Body Shop potions work for now but Christmas could still be dismal

The group's ethical-beauty message had long been drowned out by the scores of me-too eco brands being pumped out by supermarkets and rival chains such as Boots. The green bottles that put rainforest-friendly retailing on the map in the Seventies just weren't cutting it anymore.

But yesterday it was a different story. The group has had a facelift since the Roddicks stepped back from day-to-day management in 2002, and looks all the better for it. The Body Shop announced yesterday that it was increasing its dividend payout for the first time in seven years as a gesture of confidence that its new look would age well.

Despite a climate of gloom in the UK, which has forced Boots to seek a merger with Alliance UniChem, The Body Shop said underlying sales across its 300 stores rose 4 per cent in the half year to 27 August. That is better than the 1.6 per cent fall at Boots and stronger growth than the market. It is also after a slow summer in London, where it has a significant clutch of stores, which have all felt the pinch from a lack of day-trippers and tourists.

Indeed like-for-like sales rose in every region bar the Americas(where they were flat) during the period, pushing underlying group sales up 4 per cent.

The fall in interim profits, to £7.1m from £8.2m, reflected nothing more than the company's decision to take control of its franchises in Canada, Hong Kong and Benelux. This has knocked wholesale revenue from selling products upfront to franchisees from the first half into the second half. It also poses extra risk for the chain because if shoppers decide to go on strike this Christmas, then it will be left with mountains of unsold Spiced Vanilla body butter and the like.

Although Anita Roddick, who founded the business in 1976 with a £4,000 bank loan, still sits on the board, as does her husband, Gordon, the revival in the group's fortunes has dovetailed her hands-off role. The notoriously outspoken founder had a habit of doing more damage for the company than her eye for good products could undo. Infamous comments include calling the group a "dysfunctional coffin"in 2001, on the grounds it had lost its soul, and telling an audience at the Cheltenham Literary Festival in 2000 that all beauty products bar moisturisers were "complete pap".

Ms Roddick, who is still very much a hands-on activist, championing causes on her website such as the victims of sex trafficking to those left destitute by the earthquake in South Asia, was always the first to admit she was "no businesswoman". For her first visit to her local bank manager all those years ago in Brighton she went wearing jeans and a Bob Dylan T-shirt, two small children in tow. She nearly destroyed the group by expanding too fast around the world, especially in the US, a market she barely bothered to research before opening stores willy-nilly and then managing to make enemies of the group's franchisees.

Ms Roddick's creativity is still as important as ever to the group, but these days she no longer has a say in the more mundane strategic issues. She is also there to ensure the group deserves its fair trade reputation, sourcing ingredients for its products direct from local communities. And to ensure her family's interests, as the group's biggest shareholder with 18 per cent, are represented.

Instead, it has been up to Adrian Bellamy, the chairman who used to control its US -business, and Peter Saunders, the chief executive, to give the group a new lease of life on the high street. Aware that the income stream from teenagers' pocket money would not sustain a turnaround, the top duo set about taking the brand upmarket. Mr Saunders likes to regard the brand as "masstiege" - a gobbledygook word he invented to describe a group with mass-market appeal but prestige products.

The word encapsulates the challenges at the heart of running a group as diverse as The Body Shop. Its 2,085 shops span 53 countries, excluding Russia, which it opens up in this December, and India, which it is still working on. In some markets, such as the Middle East, the group has instant cachet as a premium brand, whereas in others, including its home market, it has had to work harder to discard its former student-friendly image.

Mr Saunders benchmarks the group against luxury eco-friendly potion makers such as Kiehls, the New York-based brand owned by L'Oréal, and Aveda, the holistic-cosmetics retailer. But it is hard to believe The Body Shop bottles hold quite the same cachet on your average bathroom shelf. Despite the new packaging - the iconic black caps have been switched for white and the bottles no longer come in small, medium and large - the products lack a certain subtlety that their so-called peers have in spades. The fragrances, from candied citrus to cranberry, manage to overpower rather than soothe.

Rita Clifton, the chairman of Interbrand, the branding consultancy, thinks the company has managed to "nudge" the brand upmarket. It has had even better success, she adds, in convincing consumers that natural products do work. "In the early days, its products were not thought to be that effective. But it has been more explicit about the power of nature, while maintaining its strong stance against animal testing and for sustainable trade," she adds.

The group is in year two of a three-year plan to transform its estate, at a cost of £100m. By next February it will have refurbished 70 of its 300 UK stores, banishing the trademark, cluttered green shelves in favour of a neutral colour scheme. Hemp-backed glass counters are intended to give the shops more of a boutique feel. The concept will work just as well in tiny kiosks or shop-in-shop formats, Mr Saunders says, expanding the potential for yet more expansion.

In The Body Shop at Home, the group reckons it has the Noughties' answer to the Tupperware parties of yesteryear. A former executive from Tupperware heads its global At Home business, which grew sales by 10 per cent in the first half. This was a slowdown from recent levels but nothing serious enough to dissuade Mr Saunders from believing the parties - which are held in people's homes by a consultant - are "a significant driver of growth". Next year, German hausfrauen can join in the fun when the group rolls out the service there.

Shares in the group rose 9.5p yesterday to 219.25p, buoyed by the prospect of The Body Shop delivering full-year operating profits growth of 17 to 22 per cent. But with the weight of expectation resting on the outcome for the festive season, there is room for some doubt.

Last Christmas was the first merry one for the company in four years, prompting nerves from its former broker, ABN Amro, about the tough comparatives. Joe Spooner, at the Dutch bank, says "it now faces among the strongest comparative performances across the sector to build on this year in what we anticipate will be an extremely challenging Christmas market".

Cracks could still appear in this grand old dame of ethical retailers that even its lotions cannot cure.