Retail's ugly ducklings deliver some festive cheer

WH Smith and Boots, two of the retailers hardest hit by the supermarkets, had a late Christmas present for investors yesterday when they unveiled robust festive trading.

WH Smith and Boots, two of the retailers hardest hit by the supermarkets, had a late Christmas present for investors yesterday when they unveiled robust festive trading.

Both companies said they would meet profit expectations - no slim feat given the state of the high street. Shares in WH Smith, which was widely feared to have fared badly, shot 6 per cent higher to 359.5p, while Boots' shares rose 2.5p to 662p.

Although underlying sales across WH Smith's high street retail chain fell 2 per cent over the six-weeks, it more than compensated for the lost sales by increasing its gross margin by more than 200 basis points.

Kate Swann, the chief executive, who embarked on a three-year battle in July to turn around the troubled group, said: "We are pleased with our performance. We did what we said we would but it's early days and too early to call any turnaround."

The group's margin boost made up for last year's swingeing profits warning and prompted a rash of upgrades. Cazenove, its joint broker, raised its pre-tax profits forecast to £69m from £65m. Iain McDonald, at Numis Securities, said: "The margin improvement has come more quickly than we were expecting and means that the group has clawed back the margin it lost in last year's disastrous Christmas period."

At Boots, the story was similar, with better-than-expected gross margins compensating for a slowdown in underlying sales growth. Across the group's core Boots the Chemist chain, like-for-like sales grew 2.6 per cent during the third quarter, which was at the bottom end of analysts expectations. It said gross margins, which tumbled 180 basis points in its first half, had stabilised. Howard Dodd, the finance director, said the full-year outcome would be "slightly better" than the 110 basis point decline the group had initially predicted.

Nick Bubb, at Evolution Beeson Gregory, said the groups' results were "tactical, rather than strategic successes", implying that both companies have their work cut out to convince investors they have a long-term future on the high street.

Ms Swann said WH Smith's margin progress was driven by fewer unprofitable promotions, better buying terms with suppliers and increasing the proportion of high-margin goods such as stationery. Underlying sales of its books and entertainment ranges fell, while stationery sales grew by 5 per cent. The group also kept a tight lid on costs, and is ahead of schedule to save about £30m over the next three years.

For the 20 weeks to 15 January, like-for-like sales across its high street business fell 3 per cent. They rose 4 per cent in its travel retail business, which has a captive audience for its sites in train stations and at airports. Sales at its news distribution arm rose 2 per cent during the period on a comparable basis.

Richard Baker, Boots' chief executive, said he was "reasonably pleased" with the group's trading performance despite blips in its healthcare division and opticians arm.

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