By Will Smale
BBC News business reporter
The recovery of High Street institution WH Smith appears to be still on track, despite the retailer reporting a dip in sales over the key festive period.
Analysts now want WH Smith to bring sales growth up to profit levels
Although the bookseller and stationer saw like-for-like sales at its 542 High Street stores fall 6% in the both the seven weeks and five months to 21 January, it managed to raise its profits at the same time.
Analysts were in agreement that the 2.5% increase in profit margins at the High Street outlets was the core part of WH Smith's trading update, but also cautioned that sales growth would have to return again soon to maintain investor confidence.
In the face of tough competition from supermarkets on one side and internet retailers on the other, WH Smith is continuing with a restructuring programme to turn around its fortunes after it was forced to report a £135m annual loss for the year to 31 August 2004.
Led by chief executive Kate Swann, who joined the Swindon-based company in November 2003, it says it is on target to deliver cost savings of £30m over three years.
The plan includes putting a renewed focus on higher-margin books and stationery products, rather than less profitable CDs and DVDs, and more product sourcing from the cheaper Far East.
Its success so far saw WH Smith return to a full-year profit of £64m for the 12 months to 31 August 2005.
After the latest trading update, Ms Swann said the company had been determined not to hammer down prices to boost festive sales at the expense of profits.
"[The trading figures] reflected the challenging environment and our commitment to drive profits, rather than sell product unprofitably," she said.
Retail analyst John Baillie of SG Securities described WH Smith's festive trading statement as "pretty robust".
"The focus has definitely been on profit growth and not simply chasing sales, which is to be welcomed," he added.
"The recovery Kate Swann has set out to achieve does seem to be still on track and coming through."
Although sales were down at WH Smith's High Street stores over Christmas, they were actually up 3% at its 127 travel outlets at UK railway stations and airports, with profit margins at these units increasing by 1%.
Mixed High Street
Credit Suisse First Boston retail analyst Tony Shiret also welcomed the trading statement.
"They have underachieved on sales but overachieved on gross margin gains," he said.
"It's a very effective way of running the business, given the current market conditions, but at some point they will need to stabilise sales."
Robert Clark, research director at analysts Retail Knowledge Bank, was in agreement that the focus now had to be bringing sales up in line with profits.
"The profits are certainly the silver lining, but now I would like to see WH Smith regain its sales momentum," he said.
"It has got to get people to spend more when they visit and not just pop in for a newspaper.
"Their shift away from entertainment products [DVD and CDs] is to be welcomed, as they really can't compete with the supermarkets, but they need to re-establish their authority in books.
"More travel books, for example, would be a good idea."
Sales at the company's newspaper and magazine distribution arm, WH Smith News, were down 2% in the 21 weeks to 21 January.
WH Smith is now sticking to its existing £77m to £82m pre-tax profit target for the full year ending 31 August 2006, taking into account the continuing mixed picture on the UK High Street.