Baker declares first phase of Boots rescue is complete

Richard Baker, the chief executive of Boots, declared yesterday the first phase of the chemist group's rehabilitation was complete despite a big fall in profits.

But the tricky outlook for the high street prompted the group to scale back its capital expenditure plans by around one-third for its high street chemists chain.

Shares in the group, which has issued two profit warnings this year, rose 13.5p to 610.5p after it reiterated its belief that underlying sales would rise by up to 2 per cent this year and costs would increase by no more than 6 per cent.

He said Boots had been dragged into the 21st century and was now a "modern, competitive and efficient retailer". Since taking the helm 18 months ago, he has made 3,300 product lines one-fifth cheaper. The group has invested £200m in lower prices, destroying its profits.

He admitted the retail downturn was making life harder for all retailers to grow earnings, adding: "I don't see anything out there at the moment that will change the situation." But he insisted: "I feel pretty good. We've grown ahead of the market for 12 consecutive quarters. I couldn't have done a lot more."

Most analysts remained gloomy about the group's future, warning that profit forecasts still looked vulnerable given consumers' reluctance to spend. Most expect Boots's operating margin at its core chemists' chain, which fell to 10.9 per cent from 11.9 per cent last year, to come under further pressure this year. It has fallen from 15 per cent over the past few years.

"Once again, Boots the Chemist gives the impression that, whatever the very real merits of the current strategy, much of the actions taken over the last 18 months have been to repair what, with the full benefits of hindsight, was a wholly unsustainable P&L [profit and loss account]," analysts at Citigroup warned investors. Paul Smiddy, at Robert W Baird, said: "It may be that we have seen the peak in group profits forever. It may be that they will have to run very hard to stand still."

In the 12 months to March, pre-tax profits plunged 11 per cent to £481m even after a hit from exceptional losses racked up after its retreat from dentistry and laser eye surgery businesses. Profits are tipped to fall by at least the same amount next year.

Boots opened 47 new stores last year, including 23 "edge of town" sites. But it said capital expenditure would be around £150m for Boots the Chemist, against £225m last year, "as investment plans are considered against at tougher trading environment". It said group capital expenditure of £200m would be the "typical levels" in the medium term.

Mr Baker said Boots was pushing ahead with the next phases of its turnaround programme, but many analysts feel Boots has work to do on improving its store estate and lowering its prices to compete with the supermarkets.

He signalled a further push into health care, following its strongest rise in pharmacy sales for five years. It has a 12 per cent share of the healthcare market and is confident that with the pressure the Government is putting on family doctors to ease the burden on the NHS it can increase that further. "Given our strong brand heritage we see good opportunities going forward," Mr Baker said.

The group plans to start marketing Boots Healthcare International, which increased operating profits by 9 per cent to £87.8m, to potential buyers in July.

GlaxoSmithKline, Reckitt Benckiser and private equity houses have expressed interest.