Boots warns of margins squeeze

Boots warned yesterday that it could struggle to meet its profit targets this year after its margins slumped during its first half.

The group, which is fighting off competition from supermarkets, blamed a lack of summer sun for disappointing sales of high margin products such as sun cream. It also said its new lower prices had lured in more customers than it had bargained for, boosting sales but hitting margins.

Just six months after Boots warned that a £390m investment programme, which revamps its shops and cuts prices, would hit this year's profits, it said margins had fallen faster than predicted. Its gross profit margin dived 50 basis points during its first half, dragging its margin down 1.8 percentage points year on year. Shares in the company, which traded at 749p earlier this year, fell 19.5p to 642p.

Although Boots stuck to its original guidance that its gross profit margin would fall by 1.1 percentage points, it warned: "Performance in H1 [first-half] has increased the uncertainty of achieving this outcome."

Richard Baker, the chief executive who was poached from Asda last year to turn around the company, said: "We always said there were few quick fixes and some execution risk to solving the problems at Boots. We've got less room for manoeuvre than in a normal year."

The company has slashed the price of 3,000 products in an attempt to tempt back those shoppers that found it too expensive. "Customers are voting in favour of what we're doing. They are seeing better value, our shops are open longer," Mr Baker said.

Underlying sales at the group's core chemist business rose 3.3 per cent in its second quarter, which was less than analysts had expected and represented a slowdown from the 4.4 per cent increase reported in its first quarter. Its healthcare business fared better, with sales rising 5.5 per cent.

The popularity of the company's "lower prices you'll love" campaign meant its beauty and toiletries sales rose 4.4 per cent during the second quarter. Mr Baker said that perversely, the success of the campaign meant the company would affect the rate it invests in cheaper goods.

Richard Ratner, at Seymour Pierce, said: "The problem is not the downgrading of forecasts per se but the fact that this is the second time around that the market has got overexcited about what Richard Baker has been doing, only to have its expectations dashed." Matthew McEachran, at Investec Securities, said: "There may be some risk to growth rates over the next 12 months due to the supply chain and systems changes."

Mr Baker denied that his credibility had taken a knock. "We can only be straightforward with everybody every inch of the way. We have continued to deliver trading momentum."

Analysts expect the group's pre-exceptional profit before tax to fall by 20 per cent during its first half to about £210m.

So far this year, Boots has axed 900 jobs from its head office, pulled out of offering services such as dentistry, chiropody and laser-eye correction and extended its opening hours.

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