Kate Swann, the chief executive of WH Smith, is set to collect a £3.95 million bonus after the high street retailer increased profits by 72 per cent.

WH Smith said that it would consult shareholders on a new three-year bonus scheme for the former Argos boss who has helped to transform the fortunes of the books to paperclips chain.

Yesterday WH Smith revealed pre-tax profits had risen to £66 million despite a 3 per cent fall in total sales as the group continued to cut back its range of low-profit entertainment goods.

Underlying sales slid by 4 per cent over the year, entirely owing to the performance of WH Smith’s high street chain, but gross margins rose by 2.8 percentage points, on top of a 2.5 percentage point increase the year before.

The company also achieved £10 million of cost savings, £3 million ahead of plan, and said it had identified opportunities for a further £11 million of savings.

The strong increase in earnings per share achieved over the year means that Ms Swann and her senior team are on track to receive their maximum bonus under an incentive scheme set up in 2004.

About 40 managers will share some £14 million if the company’s shares stay at yesterday’s close price.

The shares fell almost 7 per cent, or 27p, to 393p yesterday as Ms Swann said she was cautious about the prospects for Christmas.

“Consumer spending is very uncertain. We have not seen the impact of the waves in the financial market yet but all the surveys say that confidence is starting to be affected and we are planning cautiously for Christmas,” she said.

New titles from the celebrity chefs Nigella Lawson and Jamie Oliver, as well as autobiographies from Sharon Osbourne and Richard Hammond, the Top Gear presenter who nearly died in a high-speed crash, are expected to drive the books market.

The third Pirates of the Caribbean film, The Simpsons movie and the latest Harry Potter instalment will help DVD sales, but Ms Swann said that the market would be highly competitive and it was unlikely that retailers would make much profit from these top sellers.

She said that underlying sales at the high-street stores were likely to continue to decline for at least another year as she continues to cut back WH Smith’s range of entertainment goods.

However, Ms Swann said she was stepping up expansion on the high street at least fourfold, to eight to ten new stores this year.

“A few years ago people said we were due for extinction but I believe we have got to a stage in the high street that is sufficiently stable so as to expand again,” she said.

The high street openings come on top of a rapid expansion for WH Smith’s travel division into 87 motor-way service station sites, with at least four more planned in the next few years.

Ms Swann said that the smoking ban, which came into force on July 1 in England, had affected sales of tobacco in WH Smith’s travel stores, reducing them by about 2.5 per cent in those outlets.

The retailer increased the final dividend by 31 per cent to 8.1p.

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