Phil McNally Business Unit Director

1
Phil McNallyBusiness Unit Director

• Tuesday 4 October 2005

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What I would like to cover

1. WHSmith Group Turnaround Plan
2. Progress
3. WHSmith High Street Strategy
4. Progress and Plans
5. WHSmith High Street Magazine Strategy

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WH Smith PLC Turnaround Plan

• Simplify the Group USA, ASPAC, Hodder Headline
• Focus on 3 core businesses
• Continue strong performance from Travel Retail
  and News Distribution
• Substantially improve performance in High Street
  Retail
• Strengthen the management team
• Rebuild external relationships

4
WH Smith PLC - Progress to date

• 6 mths to 6 mths to Growth
• Feb 04 m Feb 05 m
• News 17 19 12
• Travel 9 11 22
• High Street 42 55 31

Pre tax profit (before goodwill exceptions)
53 70 32
Pre tax loss/profit (after goodwill exceptions)

(14) 69 inf
Continuing operations
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Pre Close Statement 23 August 2005

• As anticipated, trading conditions in the high
  street remained challenging during the second
  half of the year. Despite this, the
  profitability of our High Street Retail business
  continued to improve.
• The Travel Retail division continues to perform
  well and our News Distribution business has also
  made steady progress.
• Accordingly WH Smith PLC expects the outcome for
  the year to 31 August 2005 to be in line with its
  expectations.

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WH Smith PLC Progress to date

• Analysts comments
• and reinforces our view that this company is
  the most credible outperform story in the
  sector. Credit Suisse First Boston
• but the re-engineering of the sales mix is not
  a "one-off" event and there is more decent profit
  growth to come (which is more than we can say
  about a few other high street retailers
  Evolution
• we are encouraged by the consistency of the
  managements strategy for recovery, the clear
  guidance and the steady delivery of results.
  Deutsche Bank

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WH Smith PLC Share price vs sector
WHS
General retailers
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WHSmith High Street Strategy

• Goal

Strategy

• Deliver a competitive and compelling specialist
  customer offer
• From a cost position that is better than others
  can do

What does that mean?

1. More competitive business units total offer and
   cost structure
2. Highly efficient and effective stores
3. Better use of our assets in all areas
4. Optimised central support

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What will it look like?

• More Competitive Customer Offer Cost Position
• Leading stationery offer with growing market
  share
• Competitive and authoritative book offer with
  stable/growing market share
• Leading market position in news and impulse with
  greater efficiencies
• Profitable entertainment business with clear
  customer positioning

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What will it look like?

• Efficient effective Stores
• Consistent delivery of the retail basics and
  excellent execution
• Appropriate service levels
• Low cost operator
• Better use of assets
• Generating maximum profit from all store space
• Ensuring the right space given to each category
• Optimised central support
• High performing teams
• Effective and efficient partnerships with
  suppliers
• Low cost

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Summary

• Strong profit recovery across the Group
• Driven by profitable Christmas 2004 in High
  Street Retail
• Strong performance from Travel Retail and solid
  performance from News Distribution
• Challenging trading conditions however turnaround
  plan on-track
• Still early days much more opportunity

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Magazines Strategy
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Objective

Develop a fact based strategy for the Magazines
category in WHSmith High Street which delivers
profitability maximisation through the following

• A unique, compelling, and convenient magazine
  customer offer which drives top line sales and
  market share
• A sustainable operating model which optimises the
  categorys economics

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Data summary

• Market
• Market growth over the last 4 years has been
  driven by the Supermarket sector
• Main growth in the Supermarket sector driven by
  Tesco, as a result of square footage growth
• Supermarket square footage growth will slow over
  the next year
• Independent sector decline has been driven by
  store closures
• WHS High Street share decline has been relatively
  modest and driven by top 200 titles
• Magazines comprises 19 of WHS High Street
  turnover, not to mention group interest
• Magazines comprises 0.7 of Tesco turnover

Supermarkets are growing the market through space
growth which will slow
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Data summary

• Customer
• Commissioned research in June 2005 which
  comprised over 1,200 in-store interviews
• Overall rating 8.2 / 10 better than Tesco and
  Newsagents in all sectors
• Despite this rating there is room for improvement
  in
• Range Construction
• Overall Convenience
• Copy Management
• Significant conversion opportunity

Whilst customer satisfaction is high we are not
satisfied, we need to convert more customers
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Data summary

• Economics
• Robust understanding of the categorys cost
  structure through Direct Product Profitability
  analysis
• After all costs, Magazines is only marginally
  profitable due to
• High volume
• Low fixed margin
• High costs
• Main cost drivers
• Staff
• Shrink and Waste
• Occupation (space)

Key to unlocking the categorys profitability is
to better manage copy and enhance the margin of
tail titles
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Direction

• Two strands to the WHS High Street category
  strategy
• Create a customer offer which is unique, tailored
  to catchment, compelling and convenient
• Refine the categorys economics by reducing costs
  and making unprofitable sales profitable
• To deliver share stabilisation in 2006 with
  growth to c.12 by 2008, and 20 variable cost
  reduction by end 2006.

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Customer offer

• Tailored Ranges - Current Situation
• Mandatory and optional titles
• Genre space dictated by national averages
• Optional ranges are used in store to do two
  things
• Select local titles
• Flex genre sizes
• In store expertise does not exist in all stores
  to optimise optional ranges

Current range management is space driven and not
supported by in-store expertise in all stores
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Customer offer

• Tailored Ranges
• Removal of optional titles
• Construction of ranges based on pillar title
  performance
• Desk top test done
• 15 stores in test by Sept. 05 implementation by
  Feb 06

• Ranges will be built by store using key pillar
  title by sub category to determine appropriate
  genre mix and composition
• Local titles will be determined using wholesaler
  postcode data
• Clear rule sets will aid process automation

Category Sales
Titles
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Customer offer

• Exclusives, Bookazines, and New Launches
• To create a more compelling reason to shop at WHS
• Recent growth in Bookazines 2 of sales LY, 4
  of sales TY
• Drives uniqueness and average transaction value
• Fred Dibnah May to date sales of c. 450k
• Tour 05 60k sales 10 yoy
• Launches are key to category growth
• Grazia - 70k sales in first 4 weeks and 9 share
  

Exclusives are key to creating a compelling
reason to shop at WHS
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Customer offer

• Improved Navigational Signage
• To drive the conversion opportunity
• In test in two stores
• Improvements need to be made to low level
  navigation
• The teams will be in discussion in September to
  determine which titles should feature by category
• In store by Jan. 06 subject to trial results and
  funding requirements

Navigation improvement is key to conversion and
convenience
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Customer offer

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Customer offer

• Secondary Siting
• To drive impulse purchasing
• Best Sellers Unit in tests saw 12 uplift in
  sales of featured titles
• Till Queuing System currently in 147 stores
  delivering 13 sales increases
• Till Top Units currently on every till in WHS
  High Street
• Secondary sites are key for impulse and
  convenience

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Customer offer

Secondary Siting
Till Queuing System
Best Sellers Unit
Till Top Unit
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Customer offer

• Improved Magazine Ordering Service
• Only retailer to offer a comprehensive national
  Magazine Ordering Service
• Poor customer awareness
• Customer experience currently poor
• Improvement plan being developed
• Implementation in Jan 05

Magazine ordering is a USP for WHS and presents a
huge opportunity considering poor awareness
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Category economics

• Copy Management Current Situation
• 132m copies delivered to WHS High Street stores
  every year of which 53m are returned 40
  unsolds
• 40 of copy is currently in stockrooms
• Stock is a key driver of both staff costs and
  shrink and waste
• Current PPA un-sold project has not delivered
  anticipated results
• Current SBR covers only 5 of all monthlies, of
  which only 6 of copy is replenished
• Current solution is biased towards retailers of
  top titles with high rates of sale
• We need a solution is more appropriate for a
  range retailer

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Category Economics
3.9

Distribution of deliveries, sales and returns for
monthly titles by sales band
Which titles is the copy in
18.0
60
16.0
50
14.0
12.0
40
Deliveries (lhs)
10.0
Sales (lhs)
Annualised quantity (millions)
of delivered quantity
30
8.0
Returns (lhs)
Unsolds (rhs)
6.0
20
4.0
10
2.0
-
0
1-100
101-200
201-300
301-400
401-500
501-600
gt600
Extrapolated from data between 1st August 2004
to 1st April 2005 for WHSmith News supplied
stores Source Teradata (Project 15)
The solution needs to cover all titles
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Category economics

• Improved Copy Management - SBR
• More appropriate SBR solution required for top
  titles
• Currently testing a more appropriate solution in
  13 stores
• Monthlies only
• Lower initial allocations
• Lower minimum hurdle rates
• Shelf capacity to be considered
• Results expected end Oct.05
• Want to work with you to find the optimal
  solution for WHS High Street

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Category economics

• Improved Copy Management Non-SBR titles
• age unsolds worse on tail titles which adversely
  effects their economics
• PPA work to date has proved unsuccessful
• Meeting arranged this Thursday to discuss how we
  progress
• Overall copy management target
• Unsolds 28
• Lifecycle availability 90

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Category economics

• Making Unprofitable Sales Profitable
• Flat margin across all titles is illogical and
  does not reflect the higher cost of selling range
  tail
• Many titles make a negative contribution
• Net margin improvements required to ensure
  longevity of listing
• Teams will finish main analysis first week in
  October 05
• Process to be complimentary to improved copy
  efficiency

Economics of uneconomic titles need to improve to
ensure their longevity
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Next steps

Tailored Ranges Range Model test in 15 stores
Beg Oct 05 05 Range Roll Out from Feb
06 Improved Navigation and Secondary
Sites Navigational Signage Roll Out from Jan
06 New Best Sellers Units Nov 05 Improved
Magazine Ordering Improved Magazine Ordering
Service end Jan 06 Improved Copy Management Test
improved SBR Model now Roll Out improved SBR from
Jan 06 Agree solution for non-SBR titles Oct
05 Test non SBR solution Oct 05 Determine
solution for uneconomic titles end Oct 05
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Next steps for you

• Ensure you and your teams understand and are
  engaged in the WHSmith High Street Magazine
  Strategy
• Positively support secondary siting initiative
• Positively support navigational signage
  development
• Assist WHSmith to apply pressure to the
  Wholesalers to deliver effective copy management
• Engage constructively in dialogue surrounding
  making unprofitable titles profitable

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Summary

• The Magazine category is key to the success of
  the WHS High Street turnaround plan
• Need to address both top line sales and bottom
  line profitability
• We will deliver this through better range and
  display and copy management
• We need your help to deliver the right solution