Boots shrugs off bad fit

The chemist business is the strong part of a group with a number of poor performers
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The Independent Online
COUGHING, sneezing, red-eyed customers clutching tissues are a cheering sight for Boots' chief executive, Lord Blyth.

At the peak of the recent flu epidemic, sales of cold and flu remedies soared by 30 per cent, helping the core pharmacy business, Boots the Chemists, to lift total third-quarter sales by more than 5 per cent.

Boots is far from alone in providing cures for the wheezing masses, but until a week ago it still enjoyed the title of Britain's biggest chemist chain.

However, if the current pounds 544m bid by rival Unichem for Lloyds Chemists goes ahead, will, with its Moss shops, create a 1,300-strong chain, and overtake Boots' 1,200 outlets.

The move comes as the UK's 12,000 chemists face new financial pressures. Government cutbacks on healthcare have eaten into pharmacies' fee income from the NHS, while supermarkets are muscling in on healthcare products and looking to add pharmacies in-store.

Asda's move to slash the price of vitamins last October, could herald further changes as the manufacturers' pricing agreement, which sets minimum prices for over-the- counter medicines, is reviewed by the Office of Fair Trading.

Boots' other retailing businesses - Do It All, Children's World, Halfords and home furnishings chain AG Stanley - face challenging times. Announcing third-quarter figures two weeks ago, Lord Blyth said they showed "a mixed performance" to say the least.

The group now is a legacy of the free-wheeling 1980s when, not content with expanding the successful Boots core, new management overpaid for Halfords and DIY chain Ward White just before recession struck.

Profit estimates for the year to March are hovering at around pounds 500m, against 1995's pounds 525.6m. A number of analysts trimmed full-year forecasts after what were seen as rather uninspiring half-year figures in November. As the Investors' Chronicle put it bluntly at the time: "Boots remains a mixture of one great business and a lot of duffers."

None the less, the shares have had a good run recently: they have climbed to 607p from a 1995 low of 465p, and have shrugged off competition fears from Unichem/ Lloyds

"The Unichem deal does not put a lot of pressure on Boots, even though Moss and Lloyds will become the biggest pharmacy chain," says John Richard, retail analyst at NatWest Markets. "Boots is predominantly in large high- street stores compared with Moss and Lloyds' small, neighbourhood shops."

Boots has around 33 per cent of the UK chemist and drug store market, according to figures from Verdict Research, against just less than the 7 per cent combined force of Moss and Lloyds Chemists, though they will hold around 35 per cent of the wholesale market. A rumoured counter- offer for Lloyds from Germany's Gehe, which owns the 300-strong Hills chain and took over wholesaler AAH last year, would create a similar sized group.

But while Boots has the biggest slice of the NHS prescription cake the company is less dependent on it than its competitors. Only 16 per cent of turnover at Boots is NHS dispensing, while for most others, including Moss and Lloyds, the figure is nearer 70 per cent.

Sales of beauty and personal-care products at Boots have continued to power ahead while those of over-the-counter medicines also look very healthy. The constraints on NHS funding have boosted OTC sales as the Government encourages people to consult their pharmacists for help with minor ailments rather than their GP.

The strength of Boots' reputation is a powerful commercial advantage. "The well-established Boots name means that its own brand products are seen to be as good as proprietary brands," says Robert Snaith, stores analyst at brokers Societe Generale Strauss Turnbull.

Boots the Chemists serves as the vital organs for Boots overall, generating at the half year three-quarters of group turnover and 84 per cent of the operating profits, with its small but lucrative property arm as the second largest earner.

Analysts see plenty of scope for the core business to grow, continuing to produce impressive returns on capital. The costly experience of its failed heart drug Manoplax in 1993 led to the pounds 840m sale of its pharmaceuticals manufacturing business to BASF last year. Boots Healthcare retained OTC products such as Nurofen, however, where better returns are expected as it develops into wider international markets.

However, analysts are markedly less enthusiastic about Boots' other retail prospects -- in particular Do It All, a joint venture with WH Smith.

Profit estimates for the year to March are around pounds 500m, against 1995's pounds 525.6m. On a price/earnings multiple of 16, Boots is at a slight discount to the sector overall. But while retail conditions hinder its non-core businesses, investors looking for a better ride might look at current retail favourites such as Dixons or Burton.