction in the revenue assumption in the next financial
year from the base cash flow projections, representing a slower recovery from the impact of Covid-19; increases in the discount rate
by 1 per cent and reductions in the long-term growth rates to 0 per cent. Under these severe scenarios, the estimated recoverable
amount of goodwill and acquired brands still exceeded the carrying value.
The sensitivity analysis showed that no reasonably possible change in assumptions would lead to an impairment.
114
WH Smith PLC Annual Report and Accounts 2020
Financial statements 12. Property, plant and equipment
£m
Cost or valuation:
At 1 September 2019
Adjustment on initial application of IFRS 161
At 1 September 2019
Additions
Acquisitions (Note 27)
Disposals
Foreign exchange
At 31 August 2020
Accumulated depreciation:
At 31 August 2019
Adjustment on initial application of IFRS 161
At 1 September 2019
Depreciation charge
Impairment charge
Disposals
At 31 August 2020
Net book value at 31 August 2020
Cost or valuation:
At 1 September 2018
Additions
Acquisitions (Note 27)
Disposals
Foreign exchange
At 31 August 2019
Accumulated depreciation:
At 1 September 2018
Depreciation charge
Impairment charge
Disposals
Foreign exchange
At 31 August 2019
Net book value at 31 August 2019
Land and buildings
Freehold
properties
Leasehold
improvements
Fixtures
and fittings
Equipment
and vehicles
15
–
15
–
–
–
–
15
10
–
10
–
–
–
10
5
22
–
–
(7)
–
15
15
1
–
(6)
–
10
5
236
(3)
233
28
18
(5)
(2)
272
147
1
148
22
20
(5)
185
87
207
26
6
(4)
1
236
134
16
–
(4)
1
147
89
168
(5)
163
23
14
(1)
(1)
198
103
(1)
102
12
14
(1)
127
71
149
18
3
(3)
1
168
93
12
1
(3)
–
103
65
120
(22)
98
10
2
(1)
(1)
108
78
(12)
66
9
5
(1)
79
29
110
10
1
(1)
–
120
67
12
–
(1)
–
78
42
Total
539
(30)
509
61
34
(7)
(4)
593
338
(12)
326
43
39
(7)
401
192
488
54
10
(15)
2
539
309
41
1
(14)
1
338
201
¹ The adjustment is in respect of assets treated as finance leases under the previous standard, IAS 17 'Leases', transferred to right-of-use assets, with a net book value of £15m and impairment
charge of £3m on the date of initial application of IFRS 16.
Impairment of property, plant and equipment
For impairment testing purposes, the Group has determined that each store is a separate CGU. Each CGU is tested for impairment
at the balance sheet date if any indicators of impairment have been identified. The significant disruption to trading as a result of the
Covid-19 pandemic has been identified as an indicator of impairment, and therefore all CGUs have been tested for impairment as at
the balance sheet date.
115
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
12. Property, plant and equipment (continued)
Property, plant and equipment and right-of-use assets have been tested for impairment by comparing the carrying amount of each
CGU with its recoverable amount determined from value-in-use calculations. It was determined that value in use was higher than
fair value less costs to sell as a result of the significant impact on fair values as a result of Covid-19. The value-in-use of each CGU
has been calculated using discounted cash flows derived from the Group's latest Board-approved budget and three-year plan, taking
into account the projected impact of Covid-19, and reflects historic performance and knowledge of the current market, together with
the Group’s views on the future achievable growth. Cash flows beyond this three-year period are extrapolated using growth rates and
inflation rates appropriate to each store’s location. Cash flows have been included for the remaining lease life for the specific store.
These growth rates do not exceed the long-term growth rate for the Group’s retail businesses in the relevant territory. Where stores
have a relatively short remaining lease life, an extension to the lease has been assumed where management consider it likely that an
extension will be granted.
The key assumptions on which the forecast three-year cash flows of the CGUs are based include sales and the pre-tax discount
rate. Other assumptions in the model relate to gross margin, cost inflation and longer-term growth rates. The forecasts used in the
impairment review are based on management's best estimate of revenue reductions versus a 'pre-Covid' base, and the recovery in
revenue over the forecast period. In developing these forecasts, management have used available information, including historical
knowledge of the store level cash flows, and knowledge gained during the pandemic up to the year end date.
The forecasts for the year for our High Street business assume that like-for-like sales will be initially lower by around 25 per cent on
average and recover to around 14 per cent below pre-Covid levels by the end of August 2021. The recovery is non-linear and is affected
by monthly seasonality.
In Travel UK, revenue is assumed to be down around 65 per cent on average across all formats, recovering to around 40 per cent
down by the end of the year. Our International locations outside of North America assume similar levels of decline. In North America,
revenue is assumed to be down around 55 per cent in the early part of the next financial year, improving to down 25 per cent by the end
of the year.
The second and third years of the three year plan include further gradual recoveries across all locations. Revenue is not assumed to
recover to pre-Covid levels within the three year plan period.
The pre-tax discount rates are derived from the Group’s weighted average cost of capital, which has been calculated using the capital
asset pricing model, the inputs of which include the risk-free rate, equity risk premium, Group size premium and a risk adjustment
(beta). The pre-tax discount rate used in the calculation was 8.9 per cent.
Where the value-in-use was less than the carrying value of the CGU, an impairment of property, plant and equipment and right-of-
use asset was recorded. These stores were impaired to their recoverable amount of £203m, which is their carrying value at year end.
The Group has recognised an impairment charge of £39m to property, plant and equipment, £1m to intangible assets and £95m to
right-of-use assets as a result of impairment testing (2019: £1m). These impairments have been presented as non-underlying items
in the current year (see Note 4).
As disclosed in Note 1, Accounting policies, the forecast cash flows used within the impairment model are based on assumptions
which are sources of estimation uncertainty and changes to these assumptions could lead to further impairments to assets. Given the
significant uncertainty regarding the impact of Covid-19 on the Group’s operations and on the global economy, management have
considered sensitivities to the impairment charge as a result of changes to the estimate of future revenues achieved by the stores.
The Group has applied certain sensitivities in isolation to demonstrate the impact on the impairment of changes in key assumptions.
The most significant assumption is the revenue assumption. A further decrease in revenue of 10 per cent versus the pre-Covid base
for the year ended 31 August 2021 to reflect a potential slower recovery from the pandemic, with no change to subsequent forecast
revenue growth rate assumptions, would result in a £19m increase in the impairment charge of retail store assets in the year ended
31 August 2020. An increase or decrease of 1 per cent in the discount rate would result in an increase or decrease in the impairment
charge of £5m.
On 31 October 2020, the UK Government announced a four-week lockdown across England. We have concluded that this is a
non-adjusting post balance sheet event. See Note 28 for the estimated financial impact of this announcement.
Other changes in assumptions have been modelled and have shown that any reasonably possible changes would not lead to a
significant impact on the impairment charge. Other modelled assumption changes include margin reductions, growth rate reductions
or further cost inflation in High Street. In Travel, we have modelled slower recovery in UK and North American airport traffic and
reductions in long-term growth rate assumptions.
The impairment assessment has also been performed on a pre-IFRS 16 basis. See Glossary on page 146.
116
WH Smith PLC Annual Report and Accounts 2020
Financial statements 13. Right-of-use assets
£m
At 1 September 2019
Additions
Acquisitions (Note 27)
Modifications and remeasurements
Disposals
Depreciation charge
Impairment charge
Foreign exchange
Net book value at 31 August 2020
Land and
buildings
439
98
108
(35)
(2)
(105)
(95)
(8)
400
Other
18
–
–
–
–
(5)
–
–
13
Total
457
98
108
(35)
(2)
(110)
(95)
(8)
413
Adoption of IFRS 16 'Leases'
The Group has adopted IFRS 16 'Leases' for the first time in the year ended 31 August 2020. The modified retrospective transition
methodology has been applied as at the initial date of application, 1 September 2019, and prior period comparative results have not
been adjusted. Further information regarding the impact of initial adoption of IFRS 16 is provided in Note 29. The information on the
Group's leasing activities is included in Note 16, Lease liabilities.
On adoption of IFRS 16, the Group has performed an impairment test on the right-of-use assets on a lease-by-lease basis as at the
transition date, in accordance with IAS 36. Further information regarding this impairment test is provided in Note 29. On transition
the Group has recorded an impairment of £18m to the opening balance of the right-of-use assets and £3m to property, plant and
equipment with a corresponding adjustment to the opening reserves.
Impairment of right-of-use assets
Right-of-use assets of £95m have been impaired in the year, as a result of the impact of Covid-19. This impairment charge has
been presented in non-underlying items (see Note 4). The approach to impairment testing is described in detail in Note 12, Property,
plant and equipment.
117
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
14. Trade and other receivables
£m
Current debtors
Trade debtors
Other debtors
Prepayments
Accrued income
Non-current debtors
Other debtors
Prepayments
Total trade and other receivables
2020
2019
22
8
10
9
49
6
3
58
34
12
10
17
73
2
8
83
Included in accrued income is £3m (2019: £10m) of accrued supplier income relating to retrospective discounts and other promotional
and marketing income that has been earned but not yet invoiced. Supplier income that has been invoiced but not yet settled against
trade payables balances is included in trade payables where the Group has a right to offset.
Included within other receivables is £1m of government grants receivable (2019: £nil).
The ageing of the Group’s current trade and other receivables is as follows:
£m
Trade and other receivables gross
Expected credit losses
Trade and other receivables net
Of which:
Amounts neither impaired nor past due on the reporting date
Amounts past due but not impaired:
Less than one month old
Between one and three months old
Between three and six months old
Between six months and one year old
Trade and other receivables net carrying amount
2020
39
(3)
36
26
4
2
2
2
36
2019
50
(2)
48
37
6
3
1
1
48
The Group has limited exposure to ECLs due to the business model. An allowance has been made for lifetime expected credit losses
from sales at 31 August 2020 of £3m (31 August 2019: £2m). The ageing analysis of these receivables is given in the table below.
This expected credit loss allowance reflects the application of the Group’s provisioning policy in respect of bad and doubtful debts
and is based upon the difference between the receivable value and the estimated net collectible amount. The Group establishes its
provision for bad and doubtful debts by reference to past default experience.
Ageing analysis of bad and doubtful debt provisions:
£m
Less than one month old
Between one and three months old
Between three and six months old
Between six months and one year old
2020
–
–
1
2
3
2019
1
–
–
1
2
No trade and other receivables that would have been past due or impaired were renegotiated during the year. No interest is charged
on the receivables balance. The other classes within trade and other receivables do not include impaired assets. The Group does not
hold collateral over these balances. The directors consider that the carrying amount of trade and other receivables approximates their
fair value.
118
WH Smith PLC Annual Report and Accounts 2020
Financial statements 15. Trade and other payables – current
£m
Trade payables
Other tax and social security
Other creditors
Accruals
Deferred income
2020
60
24
67
87
3
241
2019
104
20
72
50
4
250
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 55 days (2019: 57 days). The directors consider that the carrying amount of trade and other payables
approximates their fair value.
Trade payables is stated net of £2m (2019: £9m) amounts receivable from suppliers in relation to supplier income, that has been
invoiced, for which the Group has the right to set off against amounts payable at the balance sheet date.
16. Lease liabilities
£m
At 31 August 2019
Adjustment on initial application of IFRS 16
At 1 September 2019
Additions
Acquisitions (see Note 27)
Interest costs
Payments
Modifications and remeasurements
Disposals
Foreign exchange
At 31 August 2020
£m
Analysis of total lease liabilities:
Non-current
Current
Total
Land and
buildings
–
476
476
87
106
11
(72)
(50)
(2)
(8)
548
2020
Other
14
3
17
–
–
–
(6)
–
–
–
11
Total
14
479
493
87
106
11
(78)
(50)
(2)
(8)
559
2020
429
130
559
The Group leases land and buildings for its retail stores, distribution centres, storage locations and office property. These leases have
an average remaining lease term of 4 years. Some leases include an option to break before the end of the contract term or an option
to renew the lease for an additional term after the end of the term. Management assess the lease term at inception based on the facts
and circumstances applicable to each property.
Other leases are mainly forklift trucks for the retail stores and distribution centres, office equipment and vehicles. These leases have
an average remaining lease term of 3 years.
The Group reviews the retail lease portfolio on an ongoing basis, taking into account retail performance and future trading
expectations. The Group may exercise extension options, negotiate lease extensions or modifications. In other instances, the Group
may exercise break options, negotiate lease reductions or decide not to negotiate a lease extension at the end of the lease term.
Certain property leases contain rent review terms that require rent to be adjusted on a periodic basis which may be subject to market
rent or increases in inflation measurements.
Many of the Group's property leases, particularly in Travel locations, also incur payments based on a percentage of revenue (variable
lease payments) achieved at the location. In line with IFRS 16, variable lease payments which are not based on an index or rate are
not included in the lease liability. See Note 3 for the expense charged to the Income statement relating to variable lease payments not
included in the measurement of the lease liability.
119
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
16. Lease liabilities (continued)
In response to the Covid-19 pandemic, an amendment was issued to IFRS 16 in June 2020. This amendment (practical expedient)
allows the impact on lease liability of temporary rent reductions/waivers affecting rent payments due on or before June 2021,
to be recognised in the Income statement in the period they are received, rather than as lease modifications, which would require
the remeasurement of the lease liability using a revised discount rate with a corresponding adjustment to the right-of-use asset.
The Group has applied this practical expedient to all Covid-19 rent reductions/waivers that meet the requirements of the amendment,
and this has resulted in a credit to the Income statement of £15m for the year ended 31 August 2020.
The Group’s accounting policy for leases is set out in Note 1. Details of Income statement charges and income for leases are set
out in Note 3. The right-of-use asset categories on which depreciation is incurred are presented in Note 13. Interest expense
incurred on lease liabilities is presented in Note 7. The maturity of undiscounted future lease liabilities are set out in Note 22.
Commitments relating to operating leases for the year ended 31 August 2019 are presented in Note 30.
The total cash outflow for leases in the financial year was £101m. This includes cash outflow for short-term leases of £16m and
variable lease payments (not included in the measurement of lease liability) of £7m. The total future income from sub-leasing the
right-of-use assets is £1m.
17. Provisions
£m
At 1 September 2019
Adjustment on initial application of IFRS 16
Charge in the year
Utilised in year
Unwinding of discount
At 31 August 2020
£m
At 1 September 2018
Charge in the year
Utilised in year
Unwinding of discount
At 31 August 2019
Total provisions are split between current and non-current liabilities as follows:
£m
Included in current liabilities
Included in non-current liabilities
Property
provision
3
(2)
12
–
–
13
Contingent
consideration
provision
2
–
–
(1)
–
1
Property
provision
5
–
(2)
–
3
Contingent
consideration
provision
1
1
–
–
2
2020
5
9
14
Total
5
(2)
12
(1)
–
14
Total
6
1
(2)
–
5
2019
1
4
5
At 31 August 2019, £2m of onerous leases were included within property obligations, being the estimated future unavoidable lease
costs in respect of non-trading properties, stores earmarked for closure and loss-making stores. On adoption of IFRS 16, Leases,
those onerous lease obligations related to right-of-use assets have been released and impairments have been recognised against the
related right-of-use asset (refer to Note 29 adoption of IFRS 16 Leases and Note 1).
Property provisions charged in the year relate to reinstatement liabilities for stores where the long-term viability has been
impacted by Covid-19. This charge has been recorded in right-of-use assets and tested for impairment as described in Note 12.
Information regarding Property provisions on a pre-IFRS 16 basis is provided in the Glossary on page 146.
120 WH Smith PLC Annual Report and Accounts 2020
Financial statements 18. Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and
prior years.
£m
At 1 September 2019
On acquisition of subsidiaries
Adjustment on initial application of IFRS 16
Charged to equity
Credited/(charged) to income
At 31 August 2020
Accelerated
tax
depreciation
5
(1)
–
–
3
7
Leases
–
–
4
–
–
4
Share-based
payments
2
–
–
–
(2)
–
Retirement
benefit
obligations
1
–
–
–
–
1
Losses and
unutilised
interest
expense
–
–
–
–
20
20
Intangible
assets
(3)
(8)
–
–
–
(11)
At 1 September 2018
On acquisition of a subsidiaries
Credited/(charged) to income
Charged to equity
At 31 August 2019
4
–
1
–
5
–
–
–
–
–
2
–
–
–
2
1
–
–
–
1
–
(2)
(1)
–
(3)
–
–
–
–
–
Total
5
(9)
4
–
21
21
7
(2)
–
–
5
The UK corporation tax rate is 19 per cent effective from 1 April 2017. In the Spring Budget 2020, the UK Government announced that
from 1 April 2020 the corporation tax rate would remain at 19 per cent (rather than reducing to 17 per cent, as previously enacted).
This new law was substantively enacted on 17 March 2020, and the impact of this change is less than £1m.
Deferred tax assets have been recognised in respect of tax losses and US unutilised interest expense. The deferred tax assets include
an amount of £10m which relates to carried forward tax losses in the UK which have been recognised to the extent that they will be
recoverable using the estimated future taxable income based on the approved budgets for the Group. These losses can be carried
forward indefinitely and have no expiry date. The Group has not recognised deferred tax assets on losses amounting to £121m
(2019: £97m) due to uncertainty over the timing and extent of their utilisation. The losses can be carried forward indefinitely and have
no expiry date.
All deferred tax assets and liabilities are offset where there is considered to be a legally enforceable right to do so. The following is an
analysis of the deferred tax balances (after offset) for financial reporting purposes:
£m
Deferred tax liabilities (non-current liabilities)
Deferred tax assets
2020
(2)
23
21
2019
(3)
8
5
121
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
19. Analysis of net debt
Movements in net debt can be analysed as follows:
£m
Borrowings
– Borrowings – repayable after one year
– Revolving credit facility
– Lease liabilities
Liabilities from financing activities
Cash and cash equivalents
Net debt
£m
Borrowings
– Borrowings – repayable after one year
– Revolving credit facility
– Obligations under finance leases
Liabilities from financing activities
Cash and cash equivalents
Net debt
2019
(200)
(15)
(14)
(229)
49
(180)
Recognised
on adoption
of IFRS 16
On
acquisition of
subsidiaries
(non-cash)
Cash flow
Other
Currency
translation
–
–
(479)
(479)
–
(479)
2018
–
(33)
(14)
(47)
45
(2)
(115)
–
(106)
(221)
1
(220)
(200)
15
78
(107)
59
(48)
115
–
(46)
69
–
69
–
–
8
8
(1)
7
On
acquisition of
subsidiaries
(non-cash)
Cash flow
Other
Currency
translation
(40)
–
–
(40)
2
(38)
(200)
18
6
(176)
2
(174)
40
–
(6)
34
–
34
–
–
–
–
–
–
2020
(400)
–
(559)
(959)
108
(851)
2019
(200)
(15)
(14)
(229)
49
(180)
An explanation of Alternative Performance Measures, including Net debt on an pre-IFRS 16 basis, is provided in the Glossary on
page 146.
Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months
or less. The carrying amount of these assets approximates to their fair value.
Lease liabilities
The adoption of IFRS 16 on 1 September 2019 has resulted in the recognition of substantial right-of-use assets and corresponding
lease liabilities on the Group balance sheet. On the transition date, £479m of lease liabilities have been recognised. In addition, lease
liabilities of £106m have been recognised as a result of the acquisition of MRG. Other (non-cash) movements in lease liabilities mainly
relate to new leases, modifications and remeasurements in the period.
Borrowings and revolving credit facilities
The Group has in place a five-year committed multi-currency revolving credit facility of £200m with Barclays Bank PLC, HSBC Bank
PLC, BNP Paribas and Santander UK PLC. The revolving credit facility is due to mature on 8 December 2023. The utilisation is interest
bearing at at a margin over LIBOR. As at 31 August 2020, the Group has drawn down £nil (2019: £15m) on this facility.
In April 2020 the Group agreed an additional multi-currency revolving credit facility of £120m with BNP Paribas, HSBC Bank PLC and
Santander UK PLC, for a period of 12 months (plus 7 months at the option of the Group). This facility will be in place until 8 November
2021 if the Group opts to use the available extension option. This is in addition to our existing facilities and includes a waiver on the
existing bank covenants at 31 August 2020, 28 February 2021 and 31 August 2021.
The Group has a four-year committed £200m term loan with Barclays Bank PLC, HSBC Bank PLC, BNP Paribas and Santander UK
PLC, that was drawn down at the time of the acquisition of InMotion (30 November 2018). This loan is interest bearing at at a margin
over LIBOR and is due to mature on 29 October 2022.
During the year, the Group agreed an additional syndicated £200m term loan with the above banks to fund the acquisition of MRG.
This loan is interest bearing at a margin over LIBOR and is due to mature on 17 October 2022.
Transaction fees of £2m (2019: £1m) including arrangement fees associated with the securing of financing have been capitalised and
are amortised through the income statement over the term of the relevant facility.
Further information regarding the Group's borrowings and revolving credit facilities is provided in Note 22.
Other movements include the repayment of a £115m loan acquired as part of the acquisition of MRG (see Note 27). This payment is
included within investing activities in the Group cash flow statement.
122 WH Smith PLC Annual Report and Accounts 2020
Financial statements 20. Contingent liabilities and capital commitments
£m
Bank guarantees and guarantees in respect of lease agreements
2020
31
2019
27
Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the
Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement with Smiths News PLC, any such contingent liability
which becomes an actual liability will be apportioned between the Group and Smiths News PLC in the ratio 65:35 (provided that the
actual liability of Smiths News PLC in any 12-month period does not exceed £5m). The Group’s 65 per cent share of these leases has
an estimated future rental commitment at 31 August 2020 of £1m (2019: £1m). The movement in the future rental commitment is due
to the crystallisation of lease liabilities, lease expiries and the effluxion of time.
Contracts placed for future capital expenditure approved by the directors but not provided for in these financial statements amount to
£18m (2019: £17m).
£m
Commitments in respect of property, plant and equipment
Commitments in respect of other intangible assets
21. Cash generated from operating activities
£m
Group operating (loss)/profit
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Amortisation of intangible assets
Impairment of intangible assets
Depreciation of right-of-use assets
Impairment of right-of-use assets
Non-cash change in lease liabilities
Non-cash movement in pension
Share-based payments
Profit on disposal of property, plant and equipment
Other non-cash items
Decrease/(increase) in inventories
Decrease/(increase) in receivables
Decrease in payables
Pension funding
Income taxes paid
Income taxes refund
Movement on provisions (through utilisation or income statement)
Cash generated from operating activities
2020
17
1
18
2020
(260)
43
39
12
1
110
95
(15)
14
–
–
2
35
27
(10)
(3)
(32)
37
(1)
94
2019
16
1
17
2019
140
41
1
9
–
–
–
–
–
6
(2)
1
(2)
(6)
(3)
(3)
(27)
–
(2)
153
123
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
22. Financial instruments
Categories of financial instruments
£m
Financial assets
Derivative instruments in designated hedge accounting relationships1
Loans and receivables (including cash and cash equivalents)2
Financial liabilities
Amortised cost3
Carrying value
2020
2019
–
161
2
117
(1,200)
(490)
1 All derivatives are categorised as Level 2 within the fair value hierarchy. The fair value measurements relating to the instruments are derived from inputs other than quoted prices that are
observable for the asset or liability, either directly or indirectly.
2
3
Included within loans and receivables are trade and other receivables (excluding prepayments) and cash and cash equivalents.
Included within amortised cost are trade and other payables, borrowings, lease obligations and other non-current liabilities.
Comparison of carrying values and fair values
There were no material differences between the carrying value of non-derivative financial assets and financial liabilities and their fair
values as at the balance sheet date.
Risk management
The Group’s treasury function seeks to reduce exposures to interest rate, foreign exchange and other financial risks, and to ensure
liquidity is available to meet the foreseeable needs of the Group and to invest cash assets safely and profitably. The Group does not
engage in speculative trading in financial instruments and transacts only in relation to underlying business requirements. The Group’s
treasury policies and procedures are periodically reviewed and approved by the Group’s Audit Committee and are subject to regular
Group Internal Audit review.
Capital risk
The Group’s objectives with respect to managing capital (defined as net debt/funds plus equity) are to safeguard the Group’s ability to
continue as a going concern, in order to optimise returns to shareholders and benefits for other stakeholders, through an appropriate
balance of debt and equity funding. Refer to Note 19 for the value of the Group’s net debt/funds and refer to the Group statement of
changes in equity for the value of the Group’s equity.
In managing the Group’s capital levels, the Board regularly monitors the level of debt in the business, the working capital
requirements, forecast financing and investing cash flows. Based on this analysis, the Board determines the appropriate return to
investors while ensuring sufficient capital is retained in the business to meet its strategic objectives. The Board has a progressive
dividend policy and expects that, over time, dividends would be broadly covered twice by earnings calculated on a normalised tax basis.
As at 12 November 2020, the Group has in place a £200m committed multi-currency revolving credit facility, a further £120m
committed multi-currency revolving credit facility, and two syndicated £200m term loans carrying certain financial covenants.
The covenants, tested half-yearly, are based on fixed charges cover and net borrowings. In response to the impact of the Covid-19
pandemic on the Group's operations, the Group has secured waivers on the existing bank covenants at 31 August 2020, 28 February
2021 and 31 August 2021. The covenants, tested half-yearly, are based on fixed charges cover and net borrowings.
In April, the Group secured eligibility to the Government’s Covid Corporate Financing Facility ('CCFF') for up to £300m. The Group
never utilised the facility. The CCFF is currently being reviewed and like many companies, the Group is in dialogue with the CCFF
concerning its eligibility.
Liquidity risk
The Group manages its exposure to liquidity risk by reviewing the cash resources required to meet its business objectives through
both short and long-term cash flow forecasts. The Group has a committed multi-currency revolving credit facility with a number
of financial institutions which is available to be drawn for general corporate purposes including working capital. The facility is due to
mature on 8 December 2023. In addition, in April 2020, as part of the Group's actions to mitigate the impact of Covid-19, the Group
agreed an additional multi-currency revolving credit facility of £120m with BNP Paribas, HSBC Bank PLC and Santander UK PLC, for a
period of 12 months (plus 7 months at the option of the Group). This facility will be in place until 8 November 2021 if the Group opts to
use the available extension option.
The Group has a policy of pooling cash flows in order to optimise the return on surplus cash and also to utilise cash within the Group
to reduce the costs of external short-term funding.
124 WH Smith PLC Annual Report and Accounts 2020
Financial statements 22. Financial instruments (continued)
The table below shows the maturity analysis of the undiscounted remaining contractual cash flows of the Group’s financial liabilities:
2020 (£m)
Non-derivative financial liabilities
Bank loans and overdrafts
Trade and other payables
Lease liabilities
Total cash flows
2019 (£m)
Non-derivative financial liabilities
Bank loans and overdrafts
Trade and other payables
Finance leases
Total cash flows
Due within
1 year
Due between
1 and 2 years
Due between
2 and 5 years
Due over
5 years
7
241
139
387
10
–
97
107
402
–
195
597
–
–
180
180
Due within
1 year
Due between
1 and 2 years
Due between
2 and 5 years
Due over
5 years
15
255
5
275
–
–
3
3
200
–
6
206
–
–
–
–
Total
419
241
611
1,271
Total
215
255
14
484
Credit risk
Credit risk is the risk that a counterparty may default on their obligation to the Group in relation to lending, hedging, settlement and
other financial activities. The Group’s principal financial assets are trade and other receivables, and bank balances and cash which are
considered to have low credit risk on initial recognition.
The Group has credit risk attributable to its trade and other receivables, including a number of sale or return contracts with suppliers.
The amounts included in the balance sheet are net of allowances for expected credit losses. The Group has adopted the simplified
approach to calculating expected credit losses allowed by IFRS 9. Historical credit loss rates are applied consistently to groups of
financial assets with similar risk characteristics. These are then adjusted for known changes in, or any forward-looking impacts on,
creditworthiness.
Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that credit risk might have increased
significantly include the failure of the debtor to engage in a payment plan and failure to make contractual payments within 180 days
past due, which is in line with historical experience of increased credit risk. Indicators that an asset is credit-impaired would include
observable data in relation to the financial health of the debtor or if the debtor breaches contract.
The Group has low retail credit risk due to the transactions being principally of a high volume, low-value and short maturity. The Group
has no significant concentration of credit risk, with the exposure spread over a large number of counterparties and customers.
The credit risk on liquid funds and derivative financial instruments is considered to be low, as the Board approved Group treasury
policy limits the value that can be placed with each approved counterparty to minimise the risk of loss. These limits are based on a
short-term credit rating of P-1.
The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk.
The Group does not hold collateral over any of these financial assets.
Interest rate risk
The Group is exposed to cash flow interest rate risk on floating rate bank loans and overdrafts.
At 31 August 2020, the Group had drawn down £nil (2019: £15m) from its committed revolving credit facility. The Group draws down
on its facility, but does not view any draw down as long-term in nature and therefore does not enter into interest rate derivatives to
mitigate this risk.
The Group has a four-year committed term loan £200m term loan with Barclays Bank PLC, HSBC Bank PLC, BNP Paribas and
Santander UK PLC, that was drawn down at the time of the acquisition of InMotion (30 November 2018). During the year, the Group
agreed an additional syndicated £200m term loan with the above banks to fund the acquisition of MRG. These loans are interest
bearing at a margin over LIBOR. The Group monitors the risk associated with the loans. At present, the Group has not entered into
interest rate derivatives in respect of the loan.
125
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
22. Financial instruments (continued)
Foreign currency risk
Foreign exchange rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of the
changes in foreign exchange rates. The Group’s foreign currency exposures are principally to the US dollar, Euro and Australian dollar.
The Group’s treasury function uses financial instruments to mitigate foreign exchange risk, in line with treasury policies approved by
the Board. Financial instruments include foreign exchange contracts, deposits and bank loans.
The Group uses forward foreign exchange contracts to hedge significant future transactions and cash flows denominated in
currencies other than pounds sterling. The hedging instruments have been used to hedge purchases in US dollars and to minimise
foreign exchange risk in movements of the USD/GBP exchange rates. These are designated as cash flow hedges. At 31 August 2020
the Group had no material unhedged currency exposures.
The Group’s US dollar, Euro and Australian dollar exposure is principally operational and arises mainly through the operation of retail
stores in North America, France, Ireland, Spain, Germany, Italy and Australia. The Group does not use derivatives to hedge balance
sheet and profit and loss translation exposure.
The fair value of cash flow hedges recognised on the balance sheet within derivative assets/liabilities is shown below:
£m
Fair value of derivative assets
2020
–
2019
2
At 31 August 2019, the total notional amount of outstanding forward foreign exchange contracts to which the Group has committed is
US$15m (2019: US$30m). These instruments will be used to hedge cash flows occurring up to one year from the balance sheet date.
Gains of £1m (2019: £nil) have been transferred to the income statement and gains of £1m (2019: £1m) have been transferred
to inventories in respect of contracts that matured during the year ended 31 August 2020. In the year to 31 August 2020, the fair
value gain on the Group’s currency derivatives that are designated and effective as cash flow hedges amounted to £nil (2019: £2m).
In addition, the Group hedged the US dollar exposure on the consideration payable for the acquisition of MRG ($400m) in December
2019. The forward contract resulted in a fair value loss of £8m that was initially included in equity, and subsequently transferred
to goodwill.
All the derivatives held by the Group at fair value are considered to have fair values determined by Level 2 inputs as defined by the
fair value hierarchy. There are no non-recurring fair value measurements nor have there been any transfers of assets or liabilities
between levels of the fair value hierarchy.
Sensitivity analysis as at 31 August 2020
Financial instruments affected by market risks include borrowings, deposits and derivative financial instruments. The following
analysis, required by IFRS 7 ‘Financial Instruments’: Disclosures, is intended to illustrate the sensitivity to changes in market
variables, being UK interest rates, and USD/GBP, EUR/GBP and AUD/GBP exchange rates.
The following assumptions were made in calculating the sensitivity analysis:
• Exchange rate fluctuations on currency derivatives that form part of an effective cash flow hedge relationship affect the hedging
reserve in equity and the fair value of the hedging derivatives.
• Year end exchange rates applied in the analysis are USD/GBP 1.3347/1 (2019: 1.2164/1), EUR/GBP 1.1193/1 (2019: 1.1066/1) and
AUD/GBP 1.8115/1 (2019: 1.8056/1).
• Group debt and hedging activities remain constant, reflecting the positions at 31 August 2020 and 31 August 2019 respectively.
As a consequence, the analysis relates to the position at those dates and is not necessarily representative of the years then ended.
The above assumptions are made when illustrating the effect on the Group’s income statement and equity given reasonable
movements in foreign exchange and interest rates before the effect of tax. The Group considers a reasonable interest rate movement
in GBP LIBOR/base rate to be one per cent, based on interest rate history. Similarly, sensitivity to movements in USD/GBP, EUR/GBP
and AUD/GBP exchange rates of ten per cent are shown, reflecting changes of reasonable proportion in the context of movement in
those currency pairs over time.
126 WH Smith PLC Annual Report and Accounts 2020
Financial statements 22. Financial instruments (continued)
Using these assumptions, the following table shows the illustrative effect on the Group income statement and equity.
£m
GBP LIBOR/base rate interest rates 1% increase
USD/GBP exchange rates 10% increase
EUR/GBP exchange rates 10% increase
AUD/GBP exchange rates 10% increase
GBP LIBOR/base rate interest rates 1% decrease
USD/GBP exchange rates 10% decrease
EUR/GBP exchange rates 10% decrease
AUD/GBP exchange rates 10% decrease
23. Called up share capital
Allotted and fully paid
£m
Equity:
Ordinary shares of 226⁄67p
Total
2020
2019
Income
gains/(loss)
(3)
4
1
2
3
(5)
(1)
(2)
Equity
gains/(loss)
–
(37)
2
1
–
45
(2)
(1)
Income
gains/(loss)
(2)
(1)
(1)
–
2
1
1
–
Equity
gains/(loss)
–
(18)
–
–
–
23
–
–
2020
2019
Number
of shares
(millions)
Nominal
value
£m
Number
of shares
(millions)
Nominal
value
£m
131
131
29
29
108
108
24
24
As part of the financing of the acquisition of MRG, on 17 October 2019, the Company issued 7,209,303 shares in a share placing at a
price of £21.50 per share, raising proceeds of £152m net of issue costs.
In addition, as part of the Group's actions to mitigate the impact of Covid-19, on 9 April 2020 the Company issued 15,802,768 shares in
a share placing at a price of £10.50 per share, raising proceeds of £160m net of issue costs.
During the year, 5,024 ordinary shares were allotted under the terms of the Company’s Sharesave Scheme.
The effect of the above share issues was to increase share premium by £306m.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at
the meetings of the Company.
The ESOP reserve of £4m (2019: £6m) represents the cost of shares in WH Smith PLC purchased in the market and held by the
WH Smith Employee Benefit Trust to satisfy awards and options under the Group’s executive share schemes. The total shareholding is
203,628 (2019: 315,306).
127
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
24. Share-based payments
Summary of movements in awards and options
Number of shares
Outstanding at 1 September 2019
Options and awards granted
Options and awards exercised
Options and awards lapsed
Outstanding at 31 August 2020
Exercisable at 31 August 2020
Outstanding at 1 September 2019
Options and awards granted
Options and awards exercised
Options and awards lapsed
Outstanding at 31 August 2019
Exercisable at 31 August 2019
Pence
Weighted average exercise price of awards:
– Outstanding at the beginning of the year
– Granted in the year
– Exercised in the year
– Lapsed in the year
– Outstanding at the end of the year
– Exercisable at the end of the year
Sharesave
Schemes
379,398
–
(5,024)
(67,297)
307,077
–
240,225
211,900
(48,295)
(24,432)
379,398
–
LTIPs
2012 CIP
1,189,362
–
371,521
–
(161,368)
–
–
(220,451)
– 1,179,064
–
–
1,046,525
276,699
424,032
–
(188,447)
(88,568)
(92,748)
(188,131)
– 1,189,362
–
–
PSP
526,922
251,081
(82,234)
(182,074)
513,695
15,899
433,041
221,630
(53,289)
(74,460)
526,922
12,566
Cash-settled
Total
awards
2,129,769
34,087
622,602
–
(260,417)
(11,791)
(5,255)
(475,077)
17,041 2,016,877
15,899
–
2,031,164
34,674
874,289
16,727
(392,223)
(13,624)
(3,690)
(383,461)
34,087 2,129,769
12,566
–
2020
2019
272.76
–
27.80
218.88
232.88
–
162.83
390.12
142.87
90.90
272.76
–
Detail of movements in options and awards
2012 Co-Investment Plan (CIP)
Under the terms of the 2012 Co-Investment Plan, executive directors and key senior executives invested their own money to buy
ordinary shares in WH Smith PLC and were granted matching awards (in the form of nil cost options in WH Smith PLC) to acquire
further ordinary shares in proportion to the amount they have invested. All award under this scheme were exercised, or had lapsed,
by 31 August 2019.
LTIPs
Under the terms of the LTIP, executive directors and key senior executives may be granted conditional awards to acquire ordinary
shares in the Company (in the form of nil cost options) which will only vest and become exercisable to the extent that the related
performance targets are met.
Outstanding awards granted under the LTIPs are as follows:
Date of grant
20 October 2016
26 October 2017
1 November 2018
5 November 2019
Number of shares
2020
2019
136,613
338,164
332,766
371,521
431,865
363,294
394,203
–
1,179,064 1,189,362
Exercise
price (pence)
Nil
Nil
Nil
Nil
Exercise period
Oct 2019 – 20.10.26
Oct 2020 – 26.10.27
Nov 2023 – 01.11.28
Nov 2024 – 05.11.29
128 WH Smith PLC Annual Report and Accounts 2020
Financial statements 24. Share-based payments (continued)
Awards will first become exercisable on the vesting date, which is the third anniversary of the date of grant. Awards made on or after
October 2016 are subject to holding periods preventing the delivery and sale of shares until the fifth anniversary of the date of grant.
For awards made in October 2016 and October 2017, the holding period will apply to 50 per cent of any shares which vest. For awards
made in November 2018, and all subsequent awards, the holding period will apply to 100 per cent of any shares that vest. The awards
will accrue dividends paid over the performance and any holding period.
Sharesave Scheme
Under the terms of the Sharesave Scheme, the Board grants options to purchase ordinary shares in the Company to employees with
at least six months service who enter into an HM Revenue & Customs approved Save-As-You-Earn (SAYE) savings contract for a
term of three years. Options are granted at up to a 20 per cent discount to the market price of the shares on the date of offer and are
normally exercisable for a period of six months after completion of the SAYE contract.
Outstanding options granted under the Sharesave Scheme at 31 August 2020 are as follows:
Date of grant
7 June 2017 (3 year)
5 June 2019 (3 year)
Number of shares
2020
140,310
166,767
307,077
2019
169,905
209,493
379,398
Exercise
price (pence)
1434.40
1609.60
Exercise period
01.08.20 – 31.01.21
01.08.22 – 31.01.23
Performance Share Plan (PSP)
Under the terms of the Performance Share Plan, the Board may grant conditional awards to executives. The exercise of awards is
conditional on the achievement of a performance target, which is determined by the Board at the time of grant. The executive directors
do not participate in this plan.
Outstanding awards granted under the PSP are as follows:
Date of grant
5 November 2012
18 April 2013
17 October 2013
23 October 2014
22 October 2015
20 October 2016
26 October 2017
1 November 2018
7 December 2018
5 November 2019
Number of shares
2020
977
–
1,693
3,111
1,346
8,772
128,867
141,392
10,476
217,061
513,695
Exercise
price (pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
2019
977
996
1,693
3,111
5,789
178,355
138,695
164,043
33,263
33,263
526,922
Exercise period
Nov 2015 – 05.11.22
Apr 2016 – 18.04.23
Oct 2016 – 17.10.23
Oct 2017 – 23.10.24
Oct 2018 – 22.10.25
Oct 2019 – 20.10.26
Oct 2020 – 26.10.27
Nov 2021 – 01.11.28
Dec 2021 – 07.12.28
Nov 2022 – 05.11.29
Deferred Bonus Plan (DBP)
The Deferred Bonus Plan is applicable to executive directors only. Under the terms of the DBP, any bonus payable over target is
deferred into shares for a period of up to three years. One third of the deferred shares are released on each anniversary of the bonus.
The DBP is being implemented using transitional provisions. For the year ended 31 August 2019, one third of the bonus payable over
target was deferred into shares. For the year ended 31 August 2020, two thirds of any bonus payable over target will be deferred into
shares. In subsequent years, all bonuses payable over target will be deferred into shares.
At 31 August 2020, 14,919 shares remain deferred in accordance with this plan.
129
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
24. Share-based payments (continued)
Cash-settled schemes
Under the terms of the LTIP, PSP and CIP, the Board may grant cash-settled awards to executives. The exercise of options is
conditional on the achievement of a performance target, which is determined by the Board at the time of grant. These awards will
be settled in cash based on the share price at the date of exercise. As at 31 August 2020 there were 17,041 outstanding nil-cost cash-
settled awards (2019: 34,087), which will be settled between 31 August 2020 and November 2028. The carrying amount of liabilities
arising from share-based payment transactions is less than £1m (2019: less than £1m).
Fair value information
Weighted average share price at date of exercise of share options exercised during year – pence
Weighted average remaining contractual life at end of year – years
Share options and awards granted
The aggregate of the estimated fair value of the options and awards granted in the year is:
£m
2020
2,223.54
7
2019
1953.67
7
2020
12
2019
11
The fair values of the CIP, LTIP and PSP awards granted were measured using a Monte Carlo simulation model. The input range into
the Monte Carlo models was as follows:
Share price – pence
Exercise price – pence
Expected volatility – per cent
Expected life – years
Risk-free rate – per cent
Dividend yield – per cent
Weighted average fair value of options – pence
2020
2,224
Nil
22
2.8
0.53
Nil
1,975.56
2019
1,929
Nil
23
2.8
0.81
Nil
1,698.34
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the expected life of the option.
The fair values of the Sharesave options granted in the year ended 31 August 2019 were measured using a Black Scholes model.
None were granted in the year ended 31 August 2020. The input range into the Black Scholes models was as follows in the year ended
31 August 2019:
Share price – pence
Exercise price – pence
Expected volatility – per cent
Expected life – years
Risk-free rate – per cent
Dividend yield – per cent
Weighted average fair value of options – pence
2019
2,012
1,610
22
3.5
0.71
2.69
427.00
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the expected life of the option.
130 WH Smith PLC Annual Report and Accounts 2020
Financial statements 25. Related party transactions
Transactions between businesses within this Group which are related parties have been eliminated on consolidation and are not
disclosed in this Note.
Remuneration of key management personnel
The remuneration of the executive and non-executive directors, who are the key management personnel of the Group, is set out
below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
Further information about the remuneration of individual directors is provided in the Directors’ remuneration report on pages
56 to 73.
£’000
Short-term employee benefits
Post-employment benefits
Share-based payments
There are no other transactions with directors.
26. Other reserves
£m
Balance as at 1 September 2019
Employee share schemes
Cash flow hedges
Balance at 31 August 2020
£m
Balance as at 1 September 2018
Employee share schemes
Cash flow hedges
Balance at 31 August 2019
2020
1,517
186
(4)
1,699
2019
3,646
264
2,095
6,005
Other
reserves
(272)
(5)
–
(277)
Other
reserves
(267)
(5)
–
(272)
Revaluation
reserve
2
–
–
2
Revaluation
reserve
2
–
–
2
ESOP
reserve
(6)
2
–
(4)
ESOP
reserve
(4)
(2)
–
(6)
Hedging
reserve
2
–
(2)
–
Hedging
reserve
1
–
1
2
Total
(274)
(3)
(2)
(279)
Total
(268)
(7)
1
(274)
The Other reserves include reserves created in relation to the historical capital reorganisation, proforma restatement and the
demerger from Smiths News PLC in 2006.
131
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
27. Acquisitions
On 20 December 2019, the Group acquired the entire issued share capital of Marshall Retail Group ('MRG'), for a total cash payment
of USD $402m (£317m) comprising $243m enterprise value, $146m repayment of loans, $12m working capital, and $1m cash and
restricted cash.
MRG is an independent travel retailer operating in high footfall airport and tourist locations in the United States. The acquisition
builds further on the acquisition of InMotion in November 2018 and significantly strengthens the Group’s offering in the United States,
the world’s largest travel retail market.
Included within the provisional fair value of the net identifiable assets on acquisition is an intangible asset of £29m (US$37m)
representing the MRG brand. The Board believes that the excess of consideration paid over the net assets on acquisition of £258m is
best considered as goodwill on acquisition representing future operating synergies. This amount is not tax deductible. The provisional
goodwill calculation is summarised below:
£m
Acquiree’s net assets/(liabilities) at acquisition date:
Intangible assets
Property, plant and equipment
Right-of-use assets
Inventories
Cash and cash equivalents
Trade and other receivables
Deferred tax assets/liabilities
Trade and other payables – current
Other non-current liabilities
Lease liabilities
Interest-bearing loans
Net identifiable assets/(liabilities)
Non-controlling interest
Goodwill on acquisition
Total consideration – satisfied in cash
Total
30
34
108
14
1
5
(9)
(15)
(1)
(106)
(115)
(54)
(2)
258
202
The provisional goodwill calculation in the table above includes significant estimates that may be refined for a period of 12 months
from the acquisition date. Transaction and integration costs totalling £20m have been incurred in the year to 31 August 2020 in respect
of the acquisition.
Revenue of £48m and loss of £37m is included in the results for the financial year in respect of MRG. If the acquisition had taken place
on 1 September 2019, total Group revenue would have been £1,073m and Group loss before tax would have been £275m.
Reconciliation of consideration
£m
Cash consideration
Cash acquired
Repayment of interest-bearing loans
Net outflow of cash – investing activities
Prior year acquisitions
202
(1)
115
316
On 30 November 2018, the Group acquired the entire issued share capital of InMotion Entertainment Group LLC ('InMotion'),
for a total cash consideration of USD $208m (£162m) comprising $197m enterprise value, $3m working capital, and $8m cash
and restricted cash.
InMotion is a market leading retailer of digital accessories in US airports, and is a strongly performing business in a category with
attractive growth prospects. The acquisition provides a platform from which to expand WH Smith’s International Travel business into
the world’s largest travel retail market, and presents additional opportunities to grow the digital accessories format in key markets
outside of North America, complementing WH Smith’s recent success internationally.
132 WH Smith PLC Annual Report and Accounts 2020
Financial statements 27. Acquisitions (continued)
Included within the fair value of the net identifiable assets on acquisition is an intangible asset of £15m, representing the InMotion
fascia name. The Board believes that the excess of consideration paid over the net assets on acquisition of £126m is best considered
as goodwill on acquisition representing future operating synergies. The goodwill calculation is summarised below:
£m
Acquiree’s net assets/(liabilities) at acquisition date:
Intangible assets
Property, plant and equipment
Inventories
Cash and cash equivalents
Trade and other receivables
Deferred tax assets/liabilities
Trade and other payables – current
Interest-bearing loans
Net identifiable assets/(liabilities)
Non-controlling interest
Goodwill on acquisition
Total consideration – satisfied in cash
Reconciliation of consideration
£m
Cash consideration
Cash acquired
Repayment of interest-bearing loans
Net outflow of cash – investing activities
Total
16
10
16
2
6
(2)
(10)
(40)
(2)
(2)
126
122
122
(2)
40
160
On 4 July 2019, the Group acquired the entire issued share capital of The Card Gallery (UK) Limited, for cash consideration of £1m
and contingent consideration of £1m, payable over three years based on certain performance and profit target criteria. The business is
a leading online supplier of stationery and event invitations, trading as dottyaboutpaper.co.uk and treeofhearts.co.uk. This acquisition
complements our existing stationery ranges in both our High Street stores and online at whsmith.co.uk. The fair value of assets
acquired was £nil, resulting in recognition of goodwill of £2m.
28. Events after the balance sheet date
On 31 October 2020, the UK Government announced a four-week lockdown across England. We have performed an assessment of this
government action on the Group to ascertain if this constitutes an adjusting post balance sheet event under IAS 10 ‘Events after the
Reporting Date’. Following our review, we have concluded that the November lockdown is a non-adjusting event.
Following the announcement of a second lockdown in England, we have 558 stores open in High Street and 243 stores open in Travel,
including 206 Post Offices and 135 hospital stores. We are expecting a significant decline in passenger numbers as a result of travel
bans with the majority of our stores at airports and railway stations temporarily closed. 135 stores located in hospitals across the UK
remain open to serve key workers. Internationally, the majority of stores remain open.
We have estimated the impact of this lockdown on the value-in-use calculations used in the impairment assessments of property,
plant and equipment, intangible assets and right-of-use assets outlined in Notes 11, 12 and 13. The estimated impact on the Group
income statement is an increase to the impairment charge on non-current assets of around £7m.
133
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
29. Impact of adoption of IFRS 16
The Group has applied IFRS 16 effective from 1 September 2019 which superseded the lease guidance under IAS 17 and the
related interpretation.
Nature of change
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to
account for all leases under a single on-balance sheet model as the distinction between operating and finance leases is removed.
The only exceptions are short-term and low-value leases.
At the commencement date of a lease, a lessee recognises a lease liability for the future lease payments and an asset (right-of-use
asset) representing the right to use the underlying asset during the lease term. Lessees are required to separately recognise the
interest expense on the lease liability and the depreciation expense on the right-of-use asset. There is no impact on cash flows,
although the presentation of the Group cash flow statement has changed, with an increase in net cash inflows from operating
activities being offset by an increase in net cash outflows from financing activities.
Impact on the Group
The standard has primarily affected the accounting for the Group’s operating leases relating to properties.
The Group has applied the simplified transition approach (modified retrospective approach) and has recognised the lease liability
on transition at the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of
transition. Right-of-use assets are measured at either:
• their carrying amount as if IFRS 16 had been applied since the lease commencement date, discounted by the Group's incremental
borrowing rate at transition date. The Group has applied this methodology to a small number of its property leases where sufficient
historical information has been available to facilitate this.
• an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. The Group has applied this
methodology to the majority of its leases as sufficient historical data was not available to enable a retrospective calculation.
The weighted average discount rate applied on transition date is 1.78 per cent.
The Group has not restated comparatives and the cumulative effect of initially applying IFRS 16 has been recognised as an adjustment
to opening reserves at the date of transition.
The Group has elected to apply the following practical expedients as allowed under IFRS 16:
• exclude short-term leases (leases with a remaining term of less than one year) and low-value assets (defined as less than $5,000
at initial cost);
• rely on its assessment of whether leases are onerous immediately before the date of transition as an alternative to performing an
impairment review. This is applied on a lease-by-lease basis;
• exclude initial direct costs from the measurement of the right-of-use assets on transition; and
• the use of hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease.
The Group has not applied the practical expedient of placing reliance on the previous identification of a lease under IAS 17 but has
assessed all its existing lease contracts to determine whether they meet the new definition of a lease and therefore fall within the
scope of IFRS 16. This has resulted in several contracts, where the landlord is considered to have substantive substitution rights over
the associated assets, falling outside the scope of IFRS 16.
In addition to this, where the Group has not taken the practical expedient of taking an onerous lease provision under IAS 37 as a proxy
to the opening impairment charge, the Group has undertaken an impairment review at the date of transition. These are explained
further below under section 'Key areas of judgement'.
134 WH Smith PLC Annual Report and Accounts 2020
Financial statements 29. Impact of adoption of IFRS 16 (continued)
Impact on the financial statements
(i) Balance sheet impact on transition
£m
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment1
Right-of-use assets
Investments in joint ventures
Deferred tax assets2
Trade and other receivables
Current assets
Inventories
Trade and other receivables3
Derivative financial assets
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables4
Bank overdrafts and other borrowings
Retirement benefit obligations
Obligations under finance leases5
Lease liabilities
Current tax liabilities
Short-term provisions
Non-current liabilities
Retirement benefit obligations
Bank overdrafts and other borrowings
Long-term provisions6
Obligations under finance leases5
Lease liabilities
Deferred tax liabilities
Other non-current liabilities4
Total liabilities
Total net assets
Shareholders’ equity
Called up share capital
Share premium
Capital redemption reserve
Translation reserve
Other reserves
Retained earnings
Total equity attributable to the equity holders of the parent
Non-controlling interests
Total equity
31 August
2019
IFRS 16
Adjustment
1 September
2019
176
49
201
–
4
8
10
448
174
73
2
49
298
746
(250)
(15)
(1)
(5)
–
(7)
(1)
(279)
(3)
(200)
(4)
(9)
–
(3)
(11)
(230)
(509)
237
24
9
13
8
(274)
455
235
2
237
–
–
(18)
457
–
4
–
443
–
(3)
–
–
(3)
440
4
–
–
5
(108)
–
–
(99)
–
–
2
9
(385)
–
11
(363)
(462)
(22)
–
–
–
–
–
(22)
(22)
–
(22)
176
49
183
457
4
12
10
891
174
70
2
49
295
1,186
(246)
(15)
(1)
–
(108)
(7)
(1)
(378)
(3)
(200)
(2)
–
(385)
(3)
–
(593)
(971)
215
24
9
13
8
(274)
433
213
2
215
135
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
29. Impact of adoption of IFRS 16 (continued)
(i) Balance sheet impact on transition (continued)
1 In respect of transfer of former finance leases and impairment on the date of initial application of IFRS 16.
2 Deferred tax recognised on transition impact on opening retained earnings.
3 Adjustment mainly in respect of prepaid rent.
4 Adjustment in respect of lease incentive and rent accrual.
5 Adjustment in respect of former finance lease liability now reclassified as lease liability.
6 Adjustment in respect of onerous lease provision.
The table below shows a reconciliation from the total operating lease commitment as disclosed at 31 August 2019 to the total lease
liability recognised in the financial statements on the date of transition:
£m
Operating lease commitment at 31 August 2019 as disclosed in the Group’s consolidated financial statements
Discounted using the incremental borrowing rate at 1 September 2019
Leases where landlords have substantive substitution rights (i.e. leases outside the scope of IFRS 16)1
Leases with variable payments2
Recognition exemption for short-term leases3
Extension options reasonably certain to be exercised4
Termination options reasonably certain to be exercised4
Additional lease liabilities recognised at 1 September 2019
Finance lease liabilities as at 31 August 2019
Total lease liabilities recognised at 1 September 2019
At
1 September
2019
986
920
(412)
(12)
(10)
4
(11)
479
14
493
1 Contracts that were considered to be a lease under IAS 17 which do not meet the definition of a lease under IFRS 16, principally because the landlord is considered to have substantive substitution
rights over the associated assets. This is explained further below under the section 'key areas of judgement'.
2 Contracts where the minimum lease payments are dependent upon a variable factor and therefore the lease payments are in substance variable in nature.
3 The Group has applied the practical expedient to classify leases for which the leases term ends within 12 months of the date of initial application of IFRS 16 as short-term leases. The Group has
also applied the recognition exemption for short-term leases.
4 Previously, lease commitments only included non-cancellable periods in the lease agreements. Under IFRS 16, the lease term includes period covered by options to extend or terminate the lease
where the Group is reasonably certain that such options will be exercised.
(ii) Income statement impact
As a result of applying IFRS 16, the Group has recognised depreciation and interest costs in respect of leases that are within the
scope of IFRS 16 (which were previously classified as operating leases), rather than rental expense. During the year ended
31 August 2020, the Group recognised £105m of additional depreciation charges and £11m of additional interest costs and a gain of
£15m due to Covid-19 rent reduction/waiver in respect of these leases instead of recognising the rental expense of £102m, resulting in
a net £1m impact on profit (before non-underlying items).
(iii) Cash flow impact
As a result of applying IFRS 16, there is an increase in net cash inflows from operating activities by £66m being offset by an increase in
net cash outflows from financing activities by £66m. There is no impact on the net cash flow.
136 WH Smith PLC Annual Report and Accounts 2020
Financial statements 29. Impact of adoption of IFRS 16 (continued)
Key areas of judgement in applying IFRS 16
Substantive substitution rights
Judgement is involved in determining whether a contract meets the definition of a lease under IFRS 16. Management has determined
that certain retail concession contracts give the landlord substantive substitution rights because the contract gives the landlord rights
to relocate the retail space occupied by the Group. In such cases, management has concluded that there is not an identified asset and
therefore such contracts are outside the scope of IFRS 16. For these contracts, the Group recognises the payments as an operating
expense on a straight-line basis over the term of the contract unless another systematic basis is more representative of the time
pattern in which economic benefits from the underlying contract are consumed. The value of such contracts excluded from the lease
liability on transition to IFRS 16 is £412m, see Note 29 (i).
Determination of Incremental Borrowing Rate (IBR)
The application of IFRS 16 required judgement around the calculation of the IBR. This has been determined on a lease-by-lease
basis based on the right-of-use asset in a similar economic environment and taking into account the risk-free rate, adjusted for
factors such as the credit rating and the lease term.
Determination of lease term
In determining the lease term for contracts that have options to extend or terminate early, management has applied judgement in
determining the likelihood of whether such options will be exercised. This is based on the length of time remaining before the option is
exercisable, performance of the individual store and the trading forecasts.
Impairment assessment
The right-of-use asset is tested for impairment on a lease-by-lease basis as at the transition date in accordance with IAS 36 where
the practical expedient has not been taken. Each store is regarded to be a cash-generating unit. In estimating the future net cash
flow, judgement is made around the lease term and estimated profit growth which is based on the underlying economics of the
individual stores such as the store contribution and location. As part of estimating the value-in-use, future cash flows for each store
are discounted based on the Group’s weighted average cost of capital which is determined based on factors such as risk-free rate and
risk premium.
The Group has recorded an impairment of £21m to the right-of-use assets and property, plant and equipment with a corresponding
adjustment to the opening reserves. The impairment predominantly resulted from the application of different discount rates in line
with the applicable accounting standards. IFRS 16 requires the use of an incremental borrowing rate based on which the right-of-use
assets is recorded whereas the value-in-use calculation under IAS 36 requires the cash flow to be discounted using a pre-tax discount
rate, for which we have used the pre-tax weighted average cost of capital. The application of these standards caused an impairment
on numerous right-of-use assets and fixed assets.
30. Operating lease commitments (prior year - IAS 17)
The below disclosure is only in relation to the comparative figure for the year ended 31 August 2019. This disclosure is no longer
required since the implementation of IFRS 16 ‘Leases’ on the initial date of application, 1 September 2019.
Minimum lease payments under non-cancellable operating leases are payable as follows:
£m
Within one year
Within two to five years
In more than five years
Land and
buildings
211
551
221
983
2019
Equipment
and vehicles
1
2
–
3
Total
212
553
221
986
The Group leases various properties under non-cancellable operating lease agreements. The leases have varying terms, escalation
clauses and renewal rights. Contingent rents are payable on certain store leases based on store revenue. For those leases that are
turnover-related leases, the annual net lease commitment is calculated using the minimum lease liability.
137
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
31. Subsidiary companies
The subsidiary companies included within the financial statements are disclosed below.
UK subsidiaries
Country of
incorporation/
registration
Registered
address Class of shares
Proportion
of shares
held by
Group
companies
%
Name
Held directly by WH Smith PLC:
WH Smith Retail Holdings Limited
Held indirectly:
Books & Stationers Limited
Card Market Limited
Dotty About Paper Limited
funkypigeon.com Limited
Modelzone Limited
Sussex Stationers Limited
The Card Gallery (UK) Limited
The SQL Workshop Limited
The Websters Group Limited
Tree of Hearts Limited
WH Smith (Qatar) Limited
WH Smith 1955 Limited
WH Smith High Street Holdings Limited
WH Smith High Street Limited
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
WH Smith Hospitals Holdings Limited
England & Wales
WH Smith Hospitals Limited
WH Smith Promotions Limited
WH Smith Retirement Savings Plan Limited
WH Smith Travel 2008 Limited
WH Smith Travel Holdings Limited
WH Smith Travel Limited
WH Smith US Group Holdings Limited
WH Smith US Retail Holdings Limited
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary &
Preference
Ordinary &
Preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary &
Preference
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Principal activity
Holding company
Retailing
Retailing
Dormant
Retailing
Dormant
Dormant
Retailing
Retailing
Dormant
Dormant
Dormant
Holding Company
Holding Company
Retailing
Holding Company
Retailing
Retailing
Dormant
Holding Company
Holding Company
Retailing
Holding Company
Holding Company
The following UK subsidiaries will take advantage of the audit exemption set out within section 479A of the Companies Act 2006 for the
year ended 31 August 2020.
The Company will guarantee the debts and liabilities of the below UK subsidiary undertakings at the balance sheet date in accordance
with section 479C of the Companies Act 2006. The Company has assessed the probability of loss under the guarantee as remote.
Name
Held indirectly:
Books & Stationers Limited
Card Market Limited
WH Smith 1955 Limited
WH Smith High Street Holdings Limited
WH Smith Hospitals Holdings Limited
WH Smith Promotions Limited
WH Smith Travel 2008 Limited
Company number
07515820
8956574
549069
6560371
03896896
2339902
6560390
138 WH Smith PLC Annual Report and Accounts 2020
Financial statements 31. Subsidiary companies (continued)
International joint ventures
The below entities are joint ventures and per the Group's accounting policies on page 95, the Group’s share of results of these joint
ventures is included in the Group consolidated income statement using the equity method of accounting.
Name
Held indirectly:
WH Smith – DFA Brasil Cafeteria, Livraria E
Conveniencia Eireli
WH Smith Malaysia SDN BHD
WH Smith LLC
Country of
incorporation/
registration
Registered
address
Class of shares
Proportion of
shares held by
Group companies
%
Brazil
Malaysia
Oman
17
13
12
Ordinary
Ordinary
Ordinary
50
50
50
Principal activity
Retailing
Retailing
Retailing
139
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
31. Subsidiary companies (continued)
International subsidiaries
The below list of interests in overseas entities includes certain entities, particularly in the United States of America, in which
WH Smith PLC holds less than 100 per cent ownership. These entities primarily relate to airport operations in which the Group is
required to engage with a local partner in order to operate the stores. Per the accounting policy set out on page 95, the Group has
determined that it has control of these entities and has therefore consolidated their results.
Country of
incorporation/
registration
Registered
address
Class of shares
Proportion
of shares
held by
Group
companies
%
Hong Kong
Australia
France
Germany
USA
Ireland
Italy
Jersey
Qatar
Netherlands
Singapore
Spain
USA
USA
USA
USA
USA
Australia
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
2
3
5
6
7
8
9
10
11
14
15
16
18
18
18
18
18
3
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
49
100
100
100
100
100
100
100
88
100
100
100
88
84
80
67
80
70
80
60
67
67
75
75
75
60
65
70
67
Principal activity
Product sourcing for
Group companies
Retailing
Retailing
Retailing
Dormant
Retailing
Retailing
Retailing
Retailing
Dormant
Retailing
Retailing
Holding Company
Holding Company
Holding Company
Holding Company
Dormant
Retailing
Retailing
Dormant
Retailing
Retailing
Retailing
Dormant
Dormant
Dormant
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Name
Held indirectly:
WH Smith Asia Limited
WH Smith Australia Pty Limited
WH Smith France S.A.S
WH Smith Germany GmbH
WH Smith Group Holdings (USA) Inc.
WH Smith Ireland Limited
WH Smith Italia S.R.L
WH Smith Jersey Limited
WH Smith LLC
WH Smith Nederland B.V.
WH Smith Singapore Pte. Limited
WH Smith Spain S.L.
WH Smith USA Holdings Inc
InMotion Entertainment Holdings LLC
InMotion Entertainment Personnel Leasing Corp
WH Smith USA Retail Inc
WH Smith SFO, LLC
Wild Retail Group Pty Limited
InMotion Entertainment Group, LLC
BTS – InMotion Atlanta, LLC
InMotion AUS, LLC
InMotion BNA, LLC
InMotion BNA-C,LLC
Soundbalance BOS, LLC
InMotion BOS-A, LLC
InMotion BOS, LLC
InMotion BOS-BCE, LLC
InMotion BWI, LLC
InMotion CLE, LLC
Soundbalance CLT, LLC
InMotion – SB DC, LLC
InMotion DCA, LLC
InMotion DEN-B, LLC
DFW-A Retail Partners, LLC
DFW-E Retail Partners, LLC
DFW-D/E Retail Partners, LLC
Soundbalance DTW, LLC
140 WH Smith PLC Annual Report and Accounts 2020
Financial statements 31. Subsidiary companies (continued)
Name
Held indirectly:
InMotion DTW, LLC
InMotion EWR, LLC
InMotion EWR-B, LLC
InMotion FLL, LLC
InMotion FLL-T4, LLC
InMotion IAD, LLC
Soundbalance IAH, LLC
BR InMotion IAH, LLC
InMotion LAX, LLC
InMotion LAX-IT,LLC
Soundbalance MCO, LLC
InMotion MCO, LLC
Soundbalance Miami, LLC
InMotion Bright, LLC
InMotion MKE, LLC
InMotion MSY, LLC
InMotion ORD, LLC
InMotion ORD T2, LLC
Soundbalance PDX, LLC
Soundbalance PHL, LLC
InMotion PHL, LLC
Soundbalance ATL-E, LLC
InMotion ATL-A, LLC
InMotion ATL, LLC
InMotion PHX, LLC
InMotion PHX T3, LLC
Soundbalance SAN, LLC
InMotion SAT, LLC
InMotion SEA, LLC
InMotion SFO-T3, LLC
InMotion SFO-IT, LLC
Soundbalance SJC, LLC
InMotion SLC,LLC
InMotion IAH, LLC
InMotion SLC-A,LLC
InMotion SLC-B,LLC
InMotion SMF,LLC
InMotion CLT, LLC
SBIP, LLC
MSP Innovations, LLC
InMotion LGA, LLC
Marshall Retail Group Holding Co Inc
MRG Holdings Corp
Marshall Retail Group LLC
The Marshall Retail Group Canada Inc
MRG Baltimore (BWI), LLC
MRG Denver, LLC
MRG Dallas II, LLC
Country of
incorporation/
registration
Registered
address Class of shares
Proportion
of shares
held by
Group
companies
%
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
Canada
USA
USA
USA
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
19
19
19
20
19
19
19
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
67
80
85
62
62
75
67
65
75
80
67
73
67
75
79
64
70
70
67
67
65
67
64
80
80
90
55
75
88
85
90
67
80
70
85
90
90
74
50
33
75
100
100
100
100
70
75
65
Principal activity
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Dormant
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Dormant
Retailing
Retailing
Retailing
Dormant
Retailing
Dormant
Retailing
Retailing
Retailing
Dormant
Dormant
Dormant
Dormant
Holding company
Holding company
Retailing
Retailing
Retailing
Retailing
Retailing
141
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Notes to the financial statements continued
31. Subsidiary companies (continued)
Name
Held indirectly:
MRG LaGuardia, LLC
MRG Los Angeles, LLC
MRG Nashville, LLC
MRG Raleigh Terminal 2, LLC
MRG Raleigh Terminal 1, LLC
MRG RDU T2, LLC
MRG Sacramento, LLC
MRG San Francisco, LLC
MRG San Francisco Terminal 1, LLC
MRG San Francisco Terminal 3, LLC
MRG Washington (DCA), LLC
MRG Washington (IAD), LLC
Nash Nails MRG, LLC
Country of
incorporation/
registration
Registered
address
Class of shares
Proportion
of shares
held by the
Subsidiary
%
Principal activity
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
19
19
19
19
19
19
19
19
19
19
19
19
19
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
80
70
80
85
55
80
90
80
80
80
75
75
39
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Retailing
Greenbridge Road, Swindon, Wiltshire SN3 3RX
Suites 13A01-04, 13 Floor, South Tower, World Finance Centre, Harbour City, Tsim Sha Tsui, Kowloon, Hong Kong
Suite 401, 80 William Street, Woolloomooloo NSW 2011, Australia
Brucknerstrasse 2/4, 1040 Vienna, Austria
248, Rue de Rivoli, 75001 Paris, France
Terminal Ring 1, Zentralgebaude Ost, Zi. 5. 035, 40474 Dusseldorf, Germany
c/o Greenbridge Road, Swindon, Wiltshire SN3 3RX
6th Floor, Grand Canal Square, Dublin 2, Ireland
Via Borgogna, Cap 20122, Milano, Italy
72/74 King Street, St Helier, Jersey, JE2 4WE
27 Um Ghwalinah Road, 230 C-ring Road, Doha, Qatar
PO Box 3275, PC112, Ruwi, Oman
C2-6-1, Solaris Dutamas, 1, Jalan Dutamas 1, 50480, Kuala Lumpur, Malaysia
Registered addresses
1
2
3
4
5
6
7
8
9
10
11
12
13
14 Weteringschans 94, 1017 XS, Amsterdam, Netherlands
15
16
17
18
19
20
11 Keng Cheow Street #3-10 The Riverside Piazza, Singapore 059608
Paseo de Recoletos, 27, 7ª, 28004, Madrid, Spain
Avenida das Americas, No. 3434, Barra da Tijuca, CEP 22640-102, Rio de Janeiro, RJ, Brazil
4801 Executive Park Court, Suite 100, Jacksonville, FL 32216, USA
3755 W Sunset Road, Las Vegas, Nevada, NV 89118, USA
2200 HSBC Building, 885 West Georgia Street, Vancouver, BC V6C 3E8, Canada
142 WH Smith PLC Annual Report and Accounts 2020
Financial statements Company balance sheet
As at 31 August 2020
£m
Non-current assets
Investments
Current assets
Cash and cash equivalents
Debtors: amounts falling due within one year
Current liabilities
Creditors: amounts falling due within one year
Net current assets/(liabilities)
Non-current liabilities
Borrowings
Total net assets
Shareholders’ equity
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account1
Total equity
Note
2020
2019
3
4
5
6
9
835
835
–
291
291
(203)
(203)
88
(400)
(400)
520
520
–
88
88
(142)
(142)
(54)
(200)
(200)
523
266
29
315
13
166
523
24
9
13
220
266
1 The loss for the year attributable to shareholders was £7m (2019: profit of £106m). See Note 2.
The financial statements of WH Smith PLC, registered number 5202036, on pages 143 to 145 were approved by the Board of Directors
and authorised for issue on 19 November 2020 and were signed on its behalf by:
Carl Cowling
Group Chief Executive
Robert Moorhead
Chief Financial Officer and Chief Operating Officer
Company statement of changes in equity
For the year ended 31 August 2020
£m
Balance at 1 September 2019
Loss for the financial year
Total comprehensive loss for the year
Premium on issue of shares
Equity dividends paid during the year (Note 7)
Balance at 31 August 2020
Balance at 1 September 2018
Profit for the financial year
Total comprehensive income for the year
Purchase of own shares for cancellation
Premium on issue of shares
Equity dividends paid during the year (Note 7)
Balance at 31 August 2019
Share
capital
24
–
–
5
–
29
24
–
–
–
–
–
24
Share
premium
9
–
–
306
–
315
8
–
–
–
1
–
9
Capital
redemption
reserve
13
–
–
–
–
13
13
–
–
–
–
–
13
Profit
and loss
account
220
(7)
(7)
–
(47)
166
205
106
106
(31)
–
(60)
220
Total
266
(7)
(7)
311
(47)
523
250
106
106
(31)
1
(60)
266
143
Financial statementsWH Smith PLC Annual Report and Accounts 2020
Notes to the Company financial statements
1. Accounting policies
a) Basis of preparation
The Company’s financial statements have been prepared on a going concern basis, as detailed in the Directors’ report on page 74.
The financial statements are prepared in accordance with the Companies Act 2006 as applicable to companies using FRS 101.
The Company meets the definition of a qualifying entity under FRS 100 (Application of Financial Reporting Requirements) issued
by the Financial Reporting Council. Accordingly, the financial statements have been prepared in accordance with FRS 101 ‘Reduced
Disclosure Framework’ as issued by the Financial Reporting Council.
As permitted by FRS 101, the Company has taken advantage of the disclosure exemption available under the standard in relation to
share–based payment, financial instruments, capital management, presentation of comparative information in respect of certain
assets, presentation of a cash flow statement, standards not yet effective, impairment of assets and related party transactions.
Where required, equivalent disclosures are given in the consolidated financial statements of the Group.
The financial statements are prepared under the historical cost convention.
The principal accounting policies adopted are the same as those set out in Note 1 to the consolidated financial statements except as
noted below. No new accounting standards, or amendments to accounting standards, or IFRIC interpretations that are effective for the
year ended 31 August 2020, have had a material impact on the Company.
Critical accounting judgements and sources of estimation uncertainty are disclosed in the Notes to the financial statements, Note 1.
b) Investments in subsidiary undertakings
Investments in subsidiaries are valued at historical cost less provision for impairment in value. Investments in subsidiaries are
tested annually for impairment. An impairment loss is recognised for the amount by which the carrying value exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s net realisable value and value-in-use.
c) Taxation
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates
and laws that have been enacted or substantively enacted at the balance sheet date.
d) Debtors
Debtors represent amounts due from other Group companies. Debtors are initially measured at fair value and subsequently measured
at amortised cost using the effective interest rate method, less provision for impairment. A provision for the expected loss on
receivables is established at inception. This is modified when there is a change in the credit risk and hence evidence that the Company
will not be able to collect all amounts due according to the original terms of receivables.
2. (Loss)/profit for the year
The Company has not presented its own profit and loss account as permitted by Section 408 of the Companies Act 2006.
The loss for the year attributable to shareholders, which is stated on an historical cost basis, was £7m (2019: profit of £106m)
comprising investment income relating to dividends received from Group companies of £nil (2019: £109m) and finance costs of £7m
(2019: £3m). There were no other recognised gains or losses.
The Company did not have any employees during the year ended 31 August 2020 (2019: nil). All directors were remunerated by other
Group companies.
3. Investments
During the year, the Company purchased additional shares in WH Smith Retail Holdings Limited for consideration of £315m to fund
the acquisition of MRG (see Note 27 of the Notes to the consolidated financial statements). A full list of the Company’s subsidiary
undertakings is included in Note 31 of the Notes to the consolidated financial statements. The registered office of WH Smith Retail
Holdings Limited is Greenbridge Road, Swindon, Wiltshire SN3 3RX.
The investment in subsidiaries balance has been tested for impairment at the balance sheet date. The recoverable amount of the
investment is assumed to approximate the Group's market capitalisation on the London Stock Exchange, adjusted for any assets or
liabilities on the Company's balance sheet. There was substantial headroom between the recoverable amount of the investment and
its carrying value. Consequently, no impairment has been recognised in respect of the investment.
144 WH Smith PLC Annual Report and Accounts 2020
Financial statements 4. Debtors – amounts falling due within one year
£m
Amounts owed by subsidiary undertakings
Prepayments
2020
290
1
291
2019
87
1
88
The Company has undertaken a review of the liquidity position of the counterparty subsidiaries and noted that the subsidiaries have
sufficient immediately available funds to settle the receivables at the balance sheet date. As a result, no expected credit losses have
been included in the profit and loss account in respect of these receivables.
5. Creditors – amounts falling due within one year
£m
Amounts owed to subsidiary undertakings
Bank overdrafts
Other creditors
2020
202
–
1
203
2019
141
1
–
142
6. Borrowings
The Company has a four-year committed term loan of £200m with Barclays Bank PLC, HSBC Bank PLC, BNP Paribas and Santander
UK PLC, that was drawn down at the time of the acquisition of InMotion (30 November 2018). This loan is interest bearing at a margin
over LIBOR and is due to mature on 29 October 2022.
During the year, the Company agreed an additional syndicated £200m term loan with the above banks to fund the acquisition of MRG.
This loan is interest bearing at a margin over LIBOR and is due to mature on 17 October 2022.
7. Dividends
Amounts paid and recognised as distributions to shareholders in the year are as follows:
£m
Dividends
Final dividend for the year ended 31 August 2018 of 38.1p per ordinary share
Interim dividend for the year ended 31 August 2019 of 17.2p per ordinary share
Final dividend for the year ended 31 August 2019 of 41.0p per ordinary share
2020
2019
–
–
47
47
41
19
–
60
The Board of Directors have not declared an interim dividend during the year and do not propose a final dividend in respect of the year
ended 31 August 2020.
8. Contingent liabilities
Contingent liabilities of £1m (2019: £1m) are in relation to insurance standby letters of credit.
9. Called up share capital
Allotted and fully paid
Equity:
Ordinary shares of 226⁄67p
Total
2020
2019
Number of
shares
(millions)
Nominal
value
£m
Number of
shares
(millions)
Nominal
value
£m
131
131
29
29
108
108
24
24
As part of the financing of the acquisition of MRG, on 17 October 2019, the Company issued 7,209,303 shares in a share placing at
a price of £21.50 per share, raising proceeds of £152m net of issue costs. In addition, as part of the Group's actions to mitigate the
impact of Covid-19, on 9 April 2020 the Company issued 15,802,768 shares in a share placing at a price of £10.50 per share, raising
proceeds of £160m net of issue costs.
During the year, 5,024 ordinary shares were allotted under the terms of the Company’s Sharesave Scheme.
The effect of the above share issues was to increase share premium by £306m.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share
at the meetings of the Company.
145
Financial statementsWH Smith PLC Annual Report and Accounts 2020 Glossary
Alternative performance measures
In reporting financial information, the Group presents alternative performance measures, ‘APMs’, which are not defined or specified
under the requirements of IFRS.
The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide
stakeholders with additional useful information on the underlying trends, performance and position of the Group and are consistent
with how business performance is measured internally. The alternative performance measures are not defined by IFRS and
therefore may not be directly comparable with other companies’ alternative performance measures.
Non-underlying items
The Group has chosen to present a Headline measure of profit and earnings per share which excludes certain items that are
considered non-underlying and exceptional due to their size, nature or incidence, and are not considered to be part of the normal
operating costs of the Group. These costs may include the financial effect of non-underlying items which are considered exceptional
and occur infrequently such as, inter alia, restructuring costs linked to a Board-agreed programme, amortisation of acquired
intangible assets, costs relating to business combinations, significant items related to pension schemes, and impairment charges
and items meeting the definition of non-underlying specifically related to the Covid-19 pandemic, and the related tax effect of these
items. The Group believes that they provide additional useful information to users of the financial statements to enable a better
understanding of the Group’s underlying financial performance.
IFRS 16
The Group has implemented IFRS 16 using the modified retrospective approach, which means that prior year balances have not
been restated. IFRS 16 superseded the lease guidance under IAS 17 and the related interpretations. IFRS 16 sets out the principles
for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under
a single on-balance sheet model as the distinction between operating and finance leases is removed. The only exceptions are
short-term and low-value leases. At the commencement date of a lease, a lessee will recognise a lease liability for the future lease
payments and an asset (right-of-use asset) representing the right to use the underlying asset during the lease term. Lessees are
required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
For the purposes of narrative commentary on the Group’s performance and financial position in the Strategic report, the effects
of IFRS 16 have been excluded, in order to provide meaningful year on year comparisons.
The impact of the implementation of IFRS 16 on the Income statement and Segmental information is provided in Notes A1 and
A2 below. There is no impact on cash flows, although the classification of cash flows has changed, with an increase in net cash
inflows from operating activities being offset by a decrease in net cash inflows from financing activities, as set out in Note A9 below.
The balance sheet as at 31 August 2020 both including and excluding the impact of IFRS 16 is shown in Note A10 below.
Definitions and reconciliations
In line with the Guidelines on Alternative Performance Measures issued by the European Securities and Markets Authority (‘ESMA’),
we have provided additional information on the APMs used by the Group below, including full reconciliations back to the closest
equivalent statutory measure.
APM
Closest
equivalent
IFRS measure
Reconciling items to
IFRS measure
Definition and purpose
Income statement measures
Headline Group
(loss)/profit
before tax
Group
(loss)/profit
before tax
See Note A1
See Note A2
Group
operating
(loss)/profit
High Street and
Travel trading
(loss)/profit,
and Group
(loss)/profit from
trading operations
Headline Group (loss)/profit before tax excludes non-underlying items.
A reconciliation from Headline Group (loss)/profit before tax to Group
(loss)/profit before tax on an IFRS 16 basis is provided on the Group
income statement on page 88, and on an IAS 17 basis in Note A1.
Group (loss)/profit from trading operations and High Street and Travel
trading (loss)/profit are stated after directly attributable share-based
payment and pension service charges and before non-underlying items,
unallocated costs, finance costs and income tax expense.
A reconciliation from the above measures to Group operating (loss)/profit
and Group (loss)/profit before tax on an IFRS 16 basis is provided in
Note 2 to the financial statements and on an IAS 17 basis in Note A2.
146 WH Smith PLC Annual Report and Accounts 2020
Additional information APM
Non-underlying
items
Closest
equivalent
IFRS measure
None
Reconciling items to
IFRS measure
Refer to definition
and see Note A6
Headline
(loss)/earnings
per share
(Loss)/
earnings
per share
Effective tax rate
None
Non-underlying
items and dilutive
effect of shares
under option, see
Note A4
Non-underlying
items
Definition and purpose
Items which are not considered part of the normal operating costs of
the business, are non-recurring and considered exceptional because of
their size, nature or incidence, are treated as non-underlying items and
disclosed separately. The Group believes that the separate disclosure
of these items provides additional useful information to users of the
financial statements to enable a better understanding of the Group’s
underlying financial performance. An explanation of the nature of the
items identified as non-underlying on an IFRS 16 basis is provided in
Note 4 to the financial statements, and on an IAS 17 basis in Note A6.
(Loss)/profit for the year attributable to the equity holders of the parent
before non-underlying items divided by the weighted average number of
ordinary shares in issue during the financial year, adjusted for the effects
of any potentially dilutive share options. See Note 10 and Note A4.
Total income tax credit/charge excluding the tax impact of non-
underlying items divided by Headline Group (loss)/profit before tax.
See Note 8 on an IFRS 16 basis, and Notes A3 and A6 on an IAS 17 basis.
None
Refer to definition This performance measure calculates the number of times Profit
Fixed
charges cover
Gross margin
Like-for-
like revenue
Gross
profit margin
Movement in
revenue per
the income
statement
Balance sheet measures
Net debt
None
before tax covers the total fixed charges included in calculating profit
or loss. Fixed charges included in this measure are net finance charges
(excluding finance charges from IFRS 16 leases) and net operating lease
rentals stated on an IAS 17 basis.
The calculation of this measure is outlined in Note A5.
Not applicable
Where referred to throughout the Annual report, gross margin is
calculated as gross profit divided by revenue.
– Revenue change
from non-like-
for-like stores
– Foreign
exchange impact
Like-for-like revenue is the change in revenue from stores that have
been open for at least a year, with a similar selling space at a constant
foreign exchange rate. A reconciliation of these percentages is
provided below.
LFL revenue change
Net new space impact
Acquisitions
Foreign exchange impact
Travel
High Street
Group
(43)%
(19)%
(33)%
1%
10%
–%
–%
–%
–%
1%
5%
–%
Total revenue change
(32)%
(19)%
(27)%
Reconciliation of
net debt
Net debt is defined as cash and cash equivalents, less bank overdrafts
and other borrowings and both current and non-current obligations
under finance leases as defined on an IAS 17 basis. Lease liabilities
recognised as a result of IFRS 16 are excluded from this measure.
A reconciliation of Net debt is provided in Note A8.
Other measures
Free cash flow
Net cash
inflow from
operating
activities
See Note A7 and
Strategic report
page 18
Free cash flow is defined as the net cash inflow from operating activities
before the cash flow effect of non-underlying items and pension funding,
and less net capital expenditure. The components of free cash flow are
shown in Note A7 and on page 18, as part of the Strategic report.
147
Additional informationWH Smith PLC Annual Report and Accounts 2020 Glossary continued
A1. Reconciliation of Headline to Statutory Group operating (loss)/profit and Group (loss)/profit before tax
£m
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other income
Non-underlying items
Group operating (loss)/profit
Finance costs
(Loss)/profit before tax
Income tax credit/(expense)
(Loss)/profit for the period
Attributable to:
Equity holders of the parent
Non-controlling interests
IAS 17 basis
Non-
underlying
items (IAS 17)
–
–
–
–
–
–
Headline
(IAS 17)
1,021
(441)
580
(545)
(97)
2
2020
IFRS 16 basis
Total
(IAS 17)
1,021
(441)
580
(545)
(97)
2
IFRS 16
adjustments
–
–
–
7
5
–
–
(60)
(9)
(69)
16
(53)
(53)
–
(53)
(157)
(157)
–
(157)
18
(139)
(139)
–
(139)
(157)
(217)
(9)
(226)
34
(192)
(192)
–
(192)
(55)
(43)
(11)
(54)
7
(47)
(47)
–
(47)
Total
1,021
(441)
580
(538)
(92)
2
(212)
(260)
(20)
(280)
41
(239)
(239)
–
(239)
Headline
1,397
(552)
845
(592)
(100)
7
–
160
(5)
155
(28)
127
125
2
127
2019
Non-
underlying
items
–
–
–
–
–
–
(20)
(20)
–
(20)
1
(19)
(19)
–
(19)
A2. Reconciliation of Headline to Statutory segmental trading (loss)/profit and Group (loss)/profit
from trading operations
£m
Travel trading (loss)/profit1
High Street trading (loss)/profit
Group (loss)/profit from
trading operations
Unallocated costs
Headline Group operating
(loss)/profit
Non-underlying items
Group operating (loss)/profit
IAS 17 basis
Non-
underlying
items (IAS 17)
–
–
Headline
(IAS 17)
(33)
(10)
2020
IFRS 16 basis
Total
(IAS 17)
(33)
(10)
IFRS 16
adjustments
6
6
(43)
(17)
(60)
–
(60)
–
–
–
(157)
(157)
(43)
(17)
(60)
(157)
(217)
12
–
12
(55)
(43)
2019
Non-
underlying
items
–
–
–
–
–
(20)
(20)
Total
(27)
(4)
(31)
(17)
(48)
(212)
(260)
Headline
117
60
177
(17)
160
–
160
¹ Includes International trading loss of £32m under IAS 17 (2019: profit of £20m) and £26m under IFRS 16.
Total
1,397
(552)
845
(592)
(100)
7
(20)
140
(5)
135
(27)
108
106
2
108
Total
117
60
177
(17)
160
(20)
140
148 WH Smith PLC Annual Report and Accounts 2020
Additional information A3. Reconciliation of Headline to Statutory tax (credit)/expense
£m
(Loss)/profit before tax
Tax (credit)/expense on (loss)/profit – Standard rate of UK corporation tax
(19.00%; 2019: 19.00%)
Adjustment in respect of prior year corporation tax
Total current tax (credit)/expense
Deferred tax – current year
Deferred tax – prior year
Tax on Headline (loss)/profit
Tax on non-underlying items
Total tax on (loss)/profit
A4. Calculation of Headline and Statutory (loss)/earnings per share
2020
IAS 17
(69)
IFRS 16
adjustments
1
2019
IFRS 16
(68)
Headline
155
(5)
(6)
(11)
(7)
2
(16)
(18)
(34)
–
–
–
–
–
–
(7)
(7)
(5)
(6)
(11)
(7)
2
(16)
(25)
(41)
32
(4)
28
(1)
1
28
(1)
27
£m
(Loss)/profit for the year,
attributable to equity holders of the
parent (Note A1)
Weighted average shares in issue for
basic earnings per share (Note 10)
Weighted average shares in issue for
diluted earnings per share (Note 10)
Basic (loss)/earnings per share
Diluted (loss)/earnings per share
A5. Fixed charges cover
Net finance costs (pre-IFRS 16)
Net operating lease rentals (pre-IFRS 16)
Total fixed charges
Headline (loss)/profit before tax
Headline (loss)/profit before tax and fixed charges
Fixed charges cover – times
IAS 17 basis
Non-
underlying
items
Headline
2020
IFRS 16 basis
IFRS 16
adjustments
Total
Total
Headline
2019
Non-
underlying
items
(53)
(139)
(192)
(47)
(239)
125
(19)
120
120
(160.0)p
(160.0)p
(39.2)p
(39.2)p
(44.2)p
(44.2)p
(115.8)p
(115.8)p
120
120
(199.2)p
(199.2)p
£m
115.7p
114.7p
(17.6)p
(17.5)p
Note
A1
A11
A1
2020
9
210
219
(69)
150
0.7x
Total
106
108
109
98.1p
97.2p
2019
5
236
241
155
396
1.6x
149
Additional informationWH Smith PLC Annual Report and Accounts 2020 Glossary continued
A6. Non-underlying items on pre-IFRS 16 and IFRS 16 bases
£m
Costs relating to business combinations
– Transaction costs
– Integration costs
Amortisation of acquired intangible assets
High Street business review
Pension past service cost
Costs directly attributable to Covid-19
– Impairment of property, plant and equipment
– Impairment of intangible assets
– Impairment of right-of-use assets
– Other property costs
– Write-down of inventories
– Restructuring costs
– Other
Non-underlying items, before tax
Tax credit on non-underlying items
Non-underlying items, after tax
2020
2019
IAS 17
IFRS 16
11
9
3
–
14
54
1
–
25
14
25
1
157
(18)
139
11
9
3
–
14
39
1
95
–
14
25
1
212
(25)
187
6
5
2
7
–
–
–
–
–
–
–
20
(1)
19
Non-underlying items on a pre-IFRS 16 basis are calculated on a consistent basis with IFRS 16, with the exception of the
below items.
A tax credit of £25m has been recognised in relation to the above items (£18m under IAS 17).
Impairment of property, plant and equipment and right-of-use assets
The impairment charge recognised on an IAS 17 basis differs from that recognised under IFRS 16. This is mainly due to a lower asset
base under IAS 17, coupled with lower expected store cash flows, with rental expenses being included in the forecast cash flows
(treated as financing costs under IFRS 16), and a higher discount rate. The calculation of the Group’s weighted average cost of capital
differs under IFRS 16 versus IAS 17. The pre-tax discount rate used in the IFRS 16 calculation was 8.9% and the pre-tax discount rate
used in the IAS 17 calculation was 10.9%.
Right-of-use assets are not recognised under IAS 17.
Other property costs
Other property costs on a pre-IFRS 16 basis include provisions for onerous lease contracts; on an IFRS 16 basis, onerous lease
contracts are recognised as an impairment of the right-of-use asset. As a result of the impact of Covid-19, the Group has carried out
a review of leases where the obligations of those leases exceed the potential economic benefits expected to be received under them.
We anticipate that a number of stores will not fully recover to pre-Covid-19 sales levels and have accelerated our internal forecasts
for the rate of sales decline in those locations. As a result, we have recognised onerous provisions of £13m for stores where we now
anticipate we will make a cash loss over the remaining term of their leases.
The Group’s IAS 17 property provisions represent the present value of unavoidable future net lease obligations and related costs of
leasehold property (net of estimated sublease income and adjusted for certain risk factors) where the space is vacant, loss-making
or currently not planned to be used for ongoing operations. The unwinding of the discount is treated as an imputed interest charge.
These provisions represent the best estimate of the liability at the time of the balance sheet date, the actual liability being dependent
on future events such as economic environment and marketplace demand. Expectations will be revised each period until the actual
liability arises, with any difference accounted for in the period in which the revision is made.
Other items included in Other property costs include £12m reinstatement liabilities for stores where the long-term viability has been
impacted by Covid-19, and the Group has crystallised its obligation to restore the site on which it is located or restore the underlying
asset to the condition required by the terms and conditions of the lease.
150 WH Smith PLC Annual Report and Accounts 2020
Additional information
A7. Free cash flow
£m
Cash generated from operating activities (Note 21)
Interest paid
Net cash inflow from operating activities
Cash flow impact of IFRS 16 (Note A9)
Add back:
– Cash impact of non-underlying items
– Pension funding
Deduct:
– Purchase of property, plant and equipment
– Purchase of intangible assets
Free cash flow
2020
94
(13)
81
(66)
20
3
(67)
(12)
(41)
2019
153
(4)
149
–
16
3
(47)
(12)
109
A8. Net debt
The table below shows Net debt on a pre-IFRS 16 basis. This includes lease liabilities that were previously presented as finance
leases (applying the principles of IAS 17, and Group accounting policies as applicable prior to 1 September 2019, per Note 1 to the
financial statements), but excludes additional lease liabilities recognised on application of IFRS 16.
£m
Borrowings
– Revolving credit facility
– Bank loans
– Lease liabilities (Note 16)
Liabilities from financing activities
Cash and cash equivalents
Net debt (IFRS 16) (Note 19)
Add back lease liabilities recognised under IFRS 161
Net debt (IAS 17)
1 Excludes lease liabilities previously recognised under IAS 17 as finance leases.
2020
2019
–
(400)
(559)
(959)
108
(851)
550
(301)
(15)
(200)
(14)
(229)
49
(180)
–
(180)
A9. Cash flow disclosure impact of IFRS 16
There is no impact of IFRS 16 on cash flows, although the classification of cash flows has changed, with an increase in net cash
inflows from operating activities being offset by a decrease in net cash inflows from financing activities.
£m
Net cash inflows from operating activities
Net cash outflows from investing activities
Net cash inflows from financing activities
Net increase in cash in the period
2020
IFRS 16
adjustment
66
–
(66)
–
IAS 17
15
(395)
440
60
IFRS 16
81
(395)
374
60
151
Additional informationWH Smith PLC Annual Report and Accounts 2020 Glossary continued
A10. Balance sheet impact of IFRS 16
The balance sheet as at 31 August 2020 including and excluding the impact of IFRS 16 is shown below:
£m
Goodwill and other intangible assets
Property, plant and equipment
Right-of-use assets
Investments in joint ventures
Inventories
Payables less receivables
Working capital
Derivative financial asset
Net current and deferred tax asset
Provisions
Operating assets employed
Net debt
Net assets excluding pension liability
Pension liability
Deferred tax asset on pension liability
Total net assets
A11. Operating lease expense
Amounts recognised in Headline Group operating profit on a pre-IFRS 16 basis are as follows:
£m
Minimum lease payments
Contingent rent payments
Total rent paid
Sublease rentals received on operating leases
Net operating lease charges
IAS 17
495
190
–
2
687
150
(226)
(76)
–
17
(27)
601
(301)
300
(4)
1
297
2020
IFRS 16
adjustment
(2)
2
413
–
413
–
43
43
–
11
13
480
(550)
(70)
–
–
(70)
2020
162
49
211
(1)
210
IFRS 16
493
192
413
2
1,100
150
(183)
(33)
–
28
(14)
1,081
(851)
230
(4)
1
227
2019
216
21
237
(1)
236
The Group has adopted IFRS 16 during the year, which requires lessees to account for all leases under a single on-balance
sheet model as the distinction between operating and finance leases is removed. In order to provide comparable information
the Group has chosen to present Headline measures of operating profit/(loss) and profit/(loss) before tax, as explained in Note 2
Segmental analysis.
The table above presents the pre-IFRS 16 net operating lease charges, applying the principles of IAS 17, and Group accounting
policies as applicable prior to 1 September 2019, per Note 1 to the financial statements.
The Group leases various properties under non-cancellable operating lease agreements. The leases have varying terms, escalation
clauses and renewal rights. The Group has a number of lease arrangements in which the rent payable is contingent on revenue.
Contingent rentals payable, based on store revenues, are accrued in line with revenues generated.
The average remaining lease length across the Group is four years.
Rentals payable and receivable under operating leases are charged to the income statement on a straight-line basis over the term of
the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line
basis over the lease term.
Temporary rent reductions due to Covid-19, affecting rent payments due on or before June 2021, have been recognised in the Income
statement in the period they are received.
152 WH Smith PLC Annual Report and Accounts 2020
Additional information
Information for shareholders
Company Secretary and registered office
Ian Houghton, WH Smith PLC, Greenbridge Road, Swindon, Wiltshire SN3 3RX. Telephone 01793 616161.
WH Smith PLC is registered in England and Wales (number 5202036).
Company website
This Annual report and accounts together with other information, including the price of the Company’s shares, Stock Exchange
announcements and frequently asked questions, can be found on the WH Smith PLC website at whsmithplc.co.uk.
Annual General Meeting
The Annual General Meeting will be held at the Company’s offices at Greenbridge Road, Swindon, Wiltshire SN3 3RX on Wednesday
20 January 2021 at 11.30am. A separate notice convening the meeting is being sent to shareholders and includes explanatory
notes on each of the resolutions being proposed. As explained in that notice, in light of the ongoing Covid-19 pandemic, we strongly
encourage shareholders not to attend the meeting in person this year and to appoint the Chair of the meeting as their proxy to
ensure that their vote is counted.
Shareholder enquiries – the registrars
All enquiries relating to shareholdings should be addressed to the registrars, Computershare Investor Services PLC, The Pavilions,
Bridgwater Road, Bristol BS99 6ZZ. You can call the registrars on the shareholder helpline 0371 495 0100 or visit their website
at investorcentre.co.uk. A textphone facility for shareholders with hearing difficulties is available by telephoning 0370 702 0005..
A textphone facility for shareholders with hearing difficulties is available by telephoning 0370 702 0005.
Sharedealing services
This can be done through a stockbroker, bank or building society.
Computershare, our registrars, also offer share dealing services for shareholders (in certain jurisdictions). For internet dealing,
log on to computershare.com/dealing/uk and for telephone dealing call 0370 703 0084. You will need to have your Shareholder
Reference Number (SRN) to hand when making this call. This can be found on your Form of Proxy, email notification of availability of
AGM documents or dividend confirmation.
Please note that dealing fees will apply and will vary between providers.
and for telephone dealing call 0370 703 0084. You will need to have your Shareholder Reference Number (SRN)
to hand when making this call. This can be found on your Form of Proxy, email notification of availability of AGM
documents or dividend confirmation. Please note that dealing fees will apply and will vary between
providers. Financial calendar
The following dates are given for information purposes only. Please check the WH Smith PLC website at whsmithplc.co.uk
nearer the relevant time for full details, and to ensure that no changes have been made.
Financial year end
Preliminary results announced
Annual report posted
AGM
Christmas trading statement
Half-year end
Interim results announced
Trading statement
Financial year end
31 August 2020
12 November 2020
December 2020
20 January 2021
20 January 2021
28 February 2021
April 2021
June 2021
31 August 2021
ShareGIFT
If you only have a small number of shares which are uneconomic to sell, you may wish to consider donating them to charity under
ShareGIFT, a charity share donation scheme administered by the Orr Mackintosh Foundation. A ShareGIFT transfer form may be
obtained from our registrar. Further information about the scheme can be found on the ShareGIFT website at sharegift.org.
153
Additional informationWH Smith PLC Annual Report and Accounts 2020 Information for shareholders continued
Warning to shareholders – boiler room scams
In recent years, many companies have become aware that their shareholders have received unsolicited phone calls or
correspondence concerning investment matters. These are typically from overseas-based ‘brokers’ who target UK shareholders,
offering to sell them what often turn out to be worthless or high risk shares in US or UK investments. These operations are
commonly known as ‘boiler rooms’. Information on how to avoid share fraud or report a scam can be found on our website at
whsmithplc.co.uk. You can also call the Financial Conduct Authority Consumer Helpline on 0800 111 6768 or go to. You can also call
the Financial Conduct Authority Consumer Helpline on 0800 111 6768 or go to
fca.org.uk/scamsmart..
UK Capital Gains Tax
Demerger 31 August 2006
Following the demerger of the Company on 31 August 2006, in order to calculate any chargeable gains or losses arising on the
disposal of shares after 31 August 2006, the original tax base cost of your ordinary shares of 213⁄81p (adjusted if you held your shares
on 24 September 2004 and 22 May 1998 to take into account the capital reorganisations of 27 September 2004 and 26 May 1998
respectively (see below)) will have to be apportioned between the shareholdings of ordinary shares of 20p in the Company and
ordinary shares of 5p in Smiths News PLC.
The cost of your shareholding of ordinary shares of 20p in the Company is calculated by multiplying the original base cost of your
ordinary shares of 213⁄81p (adjusted where necessary to take into account the capital reorganisations of 27 September 2004 and
26 May 1998 (see below)) by 0.69585.
The cost of your shareholding of ordinary shares of 5p is calculated by multiplying the original base cost of your ordinary shares of
213⁄81p (adjusted where necessary to take into account the capital reorganisations of 27 September 2004 and 26 May 1998 (see below))
by 0.30415.
As a result of the share consolidation on 22 February 2008, the nominal value of the Company’s ordinary shares increased from
20p per ordinary share to 226/67p per ordinary share.
Capital reorganisation 27 September 2004
If you acquired your shareholding on or before 24 September 2004, in order to calculate any chargeable gains or losses arising
on the disposal of shares after 24 September, the original tax base cost of your ordinary shares of 555/9p (adjusted if you held your
shares on 22 May 1998 to take into account the capital reorganisation of 26 May 1998 (see below)) will have to be apportioned
between the shareholdings of ordinary shares of 213⁄81p and ‘C’ shares resulting from the capital reorganisation.
The cost of your shareholding of ordinary shares of 213⁄81p is calculated by multiplying the original base cost of your ordinary shares
of 555/9p (adjusted where necessary to take into account the capital reorganisation of 26 May 1998 (see below)) by 0.73979.
Capital reorganisation 26 May 1998
If you acquired your shareholding on or before 22 May 1998, in order to calculate any chargeable gains or losses arising on the
disposal of shares after 22 May 1998, the original tax base cost of your ordinary shares of 50p will have to be apportioned between
the shareholdings of ordinary shares of 555/9p and redeemable ‘B’ shares resulting from the capital reorganisation.
The cost of your shareholding of ordinary shares of 555/9p is calculated by multiplying the original cost of your ordinary shares of 50p
by 0.90714.
March 1982 values
If you acquired your shareholding on or before 31 March 1982, in order to calculate any chargeable gains or losses arising on
disposal of shares, the tax base cost of your ordinary shares used the 31 March 1982 base values per share as follows:
Ordinary shares of 20p
Smiths News PLC ordinary shares of 5p
Arising from an
original
shareholding of ‘B’
ordinary shares
50.92p
22.25p
‘A’ ordinary shares
61.62p
26.93p
If you have a complicated tax position, or are otherwise in doubt about your tax circumstances, or if you are subject to tax in a
jurisdiction other than the UK, you should consult your professional adviser.
‘Company’ means WH Smith PLC, a public limited company incorporated in England and Wales with registered number 5202036;
and ‘Group’ means the Company and its subsidiaries and subsidiary undertakings.
154 WH Smith PLC Annual Report and Accounts 2020
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Contact details
WH Smith PLC
Greenbridge Road
Swindon, Wiltshire SN3 3RX
United Kingdom
T 01793 616161
W whsmithplc.co.uk
WHSmith Travel
133 Houndsditch
London EC3A 7BX
United Kingdom
T 020 3981 0900
W whsmithplc.co.uk
WHSmith High Street
Greenbridge Road
Swindon, Wiltshire SN3 3LD
United Kingdom
T 01793 616161
W whsmith.co.uk
Investor Relations
T 020 3981 1285
W whsmithplc.co.uk/investors
Media Relations
T 01793 563354
W whsmithplc.co.uk/media
Sustainability
W whsmithplc.co.uk/sustainability
Recruitment
W whsmithcareers.co.uk
Customer Service
Freepost SCE4410
Swindon, Wiltshire SN3 3XS
United Kingdom
T 01793 616161
E customer.relations@whsmith.co.uk