The Investment Column: Hold on to more modern Boots

Cannabis drug company beset by approval delays; Christmas slump weighs on JD Wetherspoon
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The Independent Online

The great strides Boots has made to convince the City that it is a focused health and beauty retailer took a knock at Christmas when certain curiosities began creeping into its core Boots the Chemists stores.

The great strides Boots has made to convince the City that it is a focused health and beauty retailer took a knock at Christmas when certain curiosities began creeping into its core Boots the Chemists stores.

Amid the shampoos, lipsticks and novelty gift sets that are supposed to set its stores apart from the high street's general retail melee, lay televisions, DVD players and even the odd Freeview box.

On top of knocking its credibility, this back-of-a-lorry approach to retailing highlights just how far the likes of Boots had to go to capture sales over Christmas. Richard Baker, the chief executive, was "reasonably pleased" with the group's 2.6 per cent rise in like-for-like sales during its third quarter, although it was at the bottom end of analysts' expectations.

The resort to cut-price tellies to drive footfall comes after Boots had already had to slash its prices to stop customers defecting to the supermarkets. The "lower prices you'll love" campaign boosted sales in the first half, but it has been crucifying its margins: they fell 180 basis points over the six months to 30 September.

The good news yesterday was that gross margins over the Christmas quarter were stable, thanks to better stock buying and a better mix of high- and low-margin products. For the full year, the decline will now be slightly better than the 110 basis points previously feared. They are likely to slip back a tad next year but stabilise thereafter.

Mr Baker's quest to make the business more modern, more competitive and more efficient is paying off. Unlike some of the historic retail chains which have fallen on hard times, there are still plenty of reasons to believe customers can be wooed back to Boots. At least (most of) the stuff it sells is genuinely useful.

But Boots' Christmas shows it is having tactical, rather than strategic, success, and it left many analysts asking where it goes from here. Since we last looked at the stock in July it has moved sideways. With so much uncertainty over the retail sector, the shares look high enough for now. Hold.

Cannabis drug company beset by approval delays

GW Pharmaceuticals is the fascinating little company which spotted a wonderful opportunity: to develop a prescription drug from cannabis, which is widely believed to ease the symptoms of multiple sclerosis. It is so nearly there. Its under-the-tongue spray, Sativex, is being considered by UK regulators; Canada will allow it on the market, pending trials which prove it is effective; and even the US, which had looked a no-go zone for such a controversial product, might now be worth exploring as a market.

But, but, but.

The UK knocked backed the drug last year, saying more scientific work was needed. Canada permits MS sufferers to use cannabis, so GW's product will have to tempt users away from the smoked stuff. And the US is going to be tough going, with a regulator even more demanding than that in the UK.

Analysts find it very hard to imagine enough sales for Sativex to justify GW's current market valuation of £134m, let alone the price the shares are sure to jump to if approvals are forthcoming. If there is much further delay to the UK launch, GW's £18m cash pile might start to look like not being enough.

Avoid.

Christmas slump weighs on JD Wetherspoon

The christmas festivities usually make for bumper times for the high street boozer, but the way the days fell this year meant two Saturdays where venues were either quiet or closed.

This meant comparisons with last year were tough for JD Wetherspoon and others, who have been struggling because of the bitter price war. There should have been some relief, then, that Wetherspoon's sales were up nearly 1 per cent, like-for-like, between November and mid-January.

But although people were drinking more, landlords practically have to give drink away these days and the group's profits margins showed continued downward pressure. Wetherspoon, in common with other operators, is battling with the rising minimum wage, insurance and utility costs and has made only tentative steps to increase prices in some areas.

Extended "happy hours" have incurred the wrath of the Government, which professes to be fed up with cleaning up after binge drinkers. Local authorities and police are under pressure to weed out irresponsible operators and stop the discounting - a potential positive for Wetherspoon. But political momentum is also gathering for a levy on the pubs industry to fund policing costs - obviously negative for the shares.

Further out, Wetherspoon is likely to ban smoking in 2009 in favour of keeping its food menus. But food is at present only 20 per cent of sales, so there is much to do to offset a drop in trade from smokers.

The shares are at 16 times 2005 earnings, which is unjustified when its house broker cut 2005 forecasts by 5 per cent yesterday. It is kicking out time on Wetherspoon shares. Sell.

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