Boots tumbles as £390m revamp bites into profits

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The Independent Online

Boots, the high street pharmacy chain, yesterday said that it would spend £390m on opening new shops and revamping existing ones, creating 3,000 jobs this year as it battles against increasing competition and price cuts.

But Richard Baker, its chief executive, failed to convince the City that the investment in the business would reap rewards in the long run.

Shares in the company tumbled more than 12 per cent as Mr Baker warned that the spending increase would hurt profits in 2004/05. Mr Baker, who joined the company last summer, said the plan to modernise its shops and improve efficiency at Boots, alongside drives to make it more competitive, was long overdue.

But the £390m of investment and price cuts will mean that margins will come down by nearly 1.1 per cent for this financial year.

"We have to address the under investment in the stores," Mr Baker said. "We have confidence in what we are doing - it is plain common sense - and we will have a much better Boots in the future."

In an effort to tackle the rising competition that it faces from supermarkets, Boots yesterday launched a no-frills, "Basics" range of cheap toiletries. "These are priced very competitively and although they may be slightly more expensive than some other low-cost ranges, the products are of a much higher quality," Mr Baker said, adding that the conditioner had a "superior after-wash feel".

Of the £390m, £250m is capital expenditure on opening 60 new stores this year.

Forty of these stores will be situated in out-of-town retail parks, and more stores are planned for openings on Sundays. Revamping shops will cost the company some £90m and £50m will be spent on efficiency improvements at the company.

Boots has axed 900 jobs at its Nottingham headquarters this year in a bid to drive out costs.

Yesterday, the company unveiled a plan to overhaul its distribution strategy to supply its stores with stock. This involves delivering fewer items more often to make it easier for staff to keep the stores' shelves stocked.

Strong sales figures over the past quarter have also failed to stop pessimism over the company's rising costs.

Yesterday, it said that like-for-like sales at Boots chemist chain, which makes up 90 per cent of group profit, were up 4 per cent in the group's fourth quarter - at the top end of analysts' forecasts.

But analysts at Morgan Stanley said that the management's credibility had been dented in its thinly disguised profits warning. Merrill Lynch reduced its 2004 to 20005 earnings forecast by £100m to £540m.

The retailer is also being hit with a £40m pension charge this year, although its fund is in surplus.